MANAGEMENT OF

VALUE ADDED TAX

(VAT)

• Syllabus Content – 15%

• No of Lecture Hours – 20 Hours

• No of Sessions – Nine (9) Sessions

including past paper discussion.

• Live Sessions – One (1) Live

Session after completing the 15%
syllabus area with questions.

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 15% SYLLABUS CONTENT

E. Management of Value-Added Tax (VAT) : 15%

Knowledge Component Learning Outcome Specific knowledge
5.1 Obligations of a 5.1.1 Assess the output tax, input tax and Output tax, input tax and balance
VAT-registered balance tax payable by a registered tax payable by a registered person in
person person in business which carries business which carries out multiple
out multiple activities. activities.
5.1.2 Advise the statutory obligations Statutory obligations with regard to
with regard to furnishing furnishing returns, payment of tax and
returns, payment of tax and documentation.
documentation.
5.2 VAT on Financial 5.2.1 Explain the meaning of financial Meaning of financial services and
Services services and computation of value computation of value addition.
addition.
5.2.2 Assess VAT payable by a person VAT payable by a person carrying on a
carrying on a business of financial business of financial services.
services.
5.3 Simplified VAT 5.3.1 Assess the VAT liability of a VAT liability of a registered identified
Scheme registered identified purchaser purchaser and registered identified
and registered identified supplier. supplier.
5.3.2 Outline the significant features of Significant features of the Simplified VAT
the Simplified VAT Scheme. Scheme.
5.4 Managing VAT in 5.4.1 Explain statutory provisions Statutory provisions of the VAT Act
a business of the VAT Act with regard with regard to assessments, time-bar
to assessments, time-bar for for assessments, appeals and appeal
assessments, appeals and appeal settlement procedure.
settlement procedure.
5.4.2 Analyse VAT issues in a complex VAT issues in a complex business
business environment and provide environment and provide appropriate
appropriate actions to mitigate actions to mitigate such situations.
such situations.
5.4.3 Advise on value of supplies with Value of supplies with regard to different
regard to different activities. activities.

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 VALUE ADDED TAX (VAT)
Value Added Tax is imposed in Sri Lanka with effect from 1st August
2002.

Main enactment,
Value Added Tax Act No. 14 of 2002
Amendments,
Value Added Tax (Amendment) Act No. 07 of 2003.
Value Added Tax (Amendment) Act No. 13 of 2004.
Value Added Tax (Amendment) Act No. 06 of 2005.
Value Added Tax (Amendment) Act No. 08 of 2006.
Value Added Tax (Amendment) Act No. 14 of 2007.
Value Added Tax (Amendment) Act No. 15 of 2008.
Value Added Tax (Amendment) Act No. 15 of 2009.
Value Added Tax (Amendment) Act No. 09 of 2011.
Value Added Tax (Amendment) Act No. 07 of 2012.
Value Added Tax (Amendment) Act No. 17 of 2013.
Value Added Tax (Amendment) Act No. 07 of 2014.
Value Added Tax (Amendment) Act No. 11 of 2015.
Value Added Tax (Amendment) Act No. 20 of 2016.
Value Added Tax (Amendment) Act No. 25 of 2018.
Value Added Tax (Amendment) Act No. 19 of 2019.

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PART – 01 OF THE MANAGEMENT OF VALUE ADDED TAX

1. IMPOSITION OF VAT / CHARGEABILITY (SECTION – 2)

The Value Added Tax shall be charged,

a)
• At the time of supply.
• On every taxable supply of goods or services, made in a taxable period,
• By a registered person,
• In the course of carrying on or carrying out a taxable activity in Sri Lanka.

b) On the importation of goods in to Sri Lanka, by any person and on the

Value of such goods or services supplied or the goods imported.

2. VAT ON TAXABLE SUPPLY OF GOODS OR SERVICES

As per the chargeability of Value Added Tax ( Section 2), following conditions
shall be satisfied to charge Value Added Tax.

(i) There must be taxable activity carried on or carried out in Sri Lanka.
(ii)There must be taxable supply of goods or services.
(iii)The taxable supply of goods or services made by a registered person

Therefore, when studying on imposition of Value Added Tax meanings of

following terms are very important.
• Time of Supply
• Taxable Supply
• Supply of Goods
• Supply of Services
• Taxable Period
• Taxable Activity
• Registered Person

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 1. Time of Supply (Section – 4)

I. Supply of goods ( Sec 4 (1)) (earliest occurrence of one of the following)

1. The invoice is issued, or

2. The payment including any advance is received or
3. The payment is due to the supplier, or
4. The delivery of goods (If the invoice is issued within 10 days of
delivery, then the time of supply is the date of invoice)

Eg : Taprobane Ceylon (Pvt) Ltd in the business of manufacturing and selling

of furniture locally and registered person for VAT. Company has delivered
the completed furniture order to hotel on 28th December 2020 based on
finalized quotation and performa invoice. And TCPL has issued the tax
invoice on 04th January 2021.

