• Local tax system is complex because Sri Lanka lacks a national tax policy
• Each time a new minister takes over tax matters, tax policies are changed
• Every year during budget proposals, tax laws are changed and amended
• Inconsistency in tax system goes against the basic principles of taxation
• IRD hardly consulted when higher authorities take major policy decisions
• During the last four years, VAT thresholds and rates changed repeatedly
• No trader has a right to sell any goods above the Maximum Retail Price
• Traders must display VAT-exempted items list, VAT registration certificate
• VAT hike amid economic hardship goes against basic principle of taxation

The complexity of Sri Lanka’s tax system is due to the lack of a national tax policy, with tax policies being constantly changed as and when ministers change and yearly budget proposals are drawn up, going against the basic principles of taxation, charged former Deputy Commissioner of the Inland Revenue Department (IRD) N.M.M. Mifly.

“There are four principles of taxation – fairness, simplicity, consistency, and efficiency – and all of them have been violated. Unfortunately, the IRD is hardly consulted when major policy decisions are taken by the higher authorities,” the tax expert said, in an interview with The Sunday Morning.

Decrying the dismal and convoluted state of the system, he pointed out that VAT thresholds and Value-Added Tax (VAT) rates had been changed several times in the last few years, leading to much confusion. “The amazing thing is that there were two thresholds and two sets of tax rates for the years of assessment 2019/’20 and 2022/’23. So how can the IRD maintain consistency and simplicity in preparing tax returns and forms? During the last four years, how many times has the VAT rate been changed? Earlier it was 15%. Then it was reduced to 8%. Again it was increased to 12% and then again to 15% and now again to 18%. You are confused, I am confused, and the general public is confused. So who is responsible for this? Government policy.”

Emphasising that constantly changing tax policies had resulted in the general public losing confidence in the tax system, he noted that the victims of this haphazardness were the country and the general public. “For the last 70 years, during election time, taxation has become a football. Each political party plays their political campaign accordingly. The result is what we see now: bankruptcy,” he added.

In the course of the interview, Mifly outlined how consumers could educate and protect themselves in relation to tax, avenues of seeking justice, mandatory rules that traders must abide by, and how Sri Lanka could improve in terms of ensuring consumer rights.

Following are excerpts:

Given that some places that are not registered for VAT are nevertheless adding VAT to their prices, how can consumers protect themselves?

No trader (VAT-registered person) has a right to sell any goods above the Maximum Retail Price (MRP). 

There can be one possible scenario for a shorter period for selling goods above the MRP by readjusting the MRP, which applies for when a trader has purchased trading stock before 1 January 2024 either before the removal of the VAT exemption or before the increase in VAT from 15% to 18%. In such a situation, the registered trader can mention the additional VAT portion above the MRP label and sell the product. This only applies to transitional cases. In all other cases, no one has a right to charge over the MRP.

If a trader sells any goods that were purchased or manufactured after 1 January, such goods cannot be sold above the MRP as the VAT is already included in the MRP by the manufacturer or importer of such goods. That is the maximum that the trader can charge from the consumer. 

In general, no one (VAT-registered trader or non-VAT-registered trader) is allowed to sell any goods above the MRP. If this is done, it is illegal and can be brought to the notice of the Consumer Affairs Authority (CAA).

There are two types of customers: VAT-registered customers and non-VAT-registered customers. The type of invoice – tax invoice or commercial invoice – is issued by the VAT-registered trader depending on the type of the customer.

Section 20 of the VAT Act talks about the tax invoice and its requirements. A tax invoice should be issued by a VAT-registered person to another VAT-registered person so that the second VAT-registered person can claim the VAT portion paid to the first person as the input tax credit against his payable output tax.

The VAT portion of goods or services can be separately shown only in the tax invoice, which is given to VAT-registered persons so that they can set it off as the VAT input tax against their output tax. Section 20 of the VAT Act No.14 of 2002 is very explicit on this matter. 

The following should be set out in the tax invoice:

• Name, address, and VAT number of the supplier and the buyer
• Date and serial number of the tax invoice
• Description and quantity of the supply
• Value of the supply and the VAT amount charged
• Words ‘tax invoice’ should be in a visible place on the tax invoice

In relation to non-VAT-registered persons or customers, an ordinary commercial invoice is issued, where the VAT portion is not separately mentioned as it is already included in the MRP.

