• IRD assures appropriate measures in place to address tax evasion
• Sporadic instances of abuse observed, but not general practice

Denying recent reports, the Inland Revenue Department (IRD) has clarified that there has been no widespread abuse of temporary Value-Added Tax (VAT) certificates and that only a few isolated incidents have been identified, which are currently under investigation. 

The IRD has assured that appropriate measures would be taken to address and prevent such abuses in future.

During the previous week, officials from Sri Lanka Customs attending the Sectoral Oversight Committee on National Economic and Physical Plans made several startling revelations regarding the misuse of temporary VAT certificates by well-known companies. 

According to these officials, these companies engage third-party businesses, which hold temporary VAT certificates in order to import products at undervalued prices. These businesses operate for 11 months before abruptly ceasing all imports, thereby evading taxes and VAT payments as permanent certificate holders. Subsequently, new businesses are established, often under the names of nattamis in the Pettah market.

However, speaking to The Sunday Morning Business, IRD Deputy Commissioner General – Tax Administration (LTU, Revenue Monitoring, Refund, Investigation, and Intelligence) T.M.J.N. Bandara stated that although sporadic instances of such occurrences had been observed, it was not a widespread phenomenon. 

Nevertheless, he revealed that the IRD was actively implementing protocols to counteract such activities and in cases where a business was flagged for engaging in such conduct, a dedicated investigation would be conducted. 

He noted that obtaining a temporary VAT certificate was not a straightforward process, thereby preventing easy abuse of the system, contrary to what had been reported. 

“We don’t grant temporary VAT certificates to anyone who applies. Applicants must have a Taxpayer Identification Number (TIN) registration, which requires them to provide all their details, including contact details and employment. The temporary VAT certificate will be issued based on this information under the TIN number. Therefore, the possibility of such widespread abuse of this system is unlikely,” he stated.

He further explained that temporary VAT certificates granted permission to import one specific type of goods for a period of three months.

According to the officials of Sri Lanka Customs, temporary VAT holders in Sri Lanka have increased from 14% in 2016 to 31% by 2023. They further revealed that about 40% of phones imported by telephone service providers were imported through such temporary VAT holders.

Therefore, the officials of Sri Lanka Customs have proposed the imposition of a 5% withholding tax on all temporary VAT holders in Sri Lanka, which would force them to become permanent VAT holders and open tax files, and to deduct the 5% withholding tax from the taxes paid by such businesses.