The Value Added Tax (VAT) Amendment Act, No. 20 of 2016, came into effect on November 1 this year. Anyone can clearly understand the changes in exemptions, which are legally effective.
This article deals with Part II of the First Schedule to the VAT Act, in relation to any change that has been made under the VAT Amendment Act.
Paragraph (a) - This paragraph deals with the goods, which are exempt when imported to Sri Lanka, as well as when supplied in Sri Lanka.
Item (i) This item has been amended several times and now has further amended by removing ‘milk powder’. As a result the import of any milk powder will be liable to the VAT, with effect from 01.11.2016.
There are only two categories now remaining under this Item (i) - wheat and wheat flour.
Milk powder
The position of the supply of milk powder in Sri Lanka has to be understood along with the provisions as amended in the Item (xxvi) of Paragraph (b), which is applicable only to the supplies in Sri Lanka.
Accordingly, the supply of any locally produced milk powder containing sugar or any other sweetening matter, will be liable to the VAT, w.e.f. 01.11.2016.
When the Item (i) of Paragraph (a) and the Item (xxvi) of Paragraph (b) taken together the position of the local supply of any milk powder will be as follows:
The supply of any imported milk powder within Sri Lanka, will be liable to the VAT.
The supply of locally produced milk powder using local fresh milk will also be liable to the VAT, if such milk powder contains sugar or any other sweetening matter.
Item (xviii) - Petrol or coal will be liable to the VAT, when imported as well as supplied within Sri Lanka.
Item (xix)(c) - Light weight electrical and electronic items as specified under Harmonized Commodity Description and Coding System Numbers, will be liable to the VAT when imported.
The local supplies of any such items imported or locally manufactured, will also be liable to the VAT.
Item (xix)(e) Telecommunication equipment as specified under Harmonized Commodity Description and Coding System Numbers, will be liable to the VAT when imported. The local supplies of any such items imported or locally manufactured, will also be liable to the VAT.
Item (xx) - Any machinery or high-tech equipment for the telecom industry imported or purchased locally, by any operator of telecommunication services, will be liable to the VAT. Even when such items were exempt from the VAT, such exemption was given only if imported or locally purchased exclusively for the use of the telecom industry by any operator of telecom services. Any other importer or local purchaser of such items never enjoyed any VAT exemption.
Spare parts
Item (xxi) - Spare parts and accessories for exclusive use by the Dept. of Sri Lanka Railways, when imported or purchased locally will be liable to the VAT. There is an ambiguity in relation to the position of the Sri Lanka Transport Board.
Item (xxii) - Out of a large number of items under this Item perfumes has been removed. As a result any purchases when imported or supplied locally, will be liable to the VAT.
(It is very strange that ‘sun glasses’ under the same item have not been removed)
Item (xxv) - Copper cables for telecom industry, whether imported or locally purchased will be liable to the VAT.
Paragraph (b) - This paragraph deals with the goods or services which are exempt from the VAT when supplied locally. These are in addition to the paragraph (a) items.
Item (x)(h)(c) - This item was introduced by the VAT Amendment Act, No. 11 of 2015, in order to remove finance leasing and operating leasing from the normal VAT and to classify them under financial services which are liable to the financial VAT.
However, w.e.f. 01.11.2016, this item has been deleted and therefore above mentioned leasing activities will not be considered liable to the financial VAT. Such supplies will be liable to the normal VAT.
Item (xi) - This is applicable to the supply, lease or rent of any residential accommodation.
w.e.f. November 1, 2016, the VAT treatment has been drastically changed, with regard to residential accommodation.
Accordingly, any supply (sale) of any residential accommodation by any person on or after November 1, 2016, will be exempt from the VAT.
However, any lease or rent of any residential accommodation by any VAT registered person, will be liable to the VAT w.e.f. November 1, 2016.
Health services
Item (xii) - This is applicable to the supply of health care services. Before the amendment “all health care services provided by medical institutions or professionally qualified persons providing such care”, were not liable to the VAT.
With effect from 01.11.2016, the supply of all such health care services will be liable to the VAT. But when the value of such supply is calculated the cost of the following supplies can be deducted from the total value of such supplies and charge the VAT only on the balance value.
In effect this removal is not an exemption but a method of valuation. Diagnostic tests, dialysis, and services provided by the OPD, but excluding ‘medical consultations’.
Accordingly, any fee for medical consultations will have to be included in the value of supply.
As per the definition given “Medical Consultations” includes a procedure where by a medical practitioner registered under the Medical Ordinance reviews the medical history of patient, examines a patient and makes recommendation as to care and treatment of such patient.
Some medical institutions bring in-patients to the OPD for various test or special consultations etc. There can be a question whether such services are OPD services since the patient is not an OPD patient ! Further, it is not clear what will be the position of the other professionally qualified persons not coming under the Medical Ordinance ?
Item (xxvi) - This is an item dealing with the supply of locally produced dairy products and rice products.
If any milk powder is produced using local fresh milk, on or after 01.11.2016, the exemption will be available only if sugar or other sweetening matter were not included in such locally manufactured milk powder.
Item (xxx) - Locally manufactured jewellery was exempted under this and now this exemption has been removed. As a result any imported or locally manufactured jewellery will be liable to VAT.
Item (xxxi) - Telecommunication services have been made liable to the VAT, covering all telecommunication services, whether such services are liable to the Telecommunication Levy or not.
Item (xxxv) - Services of issuing licenses to local telecom operators by the Telecommunication Regulatory Commission have been made liable to the VAT.
Paragraph (f)(iii) - The supply of taxable goods or services by any registered co-operative society or Lak Sathosa will be liable to the VAT, w.e.f. 01.11.2016.
Paragraph (I)(b) - The import or supply of cigarettes will be liable to the VAT, w.e.f. 01.11.2016. This item was exempted w.e.f. 25.10.2014, under the VAT Amendment Act, No. 11 of 2015.
Paragraph (I)(c) - The import or supply of any liquor will be liable to the VAT w.e.f. 01.11.2016. This item was also exempted w.e.f. 25.10.2014, under the VAT Amendment Act, No. 11 of 2015.
Further changes - The following changes have been indicated in the Technical Notes attached to the Budget Speech - 2017 (These changes may be effective from 01.01.2017)
New exemptions -
Plant, machinery and equipment for renewable energy generation identified under H.S. Codes.
International telecom services to local operators by External Gateway Operators. Geriatric care services and child care services. Certain electrical goods identified under H.S. Codes.
Magazines, Journals and Periodicals identified under H.S. Codes.
Medical machinery and Medical equipment identified under H.S. Codes.
Removal of exemptions -
Existing VAT exemptions on the following will be removed -
Gold coins, Precious metals, Precious stones, Jewellery and Locally Manufactured Milk Powder.
Note: Jewellery has been already made liable w.e.f. November 1, 2016.
The position regarding locally manufactured milk powder has also been dealt with in the amendments discussed above. Only gold coins have been mentioned.
The writer is a Senior Tax and Investment Consultant and a retired Deputy Commissioner of Inland Revenue and a former Fiscal Policy Advisor to the Ministry of Finance, Sri Lanka.