Tirani Kulathunge  00:11
Welcome to another episode of Advocata Studio. Today we are going to discuss something that's more digital. I'd rather say so. We're looking at what's digital VAT, what's digital tax, all of these confusions, and then there's digital service tax also. To help us understand all of this, we got our usual tax expert, mr. Suresh Pereira, the principal of KPMG, tax principal of KPMG Sri Lanka. Thank you so much for joining, mr. Suresh. So then, just days ago, mr. Donald Trump, U.S. President, threatened 100% tariff on any country that imposes a digital service tax on U.S. companies, explicitly naming European countries close to legislating one, and what he said was, the tax will immediately be met with 100% tariff or any and all goods sent to the America, sent to the United States of America, and this would override basically all trade deals. Does a threat like this change the calculus, or for a country like Sri Lanka, and or is it like purely aimed at just Europe? Do we have to worry at all?

Speaker 1  01:32
Okay, let me let me put it this way. So the comment that has been made by the president of USA, mr. Donald Trump, is in relation to countries imposing what's called DST digital service taxes. So Sri Lanka right now is implementing what is called digital VAT or VAT on digital services provided by non-resident persons. So these are two different concepts. So, we are not Sri Lanka is not imposing digital services tax. Sri Lanka is imposing VAT on digital services.

Tirani Kulathunge  02:12
What are the differences again? Provided

Speaker 1  02:14
by non-residents. So, these are two differences. These are two taxes. Let me explain the differences. So, digital services tax means basically these tech companies providing services to consumers in various jurisdictions, various countries, deriving value, deriving revenue in relation to those revenues. Countries come up with unique tax frameworks, unique taxes to collect taxes from those tech companies in relation to those revenues that they derive from their jurisdiction, from their consumers. So these services are not caught within the normal standard tax frameworks. For instance, if you take the income tax statutes in those countries, those are not wide enough to capture these services that are being provided from outside those countries. So, this is this is the how to say the evolution of the way in which services are being provided due to due to the e-commerce, due to the development of the technology, so things have changed. So our tax frameworks are to address the brick and mortar industries, not exactly this e-commerce world. Okay. So so many when many countries realised that there are revenues being revenues being derived. There are payments that are being made by the consumers in their countries to tech companies outside that particular country. They had to do something, so they are basically coming up with these new taxes called digital services taxes. In different countries, different names are being used. Okay, in USA, these are being most of these taxes are being subject should be paid by the USA tech companies. So USA is thinking that this is unfair tax regime, and therefore that they are going to resist is what the president of the USA say, right? So that is that concept is different. So this what we have introduced is what is called the digital VAT. This is basically this is not a new tax. This is the existing VAT framework. We do have VAT in Sri Lanka. Okay. So within that framework, when the non when the non residents are providing services to Sri Lankan consumers via electronic platforms. In relation to those services, it is wet that is being collected by the Sri Lankan government.

Tirani Kulathunge  04:52
18%

Speaker 1  04:53
Yeah, at the rate of 18% So this concept is applicable is there in more than 100 countries. So the. That you are asking, should Sri Lanka be worried whether we will be exposed to this 100% tariff stress coming from mr. Trump? My answer is no, because these are he is threatening in in relation to DST digital services taxes. It's a different basket altogether. Whereas what we have implemented is a digital VAT. Two different things.

Tirani Kulathunge  05:23
But is it would would there be chances again? I mean, this is just people might question this, right? Whether Washington would mistake, let's say, our digital VAT and saying that okay, you have something similar to the digital service tax, any of that regard. Okay,

Speaker 1  05:41
let me let me let me put it this way. I believe the policymakers are aware of the taxes in different countries, and this Sri Lankan digital VAT is not something unique. This framework is being used. Obviously, this concept is there in other countries. Over 100 countries they impose a digital VAT. Yeah. So I think a reasonable policy adviser has to make the has to see the distinction between the DST and the digital wealth. So to me, in my mind, I don't think there is any risk whatsoever. This being misinterpreted as a digital service tax, so this is not the DST.

Tirani Kulathunge  06:20
Right. Is there a need for a digital service tax in Sri Lanka?

Speaker 1  06:24
Okay, that's a good question. Now, here what happens is, from our jurisdiction also, like India to any other countries, Europe, there are services being provided from outside Sri Lanka, and there is there are revenues that are going from Sri Lanka, from Sri Lanka to outside Sri Lanka. Whether we should go after those revenues, my personal view is yes. But at the same time, this threat is there if we try to use this form of taxation called the DSTA, Digital Services Tax. So that is a policy decision that we have to take. But there is no denial that there is revenue derived by those tech companies from Sri Lanka. So DST is a revenue-based tax. Digital tax is a transaction-based tax. Consumption-based. Consumption tax. It's based on the what you call the destination principle. So, where the service is being consumed, the tax should be collected by that. That is what Sri Lanka is doing. Not something, not something unique.