Explain the applicability of Time of Supply.

II. Supply of Services ( Sec 4 (3)) (earliest occurrence of one of the

following)

1. The payment is received, or

2. The payment is due for the services rendered or for future services,
or
3. The invoice is issued
4. The service was performed , or (If an invoice is issued within 10
days of the performance, the date of invoice will be the time of
supply)

III. Supply under Hire Purchase Agreements – Time at which the agreement
entered into.

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IV. Registered Under Cash Basis Supplies

Any registered person to account for the tax on a payment basis under
section 23, the time of supply of goods and services shall be the time at
which the payment in respect of such supply is received. ( Section 4 (6) )

Interpretations (Section 83)

a) Taxable Supply - means any supply of goods or services made or deemed
to be made in Sri Lanka which is chargeable with tax under this Act and
includes a supply charged at the rate of zero percent other than an exempt
supply.
Under above definition VAT shall be charge on,
1. Supply made by a company in Sri Lanka chargeable with standards
rate – 8%
2. Export of goods or services made by a company at 0%
And VAT shall not be charged on,
1. Exempted Supplies as per the first schedule part II of the Act.

b) Supply of Goods - means the passing of exclusive ownership of goods to

another as the owner of such goods or under the authority of any written
law and includes the sale of goods by public auction, the transfer of goods
under a hire purchase agreement, the sale of goods in satisfaction of a debt
and the transfer of goods from a taxable activity to a non-taxable activity.

c) Supply of Services - means any supply which is not a supply of goods

but includes any loss incurred in a taxable activity for which an indemnity
is due.

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d) Taxable Period means,
There are two types of taxable periods:

(a) A period of one month-

(i) Where any person makes zero rated supplies; or

(ii) Project registered under section 22(7)
(iii) Any person registered with Textile Quota Board or Export
Development Board as the case may be, who makes supplies to an
exporter registered with Textile Quota Board or Export
Development Board.

(b) A period of three months

Commencing respectively on the first day of January, the first day of

April, the first day of July and the first day of October of each year in
respect of a registered person whom is not referred to in above.

e) Taxable Activity means –

(a) Any activity carried on as a business, trade, profession or
vocation other than in the course of employment or every
adventure or concern in the nature of a trade;

(b) The provision of facilities to its members or others for a

consideration and the payment of subscription in the case of
a club, association or organization;

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 (c) Anything done in connection with the commencement or
cessation of any activity or provision of facilities referred to in
(a) or (b);

(d) The hiring, or leasing of any movable property or the renting

or leasing of immovable property or the administration of any
property;

(e) The exploitation of any intangible property such as patents,

copyrights or other similar assets where such asset is
registered in Sri Lanka or the owner of such asset is domiciled
in Sri Lanka;

Practice Question – 01
Explain following activities fall within the meaning of taxable activity of a
registered person.
1. Company incorporated in Sri Lanka engaging in the principal business
activity of manufacturing and selling of Garments.
2. Company incorporated in Sri Lanka provides consultancy services
entirely based on outside Sri Lanka.
3. Company incorporated in Sri Lanka engaging in off shore business.
4. Company receives a rent income from investment property.
5. Individual receives a rent income from commercial property.
6. Company incorporated in India provides consultancy services in Sri
Lanka.
7. Disposal of furniture and fittings used for business.

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f) Goods means all kinds of movable or immovable property but does not
include,
(a) Money;

(b) computer software made to customers special

requirements either as unique programme or
adaptation for standard programme, intercompany
information data and accounts, enhancement and
update of existing specific programmes,
enhancement and update of existing normalized
programmes supplied under contractual obligation
to customers who have bought the original
programme or where the value of contents
separately identifiable in a software such vale of
contents;

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3.VALUE OF SUPPLY (SECTION 5)
VAT is calculated on the value of supply. Value of supply depends on the type
of supply.
How to ascertain the value in certain situations given below.

