VAT default - input credit

I refer to the Finance Minister’s speech made last week in Parliament wherein the inadequate checking of VAT input credit was pointed out as an important feature resulting in VAT default.

I admit that checking of input credit is equally important in calculating the output liability for VAT .ie Tax defaulters could show a lesser VAT liability by suppressing sales or claim higher input credit or even both.

As a remedy it has been suggested (not by the Ministry) that VAT payers should include a statement giving details of input credit claimed by them every month when submitting their VAT return.

This procedure will be an unnecessary burden on the VAT payers who will have to prepare and submit numerous documents every month. Even the Dept. of Inland Revenue will require more time to scrutinise all details submitted and finalisation of VAT Returns will be unduly delayed.

The best method to verify VAT input credit would be to carry out random and sample checks. It has been proven that random and sample checking techniques give better results than the monotonous task of detailed checking.

When GST was applicable (1.4.1998 to 31.7.2002), the Dept. of Inland Revenue used to carry out such sample checking for a particular period.

Input credit is embedded in the following documents:

(1) Customs Duty declaration

(2) Local Suppliers’ Invoices.

In the case of Importers, it could be observed that a material portion of the input credit claimed by them is embedded in Customs Duty declarations (which are few in number) and only a small portion is embedded in Suppliers’ Invoices (which are numerous).

I have experience where the GST auditors when checking the input credit have found it difficult to reconcile the Customs input credit as per their records with the input credit claimed by the Tax payer. This was mainly due to the lack of co-ordination between the Customs Dept. and the Inland Revenue Dept.

Therefore, to ease the burden on all concerned, I suggest the following procedure:

(a) At present importers pay Customs Duty, Surcharge, VAT, PAL (Port & Airport Levy), Computer & Examination Charges etc. by drawing a single cheque in favour of the Director General of Customs. It would be better if the VAT payment could be segregated by issuing a separate cheque. The tax payers could submit the following details to the Dept. of Inland Revenue when required:

i. Value in Foreign Currency.

ii. Custom Entry No. and the date.

iii. Value of total payment

IV. Value of VAT payment and the respective Cheque No. and date of payment.

v. The date on which the VAT payment cheque was paid by the Bank.

When these particulars are scrutinised by the Inland Revenue officers, the major part of checking Customs VAT input credit is over.

(b) In the case of input credit from local suppliers the tax payers could submit a schedule giving details as and when requested. Since most companies have computerised their accounts, checking these particulars is simplified.

(c) VAT Return & Remittance Form

This Return has to be modified. It could be observed that separate cages are provided for 10% and 20% VAT output liability. Whereas, only one cage each is available to show the input credit available with the Customs and the Local Suppliers. It could be understood that this serves no purpose as the Revenue Officer will not be in a position to check this information correctly. Therefore, I suggest two separate cages each be provided for 1O% & 20% input credit with the Customs and the Local Suppliers.

When carrying out the random check the officers could select 20% input credit on import or 10% input credit on local purchases or vice versa. This will strengthen the authenticity of the checking carried out.

The Department of Inland Revenue should check whether tax payers are submitting the returns regularly and also on the due dates, Returns should be checked by the Data Processing Unit of the Department in an orderly manner. In the past, when GST was in force, there have been instances where penalty has been imposed for alleged underpayment because the refund claimed from the previous month was not checked.

Whenever VAT is not paid it is better to send a letter to the tax payer requesting for his explanation before sending him a Notice of Assessment. My experience shows that whenever Assessment Notices are served with penalty even when the tax payer replies immediately, the details given are not checked by the department and the respective entries are not reversed. After some time the tax payer is served with another Notice and when he requests for a tax clearance certificate additional problems are faced by him

There should be co-ordination between the Data Processing Unit of the Dept. of Inland Revenue, the Internal Audit Dept. and the Assessor in charge. Any protest made or explanations given by the tax payer should be looked into and corrective action taken early.

It is better to appoint additional team of auditors for the Dept. of Inland Revenue consisting of past Commissioners, Deputy Commissioners and also retired Auditors to ensure that all arrears in work is finished without further delay and records are updated.

It is advisable for the department to maintain a policy of understanding with the tax payer. Generally, an immediate penalty of 1O% is imposed when an under payment is made unintentionally or if payment is delayed by one or two days. Due to this reason, the tax payer may suppress more information. Penalties could be waived off considering the past reputation of the tax payer.

As mentioned in the past, the Customs Department plays a major role in the collection of VAT. Special attention should be paid towards grey and fake imports, under invoicing, smuggling and bringing items of commercial value for personal use. If these are properly checked more revenue could be earned.

Customs should not take measures of levying penalties for simple mistakes. For eg: 5% penalty is imposed if items are received after one month from the date of making foreign remittance for them. In such instances, the date on which the goods are received is taken into account and not the date of Bill of Lading or the Airway Bill. We are aware that shipments from some countries take nearly 2-3 weeks to reach Sri Lanka and the supplier is left with hardly any time to supply the goods within the allocated period of one month. Penalty is also imposed if the date of the Invoice is later than the date of the Bill of Lading/Airway Bill. There are suppliers who raise their Invoice only after the goods are shipped.

What I wish to stress on is that more attention should be paid to detecting frauds and not on policy violations which are generally committed unintentionally not involving any fraud.

There are suggestions to reshuffle VAT rates. I categorically state that this is not the time to do so, because it is the duty of the Government and the Dept. of Inland Revenue to verify what the draw-backs are and take corrective action before reshuffling the rates. Otherwise, it will bring unpopularity to the government. There is also a suspicion in the minds of the people that VAT rates may be increased shortly or at the next Budget. ...

I presume the above suggestions will catch the eye of the officials concerned and look forward to corrective action.

S.R. Balachandran,
Council Member
The National Chamber Of Commerce
Of Sri Lanka