Removing trading activities from VAT and limiting SSCL only to non-VAT registrants

THE Value Added Tax (VAT) is imposed quarterly at the rate of 18% on four principal branches of business activity: manufacture, imports, trading (buying and selling), and services. Similarly, the Social Security Contribution Levy (SSCL) is also imposed quarterly at the rate of 2.5% on the very same branches of business.

- By N.M.M. Mifly

It is difficult for any rational observer — except perhaps those in the political sphere — to comprehend the logic of maintaining such double taxation on the same business activities.

The imposition of such dual taxes of similar nature on the same business turnover may serve short-term political convenience, but it does not reflect sound economic or fiscal policy wisdom.

Splitting what is essentially a single sales tax into two components, VAT and SSCL, may create the illusion of moderation, as each appears less burdensome when considered separately. However, this illusion cannot be sustained in the long run. Ultimately, the combined impact of these taxes increases the cost of doing business and triggers inflations, undermining efficiency of both tax administration and taxpayers.

It is a pity—if not a tragedy—that the NPP Government, which came to power with an overwhelming popular mandate to end a 76-year curse and open a new political chapter, now appears to be following the same outdated and illogical fiscal policies of its predecessors. It is not a secret that this duplicate sales tax of SSCL was introduced by the Ranil Wickremesinghe Government effective from 1 October 2022.

As the author highlighted in his earlier article “Keeping Trading Activity out of VAT: A Correction of a Bureaucratic Slip-up,” both the Goods and Services Tax (GST) and the Value Added Tax (VAT) were originally designed to exclude trading (buying and selling) activities from their scope. It is a matter of record that trading was later brought within the VAT net due to arbitrary bureaucratic outfox. However misguided, even that decision retained a semblance of prudence by maintaining a substantial disparity in the annual registration thresholds — Rs. 2,000 million for trading activities and Rs. 12 million for other non-trading activities.