What avenues do customers have in terms of seeking justice if they have been cheated? Whom should they reach out to and what steps should they take?

There are two ways to address this type of cheating by dishonest traders. 

If the charged price is above the MRP, the consumer can make a complaint to the CAA. If the trader has charged above the MRP stating the additional amount as VAT, thereby implying that he is collecting VAT, then the consumer can complain to the IRD as it is a punishable offence under Section 67(1) of the VAT Act. Under this, a Magistrate’s Court can impose a fine not exceeding Rs. 25,000 and/or imprisonment not exceeding six months.

How can people educate themselves on the VAT-inclusive list and the exemptions?

The list of VAT-exempted items, which had nearly 150 items, has been reduced to about 45 items. The VAT-exempted items are mentioned in the VAT (Amendment) Act No.32 of 2023 in Part 1 of the First Schedule. The list of these exempted items was published by the IRD on its website and via a paper notice on 18 December 2023. All other items are VAT-able. 

Further, Section 15(4) of the VAT Act mandates all VAT-registered persons and traders to display the list of VAT exempted items available for sale at their business place. For example, items such as infant milk powder, wheat, wheat flour, rice, rice flour, etc. are VAT exempted.

It is a punishable office if a trader does not display the list of exempted items in the place of business. However, I have not seen such lists of exemption displayed at shops or even at leading supermarkets.

Non-compliance with this requirement is an offence for which the Commissioner General of Inland Revenue (CGIR) can impose a penalty on such a person under Section 15(5) of the VAT Act.

What is the process to check whether an institution is VAT registered?

The list of deactivated persons (nearly 49,000 as at 26 September 2023) is displayed on the IRD website but unfortunately VAT-registered persons’ names are not published on the website due to the secrecy provisions of the VAT Act. 

Under Section 73 of the VAT Act, a tax official is bound to preserve secrecy with regard to all the matters that come to his knowledge in performing his duties unless and otherwise stated in the act. Therefore, if any customer wants to know if a party is registered or not, they have to write to the CGIR and get the information. 

How do you view the VAT hike given the ongoing economic hardship and rise in the cost of living?

This is against the basic principles of taxation, which are fairness, simplicity, consistency, and efficiency. This hike at this time of economic hardship goes against the basic principle of fairness of taxation. Fairness means the ability to pay taxes – direct as well as indirect.

It is obvious that people are struggling to live nowadays. The VAT rate hike and reduction of the threshold are severe blows to the public in general and to middle and lower middle class people in particular.

The Government had to take this unpopular decision due to the lack of any other alternative, but I am uncertain on whether the IRD can collect this estimated VAT revenue through this hike. Given the economic hardships and crises, people’s purchasing power is at a minimum. Consumption is at a low ebb. As a result, the expected additional VAT revenue from this hike is a bigger challenge to the IRD.

While the people have been called upon to report any VAT-related issues, do the CAA and the IRD have the manpower and capacity to handle complaints?

I do not think that the CAA has the manpower and capacity in this regard, as tax matters are rather technical. The IRD has the capacity to do so if it is related to tax matters. However, both are State institutions and they can arrest such situations by working in collaboration.

Do you see that happening in a practical sense? Will such matters just drag on for a long time or will there be immediate relief for the people?

No, they will drag on.

Are businesses required to have price tags that show prices inclusive of all taxes?

Yes, MRP of any goods or services inclusive of the taxes should be displayed. It is a mandatory requirement. However, it is not happening. 

It has been made mandatory for businesses charging VAT to display their certificate of registration. Do you see this happening or will businesses find ways around it?

It is a mandatory requirement for every VAT-registered person to display the registration certificate at a visible place at the business. Failing to display it is an offence and the CGIR can impose a penalty on such a person in terms of Section 15(5)(a) of the VAT Act – an amount not exceeding Rs. 50,000.

Traders are not displaying the VAT registration certificate and they are also not displaying the list of exemptions, despite these being mandatory, but the people – everyone over the age of 18 – are being called upon to register with the IRD and obtain a Taxpayer Identification Number (TIN). Why should the people comply when the other parties are not complying and continuing to operate in an illegal manner?