Type of Supply Value

a) When the recipient is a
registered person:

If the consideration is in money

• Total consideration less VAT
1. Supply of goods or services which is not less than the open
market value

If the consideration is not in money

• If not in money or partly in
money the open market value

b) When the recipient is not a

registered person

• The tax inclusive value not less

than open market value
2. Import of Goods (Sec 6) – CIF Value + Custom Duty + Cess +
We will discuss this under Excise Duty + Surcharges+ Port and
Section 6 Separately. Airport Levy (PAL) + Any other duty
payable to customs + 10% of the CIF
value (Changes made from amended
Act No. 19 of 2019)
3. Benefit from Employment Open market value or such open
market value cannot be ascertained,
the cost of similar benefit to any other

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4. Lottery or wagering
contract or any business of
like nature
employee as determined by the
Assistant Commissioner.
Total amount received less value of
the prize or winning awarded and the
commission paid on sale of tickets.

5. Supply of goods under Hire Cash price not less than the market
Purchase Agreement value. Provided that,
• If the cash price includes tax
charged by the seller who is not
registered and the buyer cannot
claim as input tax the cash price
or market value can be adjusted
for the purpose of charging
VAT by deducting the tax so
charged by the seller.

• Second hand goods circulated

for a period over one year is
exempt from VAT ( Under VAT
on Financial Services)
6. Supply of land & land Consideration – (Market value of the
improvements thereon bare land at the time of sale + cost of
improvements as at 01.04.1998). The
consideration should not be less than
the open market value.
7. Supply under leaseNot exceeding 10% of the total
agreement subsequently consideration of the lease agreement
transferred to the lessee atsuch consideration is treated as lease
an early termination recovery. Such provisions were
removed with effect from 25.10.2014
and accordingly the total
consideration is treated as a lease
installment.
8. Supply is a combination of Open market value of the taxable
both taxable & non- taxable portion
supplies

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9. Issue of tickets or deposit of
money for the supply of
goods or services
10. Goods subject to maximum
retail price fixed in terms of
the Consumer Protection
Act
11. Supply of Healthcare
Services
Value of the tickets or deposits less
the VAT, not being any refundable
amount
Person who are liable to VAT on the
supplies made as a buying and selling
dealer would be entitled to adjust
prices for VAT purpose.
Hospital Room Charges are liable for
VAT with effective from 16th August
2018 by Value Added Tax
(amendment) act, no. 25 of 2018.
(Amendment to Section 5 (15)
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 5. EXCLUDED SUPPLY (SECTION 3)

1. The tax shall not be charged on the wholesale or retail supply of goods,
other than on the wholesale or retail supply of goods, by-

a. A manufacturer of such goods; or

b. An importer of such goods; or

c. A supplier who is unable to satisfy the Commissioner-General, as to the

source from which the goods supplied by him, were acquired

d. Any person, who supplies such goods under any tender agreement.

e. Any person or a partnership having total supplies for any consecutive

period of three months in any calendar year of not less than rupees ( As
prescribed below), (including the supplies under the preceding
paragraphs of this section and any supplies exempted under Part II of the
First Schedule)

i. five hundred million (Rs.500Mn), for any such period of

three months falling within any period commencing on
or after January 1, 2013, but ending on or before
December 31, 2013, liable for VAT;

ii. two hundred and fifty million ( Rs. 250Mn), for any such
period of three months falling within any period
commencing on or after January 1, 2014, but ending on
or before December 31, 2014 liable for VAT;

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 iii. One hundred million (100Mn) , for any such period of
three months falling within any period commencing on
or after January 1, 2015 but ending on or before March
31, 2016, for the period commencing on April 1, 2016 but
ending before May 2, 2016; and

iv. for the period commencing from July 11, 2016 but
ending on or before November 1, 2016 liable for VAT;
and, twelve million and five hundred thousand, for
any such period of three months falling within any
period commencing on or after November 1, 2016 but
prior to 01st January 2020 liable for VAT;

v. With effective from 01st January 2020, the threshold is

Seventy Five Million Rupees per quarter (Rs. 75Mn)
or Three Hundred Million Rupees (Rs.300Mn) per
annum.

For the purposes of paragraph (e), the total supplies mean, the aggregate value
of supplies of,

(i) any person or partnership engaged in the wholesale or retail business while
carrying on other business of similar nature in one place or different places
under one or more registrations for the purposes of this Act; and

(iii) With regard to any subsidiary or associated company of a group of

companies, engaged in the wholesale or retail business, the aggregate
value of supplies of each company of the group, other than any company
not engaged in the wholesale or retail business.

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 6. SUPPLY AND IMPORTATION EXEMPTED FROM TAX
(SECTION 8)

No tax shall be charged on the supply of goods or services and the

importation of goods specified in the First Schedule Part II to this
Act as such supplies and imports are not taxable unless zero rated
under section 7.