Tirani Kulathunge  07:29
Yeah. If you could, let's let's dive into the legal framework on digital VAT at the moment. So, in the actual legal architecture, the value-added tax amendment bill sets the framework where, actually, just walk us through what's actually in the legal text versus what's left for regulation or guidance.

Speaker 1  07:55
Yeah, let let me make it in a short way. So, so basically, once upon a time in Sri Lanka, there was no legal provision for taxing this kind of digital VAT. Right. So, according to charging section of the VAT Act, supply of goods, supply of services, while carrying on a taxable activity in Sri Lanka is liable, and also importation of goods attracted VAT, but not importation of services. So, therefore, this kind of services being provided by non-residents from outside Sri Lanka to Sri Lankan recipients was not falling within the charging section. So, in 2025, there was an amendment that was introduced to the charging section of the Indian Revenue Act, namely the 2C, to say that any non-resident person providing services via a digital platform, via electronic platform, to Sri Lankan recipients liable for tax, provided they their value of supply happens to be above the registration threshold. So right now it is 60 million per year. So any person providing a service via electronic platform, a non-resident person should register with the Inland Revenue Department according to the legal framework that has been introduced. So when I say legal framework, in 2025 there were including the charging section there were certain sections that were introduced, certain definitions that were introduced, and in 2026 amendment recently some of those points have been refined, and in 2025, in in relation to 2025, there was a gazet that was introduced to introduce supplementary rules, but that gazet will be abolished. There will be a new gazet that will be introduced to supplement the provisions in the BAT two amendments. But up to date, that cassette has not been finalised and published. So that is where it is. So that's the legal framework with regard to the digital vaccine in Sri Lanka. Is there any

Tirani Kulathunge  10:12
expectations for any recent activities on that?

Speaker 1  10:15
So the position is this: with effect from first of July, 2026, the digital web framework is applicable. That means any non-resident person providing a service to a Sri Lankan person via electronic platform, if the service provision is value of supply of the service provision is above 60 million a year has to register with the Indian Revenue Department.

Tirani Kulathunge  10:47
Okay, I have this question again now with the U-turn again. Now, given that that does this conversation, I think I had this podcast with you also. The absorption of SSCL with VAT. How does it look like with digital VAT in this? Does the SSCL is still a part of it or not?

Speaker 1  11:11
No, two things. One is now you said absorption of the SSCL with regard to the VAT. Yes, we have seen that happening in relation to Financial services,

Tirani Kulathunge  11:21
okay. Digital VAT, but financial services. No

Speaker 1  11:24
financial services only. So let me explain that one, right? So, say finances, banks, etc. who are providing financial services under the earlier framework had to pay both VAT on financial services at the rate of 18% plus SSE. at the rate of 2.5% on the value addition. Same base, but two different price, two different tax returns to be filed. So government added, I think, the prudent thing, eliminated, abolished two point percent SSEL, added it, consolidated it to the VAT rate of 18% so absorption happened in the financial VAT. So 18% went up to 20.5% So I think, if I'm not mistaken, that is what you refer to in relation to the absorption. So that is what happened. So in relation to the digital VAT, there is no absorption. No

Tirani Kulathunge  12:20
right. Next thing is that to be a recipient, or let's say to be deemed for for digital VAT, what are the conditions that's necessary?

Speaker 1  12:30
Yeah, correct. So basically, when a non-resident person is supplying services via electronic platform, the recipient of the service has to be a resident. Now, who is a resident? There are four criteria given. Out of the four criteria, at least two criteria must be fulfilled. So, what are these four criteria? Out of which two criteria should be fulfilled? The first one is the billing address of that recipient should be could be residential address or the business address should be in Sri Lanka. First criteria. The second one is payment should be made via Sri Lankan financial institution bank or a financial institution. The third one is the payment instrument use. Let's say the credit card should have been issued in Sri Lanka. And the fourth one is the IP address should be a Sri Lankan one. So there are four criteria. Out of the four criteria, at least two criteria should be fulfilled. If that's the case, then that person is considered as a person resident in Sri Lanka who is who is in receipt of the digital services.

