Sri Lanka is set to amend its Value Added Tax (VAT) Act to phase out temporary VAT registrations by the end of 2024, targeting importers and distinguishing between personal and commercial imports to prevent tax revenue loss, according to a recent Parliamentary report.
The Third Report by the Committee on Ways and Means revealed that the Finance Ministry will amend the VAT Act to suspend temporary VAT registration, a move aimed at addressing the undervaluation of imports. Currently, 65% of importers of essential goods are using temporary VAT registrations under the casual stream of 2525.
For instance, in 2023, 93% of big onion importers fell under this temporary registration category. These temporary VAT numbers are valid for three months, whereas commercial traders in the 7000 stream have permanent VAT numbers with the Inland Revenue Department (IRD), which requires them to disclose their income.
While the proposed suspension aims to boost tax compliance, the Finance Ministry noted that it contradicts Section 11 of the VAT Act, which mandates anyone importing goods to Sri Lanka to obtain an identification number from the Commissioner General of Inland Revenue 14 days before clearing goods.
The IRD has formed a new committee to collaborate with Sri Lanka Customs to address the issue, recommending legislative changes to streamline the VAT registration process. Temporary VAT registrations have increased from 14% in 2016 to 31% in 2023, highlighting the growing reliance on this system.