What is VAT? Here’s everything you need to know

As VAT regulations and rates change frequently, Sri Lankan business owners can find it challenging to stay up to date with the latest information. As a result, they may fail to take the necessary steps to remain compliant with tax regulations.

To make this process easier, we’ve created this guide covering everything you need to know about VAT, including the current regulations, how to calculate your VAT rate, how and when to pay VAT payments, and how to avoid any fines or penalties.

What is Value Added Tax?

When goods and services are sold, they go through one or more stages before reaching the end customer. In the case of goods, these stages would be raw material purchase, manufacturing, distribution, retail, and finally, the purchase customer. The government charges VAT during each of these stages and If a particular product or service has many steps from production to the sale, there will be more stages where VAT can get charged. Let’s take a look at an example. Assume that 10% of VAT applies to the goods.

• Kamal wants to purchase a chair from a furniture store for the price of Rs. 3000. When Kamal is buying the chair, the store also charges the 10% VAT from Kamal.
• Therefore Kamal pays a total of Rs. 3300 to the store during his transaction. The store then pays the Rs.300 collected as VAT to the government.

As the end customer pays the actual tax amount, VAT is called an indirect tax. It is also applicable to both goods and services supplied in Sri Lanka as well as imported goods. Depending on the point where VAT is charged, we can categorize it in two ways:

• Output VAT – Charged by your business when selling the goods and services to other companies or consumers.
• Input VAT – Paid by your business when purchasing taxable goods and services from other companies.

Below is an example of how input and output VAT is applied. Assume that 10% of VAT applies to the goods.

• Kamal has a business that manufactures bikes.
• Kamal buys the raw materials needed at a total price of Rs.55,000, including 10% VAT, which is Rs.5,000.
• This additional  Rs.5,000 Kamal has to pay is known as the input VAT.
• After manufacturing the bike, Kamal decides to sell the bike at a total price of Rs.110,000, including 10% VAT, which amounts to Rs.10,000.
• This additional price of Rs.10,000 that he charges is known as the output VAT.

Who should pay VAT?

According to the Inland Revenue Department (IRD) of Sri Lanka, a certain threshold must be exceeded by businesses before they become liable to pay VAT.  The government changed this threshold in 2022 to apply only to companies with an annual turnover of Rs. 80 Million. Every business that exceeds these thresholds must register for VAT before charging VAT on the goods and services they sell.

How to register for VAT?

Businesses cannot collect VAT without a certificate issued by the Inland Revenue Department, stating that they are allowed to collect VAT on behalf of the government.  A company can obtain a VAT Certificate through any of the following registration methods.

1. Compulsory Registration

Suppose the value of a business’s taxable supply (sale of taxable goods and services) exceeds the following thresholds. In that case, they must register to pay VAT.

• Businesses that have exceeded Rs.80 Million per annum.
• A business that is likely to exceed Rs.80 Million in the next twelve​ months period.

Businesses are required to register for VAT within 15 days of exceeding the threshold.

2. Forced Registration

There can be situations where a business has exceeded the threshold but has not requested to register for VAT. In such cases, the Commissioner-General of the Inland Revenue Department has the power to register the business from a date decided by him.

Step 1 – obtain the taxpayer registration form from the Primary Registration Unit of the IRD or download it from the IRD website. 

Step 2 – complete and submit it to the Taxpayer’s Service Unit (TPSU) at the IRD or send it by post. Alternatively, you can complete the submission online, using the IRD e-services.

Step 3 – Once you obtain your Tax Identification number, you can complete the VAT registration form and submit it to the Inland Revenue Department. This form can be obtained in-person and online.

• In-person – You can obtain the VAT registration form either from the Tax Registration Unit or from any Regional Office of the Inland Revenue Department.
• Online: You can request a PIN through the e-services page to access all the e-services provided by IRD, including VAT registration.

you can submit it in person to the Taxpayer’s Service Unit (TPSU) at the Inland Revenue Department or send it by post. You can also submit it by using the online services of the IRD. Regardless of either submitting in-person or online, you must also submit the following documents with the application.