Tirani Kulathunge  13:37
Okay. So I had this another question. Of course, most of Sri Lankans know the crypto problem. What are your thoughts on this now? Given that digital service tax, digital VAT, all of these have some application for electronic platforms, does crypto has any space for this taxation? Are there any space for taxation on crypto in Sri Lanka?

Speaker 1  14:03
Okay, crypto tax. That's what you're asking. Yes. So basically, when you talk about the electronic platforms and the crypto, yes, basically cryptos are basically traded on electronic platforms, right? So that's I think it's given. And let me try to elaborate a little bit with regard to the taxation of the crypto.

Tirani Kulathunge  14:19
Yeah.

Speaker 1  14:20
So in Sri Lanka, the law is silent with regard to the crypto taxation. We have the general law. We don't have express rules with regard to the taxation of crypto. So it's up to in my eyes, it's a lacuna, and that is creating a confusion in Sri Lanka. Okay. So also I have to say that nowadays we are talking a lot with regard to the financial frauds, and at one end of these financial frauds, you always find crypto involvement also.

Tirani Kulathunge  14:52
Yes, yes. Right.

Speaker 1  14:53
So what I'm telling here is that Sri Lanka should follow what. What is happening in India? In India also, they don't have regulations in relation to cryptocurrency. It is not a regulated industry. But there are express provisions in their tax code with regard to the taxation of crypto. Okay. So that enables the policy that enables the authorities to keep an eye with regard to the crypto transactions. So that is a deterrent for using crypto for financial frauds.

Tirani Kulathunge  15:29
Let me get back to that. So there's authorities that can see or overlooks crypto transactions. Which authority does that?

Speaker 1  15:39
No. So what will happen here is that if we have clear, express provisions with regard to taxation of the crypto transactions, invariably the Inland Revenue Department officers are going to be more vigilant with regard to the tracing and tracking the crypto transactions in in the context of the taxation.

Tirani Kulathunge  15:57
Yeah, is

Speaker 1  15:58
the right tax being paid? So that is going to act as a supervisory framework for the crypto dealings in Sri Lanka. Mainly, yes. Yes. So, if in the absence of that, crypto dealings are not being supervised or monitored by anybody because we don't have general infrastructure

Tirani Kulathunge  16:19
to begin with.

Speaker 1  16:20
Infrastructure plus the regulatory framework to monitor crypto transactions. Crypto is not trading in crypto or owning crypto is not a prohibited activity in Sri Lanka according to the Sri Lankan law. It is not prohibited. It is not permitted. Also, law is silent. There are certain countries like Australia, UK, USA where crypto is expressly regulated, permitted. Then there are other countries where crypto is prohibited. Sri Lanka is in the middle. We are not prohibiting. We are not regulating

Tirani Kulathunge  16:56
it. Right.

Speaker 1  16:56
So in that context, there is much scope for crypto to be used for illegal activities. So what I'm advocating here is, yes, we have to come up with rules to regulate crypto industry. In fact, this was mentioned specifically in the magistrate court also recently with regard to some financial fraud case that Sri Lanka need to come up with regulations to monitor regulate the crypto industry in Sri Lanka, but that is a long journey. What I'm advocating is yes, while you are doing that thing, going taking that journey, come up with express income tax legislation come up with express VAT rules with regard to the cryptocurrency transactions. That will help even the genuine investors also. So they will know at what values what are what are the disclosure requirements at what values that this will be taxed. What are the taxes that they have to pay? In what form it should be disclosed in the VAT return or in the income tax return? So it's going to help everybody.

Tirani Kulathunge  18:10
Okay.

Speaker 1  18:12
Because of that necessity, you will have the Inland Revenue Officers keeping a track of the crypto dealings in Sri Lanka, and that is what I'm saying, is going to be the major deterrent for fraudsters to use crypto channels for financial frauds.

Tirani Kulathunge  18:31
Right now, the tax office are we at all equipped for any of these ideas?

Speaker 1  18:39
Two things. So when you say when you ask whether they are equipped, first one is, are there clear loss? So we do have a general income tax framework. We have a general VAT framework. That within that, okay, if you look at income tax, we can take crypto as an intangible asset. So with regard to intangible assets, we do have general tax framework, income tax framework, but that is not sufficient for crypto transactions. For instance, if you take a crypto, how do you value the crypto?

Tirani Kulathunge  19:11
Yeah,

Speaker 1  19:12
those rules are not there in the income tax return. Where are you going to disclose this? There is no specific cage. So this is where the confusion is. This is why I say crypto specific. tax regulations to be introduced into the tax codes.

