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2.1 Restriction on Input Tax Credit claims

The Hon. Minister mentioned that there were several loopholes in the tax system that are now closed
and to further curtail such leakages the following restrictions will be introduced with effect from
January 1, 2007

Presently permitted input tax credits can be claimed in full. Such allowable input tax credits are now to
be restricted as follows.

- limited to 85% of the output declared
-any balance to be carried forward to the subsequent taxable period but subject to the
same restriction

ILLUSTRATION






a)

The following persons can continue to claim full input tax credit without being subject to the above restriction
- Zero rated suppliers (eg: exporters , international transportation services)
- Suppliers registered with the Textile Quota Board (TQB) or Export Development Board (EDB) for the supply
of goods and services to exporters
(indirect exporters)
- persons registered under section 22 (7) of the VAT Act. i.e. approved persons not making taxable supplies
during project implementation period.

b) Input Tax on Motor Vehicles used for traveling will be fully disallowed. (presently 50% claimable). Input tax
on related expenses such as repairs, insurance etc. will also be fully disallowed.

c) At present Input Tax can be adjusted through the issue of a “Tax Debit Note” without a time limit. Such Tax
Debit Notes will hereafter have to be issued within 6 months of the issue of the original Tax invoice.

d) Input tax paid at 20% can now be claimed only up to 15%, 5% being disallowed. Where a person who
exports goods, imports raw materials for the manufacture of such goods, the above restriction has been
removed and the entire 20% will be claimable provided the Commissioner General is satisfied that such
goods have been exported by such person.

e) The transitional provision whereby input tax has been claimed on goods that have subsequently been
exempted is removed. This would mean that such claims will be permitted now (at present if the supply
is subsequently exempted the input tax attributed to the exempted supply which has already been
claimed is disallowed.).

2.2 Import Point profit mark up increased to 10%

The Hon. Minister mentioned that to mitigate the impact of under valuation, the mark up that prevails at 7%
on the CIF value at point of importation will be increased to 10% effective from November 17, 2006.

This will impact the calculation of VAT, Excise Duty and Cess. Please refer section
on Customs Duty for an illustration.

2.3 One third of VAT withheld on supplies to Government Agencies

Effective from January 1, 2007 Government Agencies will withhold 1/3rd of the VAT payable to contractors
and any other service providers on supplies made to such agencies. The amount withheld should be
remitted to the Inland Revenue Department the same day the payment is made to the contractor or supplier.

It is assumed that the respective government agency will issue a WHT certificate
to enable the supplier to claim tax credit at the point where such tax becomes payable.

It was also mentioned that such withholding will not apply to small suppliers below the VAT threshold.

Comment - It is assumed that this would provide a cash flow benefit to such contractors who are
now required to pay VAT on their receipts on an accrual basis even though the payment may be delayed for some time.

2.4 5% VAT for those below the VAT threshold

A 5% non refundable VAT to be paid by persons who are on the border of the VAT threshold of Rs. 1.8 mn
until turnover reaches Rs. 2.5mn or for a period of 3 years from the date of entering in to this scheme whichever
occurs earlier. The scheme is to be introduced from January 1, 2007.

- the scheme will operate only on a voluntary basis

- such persons are not VAT registered persons and cannot issue tax invoices
- Input tax credit cannot be claimed
- the option to enter the normal VAT system is available.

2.5 VAT deferment for local value added industries

To encourage high value addition in local industries, the Hon. Minister mentioned that a VAT deferment facility
will be granted to BOI projects for purchase of material from local industries. It was also mentioned that in future BOI
will grant duty free imports only for materials that are not available locally in adequate quantities or in the required quality.


2.6 Other changes

- Locally manufactured handloom textiles – exempt from VAT
- Lotteries: Commission paid to any agent on the sale of tickets in respect of any lottery can be deducted when
computing the taxable value for purposes
of VAT.
2.7 VAT changes to selected industry segments: these changes are stated under each specific industry heading.


2.8 Processing of VAT refunds- a general flow chart

Due to the prevailing position with regard to VAT refunds particularly in relation to refunds due to zero rated
suppliers either under the 45 day regime or 15 day regime where a bank guarantee is provided, for the benefit
of our clients and other readers we have given in the ensuing pages a summary flow chart of the documentation
flow that relates to the processing of such refunds at the Department of Inland Revenue which is based on our
experience in following up on such refunds.

Whilst much improvement has been made to make this process efficient and effective, it is important that each
step be completed at every stage in order for the process to finalize the refund. Unless this flow occurs smoothly
and without interruption it will not be possible to obtain such refund within the legally stipulated time period.
We hope that this information will assist you to follow up on your VAT refunds more expeditiously.