• TIN Certification
• Certificate of Business Registration
• In case of limited liability company
  • Articles of association
  • List of Directors
  • Certificate of incorporation
• Copies of NIC of the directors of the business
• Particulars of sales to prove the turnover
• Monthly Bank statements to verify cash receipts.
• Documents to prove that exports were made continuously by such exporters
• For 22(7) registration – Project Plan
  • A copy of the agreement with the Board of Investment(if any)
  • Deed or rent/lease agreement of the property
  • Sources of funds to the project to be proved for non BOI projects
  • A list of intended purchases both local and imports

Step 4 – If you submit the form in-person, you could collect the VAT certificate within one hour, given all the required details are accurate. If you submit online, you will receive a PDF of the original certificate to your email.

What are the applicable VAT rates?

There are two types of rates used to calculate the VAT applicable on goods and services; the standard rate and the zero rate.

The standard rate was increased from 12% to 15%, effective October 2022. Currently, this applies to all taxable goods and services, except for financial services.

Types of VAT rates	Applicable to	Rate
Standard rate	Goods or services other than exempt or zero-rated supplies	15%
Standard rate	Financial Services	18%
Zero rate	Direct export of goods and certain services provided outside Sri Lanka.	0%

Further, the removal of the VAT exemption on Condominium Residential Apartments will be effective from the 1st of October 2022.

What are the goods exempted from VAT?

The below table provides some examples of goods and services which are not subject to VAT. You can access the full list of goods and services that are exempt from VAT through the Inland Revenue Department website.

Categories	Examples
Goods and services exempted for import	Any machinery or equipment needed for the supply of electricity.Pharmaceutical machinery and spare parts needed for such machinery, which are not manufactured in Sri Lanka. Any machinery and equipment needed for international transportation.Goods needed for a strategic development project under the Strategic Development Project Act, No.14 of 2008.Machinery and equipment needed by the Government to provide services to the public such as gully bowsers and equipment needed for garbage disposal activities.
Goods and services exempted for domestic supply	Products manufactured locally such as tea, rubber, desiccated coconut, etc.Machinery or equipment needed to manufacture local productsEducational services provided by a person or a partnership.Goods or services funded directly by foreign organizations due to sudden natural or human disasters.Fabric manufactured locally by a manufacturer who does not have any concessions under any agreement with the Board of Investment of Sri Lanka.
Goods and services exempted for both import and domestic supply	High tech medical equipmentAgricultural products such as seeds, plants, and machineryTypes of fuel: Aviation fuel, oil for ship, and liquid petroleum gas.Essentials for disabled people: artificial limbs, wheelchairs, hearing aids, etcPharmaceutical products, medicinal drugs, and raw materials needed to produce the above.

How to calculate VAT?

1. The VAT applied for taxable goods or services can be calculated by multiplying the price of a product or service by its applicable VAT rate divided by 100. VAT = A x (B / 100) A is the product/service to which VAT is applicable in Sri Lanka. B is the applicable rate of VAT associated with the product/service in Sri Lanka. 

2. To find the total VAT to be paid for a month, you must deduct the total output tax (the VAT charged during sales) from the total input tax(the VAT paid during purchases) for the month. VAT payable = Output tax – Input tax

When should you pay VAT?

Every VAT registered business must make the payments within the provided period or before the following month’s due date to avoid penalties. The scheduled dates and periods are as follows;

You can make the VAT payments to the Inland Revenue Department through any branch of the Bank of Ceylon (BOC).

Type of Taxable Supply or Service	Period to make payments	Due Dates
On all Supplies, including manufacturers and financial services	Monthly basis (end of the month)	On or before the 20th of the following month.

You can make the VAT payments to the Inland Revenue Department through any branch of the Bank of Ceylon (BOC).

What are the additional obligations of a VAT registered person?