Tirani Kulathunge  19:26
So how how does India does it at the moment? So now you mentioned that is it the central bank that let's say equivalent of Central Bank of India that's covering all of these activities? No,

Speaker 1  19:36
no, no, not the Central Bank of India. So Central Bank of India still has not come up with any regulations to regulate the crypto industry.

Tirani Kulathunge  19:44
Right.

Speaker 1  19:44
So just like Sri Lanka, Indian authorities are also silent with regard to the issue of regulating the crypto industry. But their tax code has specific provisions specific. Sections with regard to how to calculate and pay taxes in relation to the cryptocurrency transactions. It is that that that ensures that the there is a authority tax authorities keeping a track of the crypto transactions, crypto dealings happening in Sri Lanka in India. So that ensures that is that is that is a deterrent for the use of crypto channels for

Tirani Kulathunge  20:26
illegal transactions. Illegal

Speaker 1  20:27
transactions. This is what I'm pointing out.

Tirani Kulathunge  20:29
So okay, now the interesting part comes in. What's recent, of course, is the recent U-turn. I think there's this number that confused everyone, which is 60 million rupees. Before we get to the recent U-turn, can you walk us through how Sri Lanka's VAT threshold got here? Let's say what you mentioned in that article also from 12 million before 2020, and up to 300 million, and now back again to 60 million.

Speaker 1  21:01
Okay, let me bring some theory also in relation to this, right? With regard to the VAT, in a country normally VAT works perfectly. That means basically the taxation of the value addition takes place. That machinery works when all the industries in a country are within the VAT net, if some of the countries, if some of the industries are not within the VAT net, then the value chain stops, and that results in cascading. So, ideal design, ideal design for a VAT system is with a low VAT rate, but Covering all the industry bases, so before 2020, Sri Lanka had a very low VAT threshold of 12 million. So that ensured most of the not not just the industries, most of the activities, commercial activities were within the V188.

Tirani Kulathunge  22:04
Yeah,

Speaker 1  22:05
in 2019, 2020, they are about this 12 million threshold was increased to 300 million, not just double, not just triple. I don't know whatever you know.

Tirani Kulathunge  22:17
Was there rational, like you know, to increase abruptly?

Speaker 1  22:21
Oh, that's what happened in 2020. There were so many. There was a big tax revision with regard to all the taxes: direct taxes, indirect taxes, tax rates, tax thresholds, etc. Yeah, and that resulted in the economic crisis of Sri Lanka, also, right? Yeah. So then I think after realising the mistake, that 300 million threshold was

Tirani Kulathunge  22:44
to make people breathe at least is what they did. No, so

Speaker 1  22:47
no, yeah. So that was the wrong wrong strategy. Yeah. So that 300 million threshold was basically reduced from 300 million. It was brought down to 80 million a year, and from 80 million, it was brought down to 60 million a year. In the last budget, there was a proposal to bring down the liable thresholds of VAT and SSEA from 60 million to 36 million to expand the indirect tax base.

Tirani Kulathunge  23:16
Yeah.

Speaker 1  23:17
So accordingly, SSCL Act was amended to bring the threshold from 60 million to 36 million. Though originally it was planned to be implemented with effect from 1st of April 2026, it was to be changed from 1st of July 2026. So as we stand today, SSCL threshold stands at 36 million a year. So,

Tirani Kulathunge  23:44
SSCO basically was introduced in 2022, and I remember it was again like you also mentioned started with the 100 million, 100 20 million threshold, right? But then cut to 60 million rupees in January 2024, alongside with the VAT changes, so I remember it was a flat 20 sorry 2.5 percent turnover based levy, which was charged regardless of whether the business is profitable or not, right? But this pattern, you see, keeps changing again. When the crisis comes in, you're trying to let people breathe. When it's not, you expand again. Any thoughts on that?

Speaker 1  24:33
Okay, I think this is what we call the uncertainty in the tax system in Sri Lanka. Yes. So, so, so, so the concept is we need to broaden the tax base, but keep the tax rates down. So I think this concept has been there. But then in 2019, what happened was basically instead of broadening the tax base, tax base was shrinked when 12 million threshold went up to three. 300 million. So now again we are taking in the other direction. What we are trying to do is now again broaden the tax base. So that is what we find in relation to the SSCL. That is what we are. What we have been seeing in relation to the VAT base also. So now here I think there's something else that we need to discuss. From instead of instead of following the budget proposal of 60 million threshold coming down to 36 million, there was a last minute policy change where a committee stage amendment was introduced not to bring down the 60 million threshold to 36 million. So the question is, why did the government take that decision at the last minute? Well, so many things contributed. The way the government put it, okay, we had bad period due to the ditva and the war and so many circumstances. So therefore, government thought it's not prudent at this time to bring down the threshold because the SME category, that is basically from 60 million to 36 million category, will be subject to this VAT, and that would be difficult for them to manage at this crisis situation. So, a short-term decision was taken to how do I say, irrespective of yeah, give relief to the SME categories. What I see here, so things

Tirani Kulathunge  26:24
got messy, right? So, like, if you can say, if you can first tell us on the SSCL side, let's say, why did that threshold cut threshold cut end up taking effect later than planned, and let's say on a different date that announced overall.

