KEEPING TRADING ACTIVITY OUT OF VAT- A CORRECTION OF BUREAUCRATIC SLIPUP

This article examines the original legislative intent to exclude trading activity from the scope of Value Added Tax (VAT) and its predecessor, the Goods and Services Tax (GST). It critiques the subsequent policy shift that brought trading into the VAT net, arguing that this move represents a bureaucratic and fiscal error that contradicts sound tax principles and imposes an undue burden on the economy.

- By N. M. M. Mifly

Value Added Tax (VAT) is presently charged on imports and on the following activities done as a business with some stipulations:

■Manufacturing and production,

■Provision of service, and

■Trading. (Defined as the local buying and selling of goods in the wholesale or retail market).

Even though VAT was nominally introduced effective from 01st August 2002, it was virtually effective from 1998 in the name of GST which was introduced by then People's Alliance (PA) government abolishing the Turnover Tax (TT). The name change from GST to VAT in 2002 was largely political, following an election promise by the incoming UNP government to abolish the GST.

A comparative analysis of the two Acts reveals near-identical structures and mechanisms, making the change one of branding rather than substantive fiscal reform.

Prudent Fiscal Policy Decision: Exclusion of Trading Activity from the Scopes of both GST and VAT

A point of rare consensus among fiscal policymakers and legislators across the political spectrum was the deliberate exclusion of trading activities from both the GST and VAT frameworks. This was a considered decision rooted in the anticipation of serious practical complications and economic distortions should such a tax be applied on the trading.

The wordings and Section 3 of both acts that excluded the trading activity from the scope of GST and VAT were identical and verbatim.

Section 3 of the respective GST Act, No. 34 of 1996 and VAT Act, No. 14 of 2002:

"Notwithstanding the provisions of section 2, the tax shall not be charged on the wholesale or retail supply of goods, other than on the wholesale or retail supply of goods, by-

(a) manufacturer of such goods; or

(b) an importer of such goods; or

(c) a supplier who is unable to satisfy the Commissioner-General, as to the source from which the goods supplied by him, were acquired: or"