A VAT registered business also has other responsibilities in addition to making sure the relevant VAT is paid to the government. They are also required to:

• Display the certification of VAT registration at a visible place on business premises.
• Keep accounts for the relevant periods.
• Submit VAT payments and the VAT returns before the due dates.
• Inform the IRD if there are any changes to the name, address, ownership, and nature of the business.
• Issue tax invoices when doing transactions with other VAT registered companies, included with the following information.
  • Date of Invoice and Serial No.
  • Name of the supplier, address, and VAT registration number
  • Name of customer, address, and VAT registration number
  • Date of supply, description, and quantity.
  • The value, amount of VAT charged, and the consideration of the supply
  • The wording of ‘TAX INVOICE’ should be shown at a prominent place on the invoice.

What is a VAT return, and how to submit it?

A VAT return is a form containing information about the supply, purchases, input VAT, and output VAT of your business during a taxable period. It is a crucial document that shows the total amount of VAT paid to the government and if your business is eligible to claim a VAT refund. You should submit the VAT return on or before the end of the month, after each taxable period, either in person or by posting it to the Central Document Management Unit (CDMU) of the IRD. Alternatively, you can submit it by using the e-services of the IRD website as well.

Who is eligible for a VAT refund?

A VAT refund is issued when a business has an excess of input VAT carried forward at the end of the month. Below is an example of how ‘Input VAT’ is carried forward.

• Rohan has a business where he exports toys directly to international customers.
• During a taxable period, Rohan bought raw materials that had a total input VAT of Rs.100,000.
• However, Rohan did not charge VAT for the toys he sold because direct exports have a 0% VAT rate. Therefore, the total amount of output VAT is zero.
• Then the total amount of VAT that Rohan should pay to the government is equal to output VAT – input VAT, which is Rs. -100,000.
• This negative amount is known as an excess of input VAT.

However, every business with an excess of input VAT is not eligible for a refund. The following is a list of types of companies qualified to receive VAT refunds. (Inland Revenue Department)

• Exporters and zero-rated suppliers are entitled to refunds within 45 days.
• Manufacturers who manufacture and supply goods to exporters
• Value-added service providers who provide services to exporters
• A project approved by the Commissioner-General of Inland Revenue under section 22(7) of the Value Added Tax Act No 14 of 2002 during the project implementation period is entitled to refunds within 45 days.
• Suppliers who provide goods or services to a specified project or a Strategic Development Project under the Strategic Development Projects Act No.14 of 2008.

How to obtain a VAT refund?

In order to obtain a VAT refund without, the below process should be followed.

1. You must submit the VAT return before the due date with the following information to the correct office.

• Input VAT applied on imports and local purchases during the period
• Amount of exports and suspended sales during the period

Returns in respect of specified projects or Strategic Development Project should be submitted to the Senior Commissioner (VAT) on the 2nd floor of IRD Building. All other other returns should be submitted to the DPRA unit on the 7th floor.

2. Ensure the following is correctly mentioned on the VAT return documents.

• Input VAT on imports during the period.
• Input VAT on local purchases during the period.
• Amount of exports during the period.
• Amount of suspended sales during the period.

3. The below documents should be kept with you until the VAT Refund Unit asks you to submit these.

• a schedule of imports (deferred and upfront) with original cus-decs for the relevant period.
• Export Schedule – where return exports data match with custom data or difference below 10% of declared exports.
• Export reconciliation – where return export data does not match with custom export data or difference is above 10% of declared exports.
• Local purchases schedule with original tax invoices for the relevant period.

4. An authorized representative of the business will verify the submitted documents.

5. Before the refund is issued, the following requirements also have to be completed.

• Suspended sales confirmation
• Place visit done by the refund officer to verify the business place.
• Tax clearance certificate.
• Details of correct bank account.

Provided the details and reports are accurate, the IRD will issue a cheque to the given bank account holder’s name and a credit voucher under the registered person’s name. The above process is also available through the Inland Revenue department website.

How can Simplebooks help?

This article provides everything you need to know about VAT in Sri Lanka. Using the steps provided in this article, you can easily make all your VAT obligations without a hassle. However, if you need any further information or guidance, get in touch with us today for a free personal consultation.