(We will discuss exempted supplies separately)

7. REGISTRATION

7.1 Compulsory Registration (Section 10)

Every person who carries on a taxable activity in Sri Lanka where his taxable
supplies exceeds or likely to exceed,

1. Other than wholesalers & Retail Supplies

• Up to 31.03.2016
Rs. 3,750,000/- per quarter, or Rs.15,000,000/- per annum

• After 01.04.2016 but prior to 01st January 2020

Rs.3,000,000 per quarter or Rs.12,000,000/- per annum

• With Effective From 01st January 2020

Rs. 75 Mn per quarter or 300 Mn per annum

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 2. wholesalers & Retailers - the total supplies (total revenue) exceed or
likely to exceed,

• Up to 31.10.2016 as prescribed in above “e”

• From 01.11.2016 but prior to 01st January 2020

Rs. 12.5 Mn per quarter

• With Effective From 01st January 2020

Rs. 75 Mn per quarter or 300 Mn per annum

****However, any person who does not come within the threshold of 75 Mn
per quarter or 300Mn per annum can register for VAT under voluntary VAT
registration
(Section 12).

And any registration during the project implementation period could be

considered under section 22(7) also can register for VAT to claim input VAT
incurred during project implementation period provided to the satisfaction of
Commissioner General of Inland Revenue. – Will be discussed under input
VAT.

**** In computing the value of supplies to determine the above threshold

followings should be excluded, (Section 10)
1. Any exempt supply
2. Any excluded supply of buying and selling activity supply does not
exceeds above mentioned threshold per quarter.
3. Single Isolated Transaction

**** Any person who exceeds or likely to exceeds above limits must notify the
Commissioner General within 15 days.

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7.2 Force Registration (Section 14 (1) (c)
Where an application for registration, has not been made but the Commissioner-
General is of opinion having regard to the nature of the activities carried on or
carried out by such person, that such person is required to be registered under
this Act, and after affording such person an opportunity of being heard, register
such person with effect from such date as may be determined by him.

7.3 Certificate of Registration (Section 15)

The Commissioner-General shall, issue
(a) A tax registration number; and
(b) A Certificate of registration
The Certificate of registration shall set out the name and other relevant details
of the registered person, the date on which registration comes into effect, and
the tax registration number of such person.

Certificate of registration shall, display at a conspicuous place in the place where

he carries on or carries out the taxable activity. Copies of such certificate may be
displayed in the event of there being more than one place of business.

To any person who fails to do so, Commissioner General may impose a penalty
of Rs. 50,000/-.

7.4 Cancellation of Registration (Section 16)

A registered person may make an application to have his registration cancelled
at any time after the lapse of a period of twelve months following the date of
registration under the following situations.

1. Where such registered person has ceased to carry on or carry out a taxable
activity or

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 2. The total value of his supplies during any taxable period within such
period does not exceed the registration threshold.

7.5 Documents Required for VAT Registration

❖ Dully filed Application

❖ Original Certificate of Business Registration/Certificate of Incorporation
❖ Original TIN Certificate
❖ Original Form 01
❖ Original Articles of Association
❖ Copies of the NIC of the Proprietor/Partners/ Directors of the Business
❖ Particulars of Sales to prove the turnover & monthly Bank Statements to
prove cash receipts
❖ Sales Summary
❖ Sales Invoices For 3 months
❖ Bank Statements
❖ Deed or Rent/ Lease Agreement of Property
❖ Grama Niladhari Certificate
❖ Letter of Authority

7.6 Responsibilities of a Registered Person

❖ Display the Certificate of Registration at a clearly visible place in the

business premises.
❖ Issue tax invoices (to other registered persons).
❖ Keep accounts for relevant periods.
❖ Pay taxes and furnish returns on or before due dates.
❖ Inform the Department any change in the following without delay. ( Sec
19)
✓ Name
✓ Business Place

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 ✓ Ownership
✓ Nature of taxable activity
✓ Person authorized to sign returns and other documents

***** After a person is registered for the VAT ( Forced registration or

voluntary registration) , that person should charge VAT on all the taxable
supplies made by him. The threshold is only a registration threshold. After
registration even turnover is below threshold, the registered person is liable
to collect VAT and pay until the official cancellation of registration.

SESSION SUMMARY – KEY POINTS TO REMEMBER

1. CHRAGEABILITY OF VAT – SECTION 2

2. DEFINITIONS AND APPLICABILITY OF DEFINITIONS
DISCUSSED UNDER SECTION 83 “INTERORETATION”
3. VALUE OF SUPPLY – SECTION 5
4. TIME OF SUPPLY – SECTION 4
5. REGISTRATION - SECTION 10
5.1 THRESHOLD
5.2 VOLENTARY REGISTRATION – SECTION 12
5.3 FORCED REGISTRATION
5.4 CANCELLATION OF REGISTRATION

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