CIMA conducts workshop on ‘Indirect Taxes on Financial Services’

CIMA conducted a comprehensive and educative workshop on the Indirect Taxes imposed on Financial Services at the CIMA Auditorium on January 25th.

A detailed presentation analysing the application of Value Added Tax (VAT), Nation Building Tax (NBT), Debt Repayment Levy (DRL) & Crop Insurance Levy (CIL) was presented by Suresh Perera, FCMA, CGMA, Principal- Tax & Regulatory and Rifka Ziyard, FCMA, CGMA, Associate Director – Tax & Regulatory, both from KPMG Sri Lanka.

Perera enlightened the audience on the classification and definition of financial services and provided a comparison of the provisions of the Value Added Tax Act No. 14 of 2002 and the Banking Act No. 30 of 1988.

He also distinguished between the common and popular definition of the term ‘Financial Services’ and the more exclusive definition encroached in the legal statutes. He also fielded questions from the audience in relation to the intricacies of the application of VAT on financial services including queries in relation to the calculation of the tax.

Rifka Ziyard stated that VAT being quite a popular tax was adopted in over 166 countries worldwide. She expounded on the four methods of calculating value addition namely Additive Direct, Additive Indirect, Subtractive Direct and Subtractive Indirect. She mentioned that the Subtractive indirect method which is also commonly known as the ‘invoice credit method’ of computing value addition was the most common method adopted in practice.

In addition to detailing the intricacies of calculating VAT and NBT applicable on financial services, the presenters also covered the application and mechanisms for calculating Debt Repayment Levy. DRL, introduced via the Finance Act No. 35 of 2018, is a 7 percent tax on the value addition calculated for the purposes of VAT on Financial Services.

However, it was pointed out that the computation, in practice, of the value addition base for the VAT, NBT & Debt Repayment Levy purposes is not identical and a person who prepares tax accounts for these three taxes must be cognizant of the implications stemming from the applicable legal provision from the three tax statutes. The participants were enlightened on the variations in the calculations of the respective tax bases as well as the rates to be applied pertaining to each tax.

The presenters stressed on the fact that although payments were to be made on the same day for multiple taxes, the tax base and liability of the institutions in relation to the tax differed. For instance the tax base for Crop Insurance Levy is the accounting profit after tax as opposed to value addition computed in terms of the VAT Act. The CIL is a 1 percent tax with quarterly payments and a final payment on 30th September of the following year.

The interactive workshop gave participants the opportunity to engage in a fruitful discussion with the presenters as well as to seek answers for a multitude of queries pertaining to the application of taxes on financial services. The participants were also provided with a detailed note on the payment and return filing dates. It was stressed that caution and diligence must be exercised with calculating the indirect tax liability of the financial institution.