Speaker 1  26:44
Okay, so that is basically because the law was enacted, drafted, and passed a little bit late. So therefore, basically, the government was not in a position to give implement it on the first of April. So that's why basically was planned for first of July. So that went through. So I think what we have to be clear is, now going forward in Sri Lanka with regard to the SHCL, we have the libel threshold of 36 million. But with regard to the VAT, the liable threshold is 60 million. That is what there are two thresholds now. Yeah. So in relation to compliance, we have to keep that in mind.

Tirani Kulathunge  27:16
Definitely. So then there's this real twist, right? During the committee stage debate that happened on june 23 this year, the government basically abandoned the VAT threshold again. This cut entirely, right? What actually happened in Parliament, and any thoughts on that?

Speaker 1  27:37
No, sorry, the Parliament. I think the Deputy Minister of Finance pointed out due to ditwa as well as the conditions taking place outside Sri Lanka, the war conditions

Tirani Kulathunge  27:47
that might hurt SMEs.

Speaker 1  27:48
Correct. So not to hurt SMEs, government decided to sacrifice the revenue collection at this moment and to permit the SMEs to consolidate their businesses. I think that is what was that

Tirani Kulathunge  28:01
the right move?

Speaker 1  28:03
Well, you have to look at it's a two-sided coin. So the person looking at it from a theoretical point could say that no, we need to somehow bring down the VAT threshold. But at the same time, I'm sure the businesses would have found that very difficult. So the government looked at the government looked at Sympathetically, the SME sector. So government took a political decision. Government took a decision. How do I say? In favour of the SMEs. Right. So one way it is correct, basically.

Tirani Kulathunge  28:36
So there was this thing that happened on social media: is that that people assume that the SSCL reversal also followed the VAT reversal, and it didn't. Right? Could you clarify what stayed and what changed?

Speaker 1  28:50
Yeah. So as I pointed out, basically, legally right now, the VAT threshold is 60 million, SSCL threshold is 36 million. Okay.

Tirani Kulathunge  29:00
Two different baskets now.

Speaker 1  29:02
Yes, two different rates. So, because the SSCL Act was passed before the VAT Act, so there was time for the there was a time for introduction of a VAT committee stage amendment to change the proposal or the what was there in the bill in relation to VAT, but SSCL was enacted, passed before that thing. So that's why we signed these two thresholds. So if the government wants to bring down the SSC, government wants to change the SSCL threshold to 60 million instead of 36 million. If they have to do that thing, then the government has to pass the amendment, amending act to the SSCL Act now. I don't know whether it will happen. I don't think so.

Tirani Kulathunge  29:48
Let's let's think from a design tax design standpoint. Is it current to have VAT and SSCL apply at different thresholds now, and let's say one levy? Catching up the businesses and the other doesn't. And honestly, what sort of administrative headache actually does that create for businesses sitting in between 36 million rupees and also 60 million rupees?

Speaker 1  30:14
Correct. So that's I said. Basically, the accountants have to be vigilant. Businesses have to be vigilant. They have to be mindful that there are two thresholds, and accordingly, even if they are not liable for VAT, they have to. If they are liable for SSCL, they have to pay the SSCL and file the return. So that's the thing. But I think there's a larger thing here, rather basically there's a long story in relation to this coexistence of the VAT and the SCL. So, what are these two taxes? Both taxes are, in a way, are basically tools to collect indirect taxes, right? So, when we looked at the world around, also, once upon a time, turnover tax used to be the main indirect tax, but at one point, countries started abandoning their turnover taxes and adopting, embracing the concept of tax on the value addition. That is the VAT or GST. Why? Because turnover tax is considered cascading, whereas taxing the value addition is the right way to collect the indirect taxes of the concept. So basically, that is what we also believed in 1990s and 1998. We abandoned the turnover tax and adopted VAT or GST. Then it was renamed as the GST VAT into 2002 thereabout, but in 2009 again we introduced a tax called NBT. What is NBT? NBT is a turnover tax in another name. It was it was abolished in 2019, but again it was introduced calling SSEL. What is that? Again, it's a tax on the turnover. So what's that again? A turnover tax. So we have this animalless situation in Sri Lanka right now, where we have both VAT and the turnover tax side by side. Right. So it is what we have in Sri Lankan is a hybrid system, and that's not correct. So what which what should happen is yes VAT is the one that should continue turnover tax should be gradually taken out of the system but it's a long term plan but that has to happen otherwise discussion

