PART – 06 OF THE MANAGEMENT OF VALUE ADDED TAX

VAT ON SUPPLY OF FINANCIAL SERVICES

SESSION OUTLINE
• INTRODUCTION TO VAT ON FS
• CHARGEABILITY ( SECTION 25A)
• PERSONS EXCLUDED FROM CHARGEABILITY
• REGISTRATION
✓ Requirement for Registration
✓ Taxable Period
✓ Due Dates for Filing of Return
✓ Payment of Tax
✓ Calculation of Tax - Gazette Notification No. 1868/10
• DISCUSSION OF GAZETTE NOTIFICATION

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 1. INTRODUCTION
VAT on financial services was introduced with effect from 01.01.2003 by
amendment Act No. 7 of 2003. The supply of financial services are exempted
from normal VAT. The VAT on financial services which was introduced
under chapter III A of the Value Added Tax Act is not based on the
input/output concept. The tax is charged on book profit after making relevant
adjustments as per the law.

2. CHARGEABILITY ( SECTION 25A)

The chargeability arises for every person,

✓ on the supply of financial services, (The supply of financial

services defines in section 25F as explained below.)

As per the section 25F supply of financial services means,

(a) The operation of any current, deposit or savings account

(b) The exchange of currency

(c) The issue, payment, collection or transfer of ownership of

any note, order for payment, cheque or letter of credit

(d) The issue, allotment, transfer of ownership, drawing,

acceptance or endorsement of any debt security, being any
interest in or right to be paid money owing by any person
other than the transfer of nonperforming loans of a licensed
Commercial Bank to any other person in terms of a re-
structuring scheme of such bank as approved by the Central
Bank of Sri Lanka with the concurrence of the Minister

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 (e) The issue, allotment, transfer of ownership of any equity
security or a participatory security

(f) Issue, underwriting, sub-underwriting or subscribing of any

equity security, debt security or participatory security

(g) The provision of any loan, advance or credit

(h) The provision —

(a) of the facility of instalment credit finance in a hire

purchase conditional sale or credit sale agreement for which
facility a separate charge is made and disclosed to the person to
whom the supply is made.
(b) goods under any hire purchase agreement or
conditional sale or hire purchase agreement while have been used
in Sri Lanka for a period not less than twelve months as at the
date of such agreement

(c) Of leasing facilities under any,

• Finance Lease Agreement

• Operating leasing agreement in respect of any

installment for any period prior to 01.11.2016,
(On or after 01.11.2016, operating lease is liable for
normal VAT)

(For above para “ c “ - On any asset other than any land or building, if such
agreement is entered into on or after October 25, 2014 and not being an
agreement entered into prior to 25.10.2014.)

❖ Such person must supply all above financial services in

carrying on the business of supplying such financial services.

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2.1 PERSONS EXCLUDED FROM CHARGEABILITY OF VAT ON
FINANCIAL SERVICES.

• Effective from 01.01.2008, corporative society is exempted from

VAT on financial services.
• From 01.01.2011, supply of financial services by a unit trust or
mutual fund shall not be treated as a financial service.
• Effective from 01.07.2003, Central Bank is exempted from supply
of financial services.

3. REGISTRATION

3.1 Requirement for Registration (25A (2))

Value of supply of financial services shall exceed Rs. 3Mn per quarter
or Rs. 12Mn per annum prior to 01st January 2020. On or after 01st
January 2020, 75Mn per quarter and 300Mn per annum.
3.2 Application for Registration ( Section 25A (3) )
Every specified institution or other person required to be registered
shall make an application and obtain registration not later than 30 days
from the date of completion of above requirement.

3.3 Taxable Period ( Section 25B)

Effective from 01.01.2011 taxable period is six months. The return for
half year ending on 30th June and ending on 31st December. (Twelve
months ending 31st December)
However, On or after 01.01.2017 there is only one taxable period of one
year and the return of VAT on financial services is to be filed on a yearly
basis within six months from the end of the taxable period of one year.

Ex – Taxable period ended 31st December 2020, return should be filed

on or before 30th June 2021.

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 Note – Special Situation
However, in the case of a specified institution or any person whose
accounts are made up for a period of twelve months ending on the 31st
day March, such period of twelve months may be commenced on the
1st day of April. Provided further, in the event of changing the
accounting period with the approval of the Commissioner-General, the
taxable period may be adjusted at the time of such change.

3.4 Due Dates for Filing of Return ( Section 25B (2A) (a)
✓ Taxable period commencing prior to 01.01.2017
Before the end of the following month of the taxable period.
❖ Eg – Taxable period ended 31st December 2016, the due date
for the return filing is on or before 31st January 2017.

✓ Taxable period commencing on or after 01.01.2017

Due Dates for Furnishing of Interim Estimate - Shall furnish an
interim estimate of the profits in the specified form in respect of
each six months period of the taxable period.
Before the twentieth day of the succeeding month of the each
such six months period.

❖ Eg – Each six months period ended 30th June 2020, the due
date for the filing of an interim estimate is on or before
20th July 2020.

Due Date for Return Filing - However, On or after 01.01.2017

there is only one taxable period of one year and the return of
VAT on financial services is to be filed on a yearly basis within
six months from the end of the taxable period of one year.
( The return should be filed with Audited FS, Detailed Profit &
Loss, A schedule of emoluments payable, A schedule of economic

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 depreciation, Reconciliation of turnover with the FS and break up
of Value of supply declared under normal VAT.)

