Guide to value added tax (VAT)

What is VAT

VAT is a tax that applies at each stage of goods or services passing from suppliers to consumers. This means VAT is charged and collected at every step of the supply chain. To prevent double taxation, businesses can claim credit for the VAT they've paid on their purchases. This mechanism helps minimize the cascading effect of taxes.

Important sections of the VAT act in Sri Lanka

Imposition - Section 2
Time of supply - Section 4
Value of supply - Section 5
Tax invoice - Section 20

VAT chargeability

VAT is charged at the time of supply on every taxable supply of goods or services made during a taxable period by a registered person engaged in a taxable activity in Sri Lanka.

It's also charged on the importation of goods into Sri Lanka by any person. If an importer is registered for VAT, they must charge VAT on sales and can claim back the VAT paid at the customs point as input tax. Importantly, this VAT paid at customs isn't an additional cost to pass on to the customer.

Standard VAT rate

Current standard VAT rate is 18%.

VAT registration threshold

You need to register for VAT if the total value of your taxable supplies exceeds Rs. 15 million per quarter or Rs. 60 million per year.

Who needs to register for VAT?

Are you running a business that deals with taxable activities?
Are the goods or services you offer not exempt?
Is the value of your taxable supplies over Rs. 15 million per quarter or Rs. 60 million per year?

If you answered "yes" to these questions, you need to register for VAT.

But even if your taxable supplies are below these amounts, you can still choose to register voluntarily with the approval from the Commissioner General of Inland Revenue.

Once you register for the VAT, the threshold is not relevant thereafter and you should charge VAT from your supplies.

All registered persons should display the registration certificate in the business premises.

Invoicing for VAT customer - tax invoice

You can only issue a tax invoice to a registered person within 28 days from the supply date, if they request it within 14 days.

The invoice must include the below information,

Supplier’s name, address, and registration number.
Recipient’s name and address.
Invoice issuance date and its unique serial/ invoice number.
Supply date and describe the goods or services.
Quantity or volume of the items supplied.
Supply value, the tax amount, and the total value.
The words “TAX INVOICE” clearly on the invoice.

Invoicing for Non-VAT customers

You can't issue a tax invoice to non-registered entities except for government bodies (like departments, provincial councils, local authorities, and corporations),

For those not registered, issue a tax-inclusive invoice, an invoice for the total value with the VAT component.

A tax invoice can’t be issued more than once. If lost, a copy marked "a copy only" can be provided.

VAT on commission agents

Commission agents operate on a commission basis and don't own the products they sell. Since they provide a service rather than sell goods themselves, the commission they earn is subject to liability.

VAT on manufacturers

In manufacturing, sales are generally subject to VAT unless the product is specifically exempted. Manufacturers can claim input tax credits on purchases of raw materials and related expenses, which helps offset their VAT liabilities.

VAT on exporters

When exporting goods or services, VAT is charged at a rate of 0%. Even though the rate is 0%, exporters can still claim input tax credits. This often results in a refund. To manage cash flow and avoid issues with refunds, exporters can opt to register under the SVAT scheme as registered identified purchasers (RIPs).

VAT on tea manufacturers

Tea manufacturers became liable for VAT starting January 1, 2024. Since tea is typically sold through the Colombo Tea Auction, tea factory owners have the option to register under the SVAT Scheme. This allows them to suspend VAT on the supplies made through the Colombo Tea Auction.

Input tax

Input tax cannot be deducted under the following circumstances:

When the supply of goods or services received is not connected with the taxable activity or included in the value of taxable supply.
When the purchase of goods or services is not supported by a valid tax invoice received within twelve months from the end of the relevant taxable period.
When the import goods are not supported by a valid customs declaration or other authenticated document issued by the Director-General of Customs within twenty-four months from the end of the relevant taxable period.
Input tax not claimed within the stipulated time frame cannot be recovered.
Any allowable input tax in excess of output tax can be carried forward and claimed in subsequent taxable periods.

Accounting for VAT

This VAT collected is not considered part of their turnover but is collected on behalf of the government.

Input tax on expenses isn't included in the cost, but any disallowed input tax can be treated as part of the cost.

The difference between the output tax and input tax claimable is the VAT payable to the government.