Tirani Kulathunge  32:30
at least

Speaker 1  32:31
I don't think so right now no unfortunate

Tirani Kulathunge  32:34
no I want to understand actually let's say who actually wins from this and let's say who's still carrying the weight, right? So, what we can know, what we know is that the obvious consumer-facing message is that no VAT price increase from these SMEs, but there is no new VAT actually relief. Also, but does the SSCL exposure from July 1 offset that for the same businesses. Again, I think this you mentioned on the turnover taxes, but I want to bring in this example that you have done on the article that you've written. I think the comparison of the 50,000 rupees household versus the 500,000 rupees household, and can you unpack that frostlessness on that end?

Speaker 1  33:29
This is with regard to how the indirect taxes affect different wealth classes. Yes. Yes. Yeah. So what happens is, the point here is indirect taxes like VAT affect everyone, whether you are rich or poor. But hit on the poor is high compared to their total income. Whereas when you take a rich household, because their total income is high, the indirect taxes that they pay via consumption as a percentage is low, so therefore the hit on a rich man, a rich family, the indirect tax indirect tax hit is low.

Tirani Kulathunge  34:13
Could you explain why that point is lower? Yeah, that is because basically

Speaker 1  34:17
indirect taxes are what are called regressive taxes, right? So if you look at so then the amount of money that a rich family spend on consumption and the consumption expenditure of a poor family, when you look at, it's almost the same, depending on the type. Depending on, but if you look at the essentials, right? But income levels are different. So, if the rich household at say 500 and the poor household at 50, when you look at the VAT paid by the rich family and the poor family comparison. Ratios when you look at you will see that percentage wise, percentage wise percentage compared to the total income that they receive, that is a high percentage when it comes to the poor household. So that is this is this a regressive nature.

Tirani Kulathunge  35:15
Understood. So you also said this that you know it creates some sort of demand suppression cycle again for the garments. Let's say its own revenue goals as well. Could you walk us through that loop?

Speaker 1  35:31
This is in relation to.

Tirani Kulathunge  35:33
So let's say when as consumers cut on spending on VAT, let's say because of the VAT pressure and because of the revenue, you'll see revenue growth falls as well, and then you can see that whether whether the government will respond by leaning even harder on indirect taxes. Yeah,

Speaker 1  35:57
I think I think what you're referring to is basically when the indirect tax rates go up.

Tirani Kulathunge  36:02
Yeah.

Speaker 1  36:03
Prices of the goods also go up. Yes. When the prices of the goods go up, the consumption goes down. So when the consumption goes down, the indirect taxes collected by the government will also go down. Yes. So now, when the government find that it's tax revenue going down from the indirect taxes, what would the government do? Again, try to do changes to the indirect tax system to collect more taxes. So yeah, that creative just correct.

Tirani Kulathunge  36:28
Okay, just want to draw draw this sharp contrast. Let's say between a corporate executive paying 30% tax and also a high earning consultant paying, let's say, effectively zero at some point. Why does that gap exist, and why does it matter? Let's say beyond fairness, and because you've linked it to trust and compliance at some point in the article.

Speaker 1  36:53
No, no. I think the point there is, if you look at an executive, executive who is in the payroll of a company, the taxes are automatically deducted under the EPIT system. EPIT means Advanced Personal Income Tax System. So, what happens is this executive's tax liability, whether he likes it or not, is correctly calculated and collected by the government due to the EPITS mechanism. So, on the other hand, if you compare him with a freelance professional, where he's not subject to automatic tax reductions, where he has to pay his taxes on self-assessment basis, and if he decides not to not to adhere to the rules and pay the taxes, then his disposal income goes up.

Tirani Kulathunge  37:47
Right.

Speaker 1  37:47
So because his disposal income is high, he can afford to purchase any luxury items that he requires. Whereas the executive who is in the apit system, his taxes are correctly calculated and deducted, which is beyond his control, so that his disposal income goes down. So you have two persons earning in different ways, having different disposal incomes.

Tirani Kulathunge  38:15
So we have this other question with regards to the recent Inland Revenue Act, which criminalised servants. certain admin activities? Can you elaborate this, please?