Ex – Taxable period ended 31st December 2020, return should be

filed on or before 30th June 2021.

The return shall be filed with all the particulars specified by

the Commissioner General of Inland Revenue.

3.4.1 Requirement of Communication by the Assistant Commissioner (

Section 25B (2A) ( a & b))

• Every registered person who furnishes a return which is not in such

form or fails to furnish an interim estimate on every six months
referred to in paragraph (b) of the proviso to subsection (1) of section
25C or fails to furnish the contents of such return or the interim
estimate as specified by the Commissioner-General, shall be deemed
for the purposes of this Act, not to have furnished a return of Value
Added Tax on the supply of financial services.

• As the case may be, and is deemed under the provisions of paragraph
(a) of subsection (2A) of section 25B not to have furnished a return of
Value Added Tax on the supply of financial services, Assistant
Commissioner shall, before the expiry of thirty days from the due
date for the submission of the return or interim estimate, inform such
person in writing, that the return or the interim estimate furnished by
him does not contain all such particulars in such form and relevant
schedules as specified by the Commissioner General.

• Where any registered person receives such kind of notice as above the
tax payer may furnish all such particulars in such form and with
relevant schedules within 30 days of receipt of such notice, required
to make the return submitted is a proper return.

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If such person does so, it is considered as that person has furnished a
return of Value Added Tax on the supply of financial services on or
before the due date.

3.4.2 Payment of Tax ( Section 25B (3)

Taxes should be paid monthly on or before 20th day of the succeeding
month after the end of the following month.

However, for any taxable period commencing on or after January 1,

2017, the tax payable by every registered specified institution or other
person on monthly basis shall be adjusted with the total liability for
every six months period on the interim estimate and payable with the
submission of the interim estimate if the monthly payments made are
less than the tax calculated based on the interim estimate.

3.4.3 Calculation of Tax ( Section 25C)

VAT on financial services should be calculated based on value addition
attributable method.

Under this method, the tax payable is calculated as follows.

Tax Payable on value addition after VAT (Calculated applying VAT

fraction on the total value addition)
• Up to 31.12.2014 @ 12%
• 01.01.2015 – 01.05.2016 @ 11%
• 02.05.2016 – up to now @ 15%

3.4.4 Exclusion from the Liability – Section 25 C (6))

Taxable value addition shall exceed Rs. 75,000 for any month to arise
the chargeability/liability of VAT on financial services.

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 Discussion of the Gazette Notification No. 1868/10 for Value
Addition Calculation.
Practice Question – 01 - VAT on Financial Services
Easy Bank PLC engages in the business of supply of financial services. The
details of income and profit for the month of 31st November 2020 and other
relevant information provided in below.

The details of income for the month of November 2020 as per monthly
accounts prepared is as follows,
Description Rs.000
Interest from loans & advances
13,796
Receipt from pawning (Includes capital recovery of Rs.
8,500,000) 12,600
Interest on Fixed Deposits
9,900
Receipts from finance lease (Includes capital recovery of
Rs. 16,500,000/-) – Note 01 28,500
Hire Purchase Interest Income
36,000
from sale of bear land
10,000
Rent Income
7,200
Management Fees
3,200
Bill discounting income
1,600
Commission income from financial services
800

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Notes
1. Out of lease rentals 20% related to agreements entered prior to 25th
October 2014.
2. Net profit before tax for the month of November Rs. 48,000,000/-
3. Following expenses were deducted when arriving in to net profit before
tax.
3.1 Depreciation Rs. 420,000/-
3.2 VAT on Financial Services Rs. 725,000/-
3.5 Staff Salary Rs. 12,900,000/-
3.6 Director Fees Rs. 1,600,000/-
3.7 Gratuity Provision Rs. 2,500,000/-
3.8 EPF & ETF Expense Rs. 2,175,000/-
3.9 Staff Insurance Rs. 1,665,000/-

4. Depreciation provision has been made on the following assets

4.1 Building Constructed in June 2010 Rs. 24,000,000
4.2 Office Equipment purchased in January 2016 Rs. 1,600,000
4.3 Travelling purpose motor vehicles purchased in September 2017 Rs.
15,000,000/-
4.4 Computer and accessories purchased in June 2019 Rs. 800,000/-
4.5 Computer software purchased from India in August 2018 Rs.
1,200,000/-
4.6 Van purchased in February 2018 Rs. 5,000,000/-

Required
1. Based on above information compute VAT payable on financial
services for the month of November 2020.
2. Advice on due dates of payment and return filing.
3. Explain consequence of non-filing VAT on Financial Services Return
without particulars.

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SESSION SUMMARY – KEY POINTS TO REMEMBER

1. CHRAGEABILITY OF VAT ON FS – SECTION 25A

2. PERSONS EXCLUDED FROM CHARGEABILITY
3. REGISTRATION
4. REQUIREMENT FOR REGISTRATION
5. TAXABLE PERIOD
6. DUE DATES FOR FILING OF RETURN
7. PAYMENT OF TAX
8. CALCULATION OF TAX - GAZETTE NOTIFICATION NO. 1868/10
WITH PRACTICE QUESTION

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