That’s a million-dollar question. The answer is rather difficult. There is no willingness on the part of the implementing agencies. As you said, this is a problem. There are laws for safeguarding the general public and the consumers but in reality they are not implemented.

At the same time there are some laws – or purported laws, as I cannot say whether the mandatory requirement for all above 18 to obtain TIN registration is within the law – which are being questioned by the people; it is a problem they are facing. Why should people comply when their rights are not safeguarded by the Government authorities?

How can Sri Lanka improve in terms of ensuring consumer rights?

Unfortunately, there is no such charter for consumers. There is a Taxpayer Charter prepared by the IRD explaining the rights and obligations of taxpayers, which has been uploaded to the IRD website. But there is no consumer charter. 

Further, another document under the title ‘Measures for the prevention of corruption at IRD’ has been uploaded to the IRD website. However, I am not sure how many members of the general public have read it and acted upon it.

I believe that a consumer charter should be prepared and uploaded to the public system and be in the public domain. It is then that consumers will know their rights and obligations. However, I don’t think this is the duty of the IRD; it is the duty of the CAA.

Since no such consumer charter has been prepared or compiled to ensure the protection of consumers in relation to taxation, a vast section of the public perceives the tax system as a monster. However, tax is not a monster; it is our ignorance that is the monster.

The following rights of the consumers should be ensured to make our tax system more vibrant and consumer friendly:

• Right to information: consumers have the right to clear and accurate information about the taxes applied to the products or services they purchase; this includes understanding the tax rates, how they are calculated, and any exemptions or rebates that may apply
• Right to fair pricing: consumers have the right to fair and reasonable pricing, which means that the tax burden should not disproportionately impact the final price of goods and services and businesses should not engage in unfair pricing practices
• Right to redress: if consumers believe they have been charged an incorrect amount of tax or if they have concerns about the fairness of the tax system, they have the right to seek redress through appropriate channels, such as filing complaints with tax authorities or consumer protection agencies
• Right to privacy: consumers have the right to privacy concerning their tax-related information; tax collection and enforcement should be carried out in a manner that respects individuals’ privacy rights
• Right to representation: consumers have the right to be represented in matters related to indirect taxation, which includes the right to have their concerns and interests considered in the development of tax policies through appropriate channels, such as consumer advocacy groups
• Right to understandable taxation: tax laws and regulations should be presented in a clear and understandable manner; consumers have the right to easily comprehend how taxes are applied and how they contribute to the overall cost of goods and services
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• Right to adequate quality and safety: indirect taxes should not compromise the quality or safety standards of products or services; consumers have the right to expect that the goods and services they purchase meet established quality and safety standards

How do you view Sri Lanka’s tax structure?

It is rather complicated and intricate. As a result, tax literacy is very low in society. You will hardly find a person who knows all the aspects of a single type of tax, be it Income Tax or VAT. If even tax professionals or experts don’t have this knowledge, how can you expect the general public to be aware of their tax obligations?

Why is the tax structure so complex, with both direct and indirect taxes, to the point where it has led to an unfair and unbalanced state of affairs for certain sections of society?

The primary reason for such complexity is that there is no national tax policy. When a minister takes over tax matters, tax policies are changed. Every year during budget proposals, tax laws are changed and amended. This inconsistency is also against the basic principles of taxation.

As I said, there are four principles of taxation – fairness, simplicity, consistency, and efficiency – and all of them have been violated. Unfortunately, the IRD is hardly consulted when such major policy decisions are taken by the higher authorities.

For example, Income Tax is an annual tax. The threshold and the tax rates are for a year. During the last four years, VAT thresholds have been changed three times. The amazing thing is that there were two thresholds and two sets of tax rates for the years of assessment 2019/’20 and 2022/’23. So how can the IRD maintain consistency and simplicity in preparing tax returns and forms?

During the last few years, how many times has the VAT rate been changed? Earlier it was 15%. Then it was reduced to 8%. Again it was increased to 12%, then again to 15%, and now again to 18%. All this happened within a short period of four years. You are confused, I am confused, and the general public is confused. So who is responsible for this? Government policy. 

When you change tax policies often, against the basic principles of taxation, the general public loses confidence in the tax system. The victims are the country and the general public. For the last 70 years, during election time, taxation has become a football. Each political party plays their political campaign accordingly. The result is what we see now: bankruptcy.