Speaker 1  38:26
Right. Yes. So the the recently introduced Inland Revenue Amendment Act had many sections to strengthen the tax administration. In other words, to empower Commissioner General to take certain measures, certain actions to collect the income taxes efficiently. So I'll go one by one. So there was this section, new section 185A, which was introduced to criminalise certain administrative actions, to criminalise certain failures of the taxpayers. So let me go one by one. So now everyone, as we all know, everyone above 18 years should have a tin number, taxpayer identification number, right? So now if a person does not have a tax identification number and he's informed by the commissioner general to get a tax number, and within 30 days, if he fails to do so, then commissioner general under the new provision can take the person directly to the magistrate court, and four lakhs tax to be paid, or he could be put in jail for up to six months. So this is this is this is the criminalization. So now what is this activity? This is normal compliance administrative activity. Failure for that, what we have to keep in mind is that can result in a jail term. So not only that. So there are about five activities like that. One is the. In registration, what I mentioned, failure to file the income tax return. If a person has failed to file the income tax return going forward, again the same process happens. Commissioner General can give him a 30-day notice warning period, and if he fails, then Commissioner General has the power under the new section to institute action in the magistrate court, and that could result in again up to four lakhs payment, or up to six months a jail tax. I had

Tirani Kulathunge  40:32
that question just very quickly. How does the IRD generally would notify these individuals, saying that your these warnings per se. Yeah,

Speaker 1  40:42
normally it is a letter in writing. According to the law, Commissioner General has the power to even send it say by way of an email also because electronic methods also included in the act now. So I mentioned two things. One is the tin. Second one is the filing of the income tax return. Then of course, other annual statements that a person has to file, like the withholding tax statements.

Tirani Kulathunge  41:06
Okay.

Speaker 1  41:06
Other one is when commissioner general informs a person to come for an interview, appear before the commissioner general or the inland general department for a examination, and if the person does not turn up, again same procedure, 30 day notice, and can end up in the same same procedure. Okay. So these are basically normal admin activities. Earlier, these were not these were earlier punished with civil punishments, but now these have been criminalised. So this is something that every taxpayer has to know. So ensure basically that you get your tin number that you file your income tax return that you file your normal annual statements. When you are notified by the Commissioner General by the Indian Department to visit the Indian Department for an examination, please do so. Otherwise, keep in mind the Commissioner General has very wide powers now to collect the taxes there to to ensure basically this income tax process is taking place according to the scheme in the Inland Revenue Act. So not only that, and I'll go on to the next power that has been given to the Commission General in this new amendment to the Act. Is it is

Tirani Kulathunge  42:17
it? I'm going to go go to that. Is it that they are now they are going to issue a certificate to collect taxes by default?

Speaker 1  42:25
Correct. Yes. Now, so one of the another issues here is when the taxes are in default, how to collect it. So in the act, there are so many other methods right now for recovery of taxes in default. For instance, the commission general can go and sees the bank account. Commissioner General has the power to go and auction the property of the taxpayer. So, so many other recovery methods. Okay. That list, a new one has been introduced. That is called the the certificate procedure. That is basically when a person has taxes in default. Commissioner General can now issue a certificate to the magistrate.

Tirani Kulathunge  43:03
What's the certificate again? Certificate

Speaker 1  43:04
basically specifying, setting out the type of taxes that have been type, amount, etc. of the taxes that have been defaulted, details, name, etc. So that will be produced given to the magistrate court, then the magistrate court magistrate court can summon the person and show costs and sentence the person. So this amount of taxes in default then would be collected as a fine imposed by the court, and if that amount is not paid, then according to procedure, again the person could be could end up serving a jail term. So here also, so that's again is a new thing that has been introduced by the amendment act. Not that it is something novel; it's already they are in the let's say the VAT Act because they are under the old Indian Act, so now basically this, and but it was missing in the new Act, so this has been now added to other recovery procedures. So this is again something that we have to keep in order. If there are taxes in default, there's a new tool, new procedure that has been given to the Commission General to collect these taxes.

Tirani Kulathunge  44:21
Interesting

Speaker 1  44:22
certificate procedure. Does it cover

Tirani Kulathunge  44:23
property taxes also under that?

Speaker 1  44:29
So it's not the property tax. This is basically income taxes. On income. So basically, income. There are taxes in default under the inland revenue. Yes.

Tirani Kulathunge  44:36
Okay. Could you explain us with regard to, let's say, in-context repeals and also the disputes disputes before that happened before the commissioner general. Let's say, can a person go to jail while these cases are also being heard at the moment?

