The Court of Appeal has ruled in favour of LOLC Finance PLC, annulling a Value Added Tax (VAT) assessment imposed by the Inland Revenue Department for the 2011/2012 tax year, in a significant decision clarifying the scope of “financial services” under Sri Lanka’s VAT law.
The appeal arose from a dispute between LOLC Finance PLC formerly known as Commercial Leasing Company Limited and the Commissioner General of Inland Revenue (CGIR) over the assessment of VAT for the taxable period from April 1, 2011, to March 31, 2012.
LOLC Finance had submitted its VAT return for the relevant year, but the return was rejected by the Assessor, who subsequently issued a tax assessment. The company challenged the assessment before the CGIR, who upheld the decision. A further appeal to the Tax Appeals Commission (TAC) was also unsuccessful, prompting LOLC Finance to seek relief from the Court of Appeal.
At the heart of the dispute was whether the company’s leasing and hire purchase activities qualified as “financial services” under Chapter IIIA of the Value Added Tax Act No. 14 of 2002, thereby attracting VAT under the special provisions applicable to financial institutions.
The Court examined the provisions of Sections 25A and 25F of the VAT Act and found that the Tax Appeals Commission had incorrectly interpreted the statutory definition of financial services. The judges observed that during the period under assessment, leasing and hire purchase transactions were not included within the legal definition of financial services.
The Court further noted that while the VAT Act was amended in 2015 to expressly include leasing activities within the definition of financial services, that amendment could not be applied retrospectively to transactions carried out during the 2011/2012 assessment period.
In its analysis, the Court emphasized that for a transaction to be classified as a financial service, it must fall within the specific categories listed in Section 25F of the VAT Act. The Court held that LOLC Finance’s principal business activities of leasing and hire purchase did not satisfy those statutory requirements at the time.
The judgment also referred to previous decisions, including Bank of Ceylon v. Commissioner General of Inland Revenueand People’s Leasing and Finance PLC v. Commissioner General of Inland Revenue, which addressed similar questions concerning the taxation of financial institutions.
Finding that both the CGIR and the Tax Appeals Commission had erred in law, the Court concluded that the VAT assessment had been calculated on an incorrect legal basis. As a result, the Court allowed the appeal and set aside the determination of the Tax Appeals Commission.
The VAT assessment for the period from April 1, 2011, to March 31, 2012, was annulled in its entirety. The Court made no order as to costs.
The ruling is expected to have wider implications for tax disputes involving leasing and finance companies, particularly in relation to the interpretation of financial services under the VAT regime before the legislative amendments introduced in 2015.