Speaker 1  44:53
Yeah. Okay. So that is also another interesting question. Actually, this matter was also discussed, or this was also. Covered in the Supreme Court determination that was given when the Inland Revenue Bill was challenged in the Supreme Court. So, in that judgement, in the last page, four scenarios had been given by the Supreme Court. Now, according to that, so you have filed your income tax return, 30th November, and declared a particular amount as payable. Let's say you have shown five lakhs of taxes to be payable, but you have not paid the tax. You have declared the tax, but you have not paid the tax. If that's the case, this tax could be collected directly by issuing the certificate, what we discussed earlier, right? Then the next part is this self-assessment return filed by the taxpayer is challenged by the inland rental department, and they issue an assessment. So let's say he filed a tax return declaring five lakhs as the income tax, but assessment is issued for seven lakhs, so there are two two lakhs excess tax that has been assessed. So now, when this matter is appealed against, or rather, let's say, gone under the administrative request request for administration review under the Commissioner General, or when this matter is before the Tax Appeals Commission, Supreme Court pointed out. Still, that five lakhs, which is self-declared, should be paid, but that extra two lakhs that has been assessed by the Indian Department cannot be collected by using the certificate procedure.

Tirani Kulathunge  46:44
Okay.

Speaker 1  46:45
So five lakhs could be collected by the certificate procedure, but not those two lakhs. But what we have to keep in mind is, though using the certificate procedure you can't collect, still Inland Revenue Act has other sections which empower the Commission General to issue use other recovery procedures. For instance, seize accounts, cease the account with regard those two lakhs. So that is there, right? But to

Tirani Kulathunge  47:06
seize accounts, you need a magistrate court order. Is that a case?

Speaker 1  47:09
Correct. Yeah. So that's a main point. So

Tirani Kulathunge  47:11
there's no big difference overall.

Speaker 1  47:13
No. So there's different because basically, going to the magistrate court and collection is the criminal procedure, whereas seizing the bank account is not considered. It's the civil punishment, civil method of doing

Tirani Kulathunge  47:26
it. Okay.

Speaker 1  47:27
So the court pointed out now the certificate procedure, which is the how to say criminalization aspect of it, cannot be extended to the excess tax, but only for the self-declared tax. But nevertheless, if that excess tax could be recovered by the Commission General using other means of recovery, like the seizure of the bank accounts, right? So then there's another stage. So third scenario, this is where basically or the fourth scenario. So this is where basically when the appeals moves from the Tax Appeals Commission to the Court of Appeal, according to the law, on a question of law, a taxpayer can appeal against the determination of the of the Tax Appeals Commission to the Court of Appeal on a question of law. So, at that point, in relation to that, the Supreme Court has pointed out, in relation to the interim order given by the Tax Appeals Commission, taxes should be accounted. And so, strictly speaking, if the interim order covers the entire seven lakhs under the Section 117A of the Tax Appeals Commission Act that could be collected by the Commission General also, but in practice, what happens in Sri Lanka is normally the bank guarantee that is given at the point of appealing to the Commissioner to the Tax Appeals Commission is in cash, but this full amount in practice is not collected. So that is that is where how the.

Tirani Kulathunge  49:02
What what are your thoughts on the design itself? Is this the right way to go?

Speaker 1  49:06
So let me put it this way: it's not the self-declared amount collection. I think is correct because you have admitted that the tax that is the tax that you have to pay with regard to the excess amount collection, may not to me. I think it's not very correct because you have you are appealing because you do have a ground because you are not in agreement on the basis that you have been assessed with regard to this excess amount by the Inland Round Department. So your matter should be heard to the conclusion, and collection of the tax using the recovery, other recovery procedures like the bank's issue. Still, I think is harsh from the point of view of the taxpayers. To be fair, by the Indian Department, Indian Department so far has not collected using that other recovery process methods. Also, when a matter is under dispute, that's something that keeping us

Tirani Kulathunge  50:14
deterrence for the moment.

Speaker 1  50:16
Yeah, those harsh provisions, they are though they are in the law, have not been used in the past by the Commissioner General.

Tirani Kulathunge  50:22
Interesting, interesting. On that note, we have discussed a lot of things today, from digital VAT, from the U-turn on, and also what defines the 60 million threshold now, and also if you don't pay taxes, what will happen, and all the nitty-gritties within that. Thank you, mr. Suresh, again for joining and explaining all of these complex details into things that we can understand. And hopefully, for our audience, if you want to listen to more of all of these insightful conversations, please follow us and subscribe. Thank you.


Transcribed by https://otter.ai