Saturday, February 9, 2013

Small Businesses in Sri Lanka crippled by the Govt imposition of VAT - Food City et al.

The Crippling of the small agri-business by the Food City Chain and perhaps Arpico and Keells also, due to the impostion of VAT on VVV large Companies.

Food City makes this claim in their PR that they have 15,000 outgrower farmers who they buy from and they are part of the Community, cutting out the middle man going direct thereby also giving the Consumer a better deal. It is the small producer that they are now crucifying!

The imposition of VAT by the Govt. on  big retail operators with sales exceeding Rs500M in a Quarter has put paid to that Canard. In order NOT to lose business Food City have decided NOT to recover it from the customer but instead absorb this cost. That too is a lie, as they have now forced all suppliers to issue VAT invoices, especially suppliers who are not registered for VAT as they are too small, or give them a lower price for the product, so that Food City will not lose out.

In explaining this to the average reader: 

Let us say that a cake of soap with a MSRP of Rs 50 is sold by Food City, they have to pay the Govt. 12% or Rs6 as VAT. As this same cake of soap can be bought in small kade for Rs50 they cannot charge Rs56 as the consumers will desert Food City. So what will they do? The producer of the Soap was earlier paid Rs40, with a margin of Rs10, now the producer is asked to reduce the price to Rs34+VAT for a total of Rs38.20 where Food City will pay the net VAT Rs6-Rs4.20 or Rs 1.80 to the Inland Revenue, but their margin remains the same – Sale 50- VAT 1.80 – Product cost 38.20=Rs10. The supplier is screwed ROYALLY. Losing Rs6 as he now has to register for VAT and pay the Rs4.20 getting only Rs34 now when in the past as an unregistered supplier he got Rs40. He can actually go out of business here.

This simple explanation goes to show the enormous problem for small especially unregistered for VAT suppliers in dealing with Food City in the future. The Government has effectively wiped out the small business by this move, and though I have shown a battle with Unilever for the margin, in the end Food City will NOT get the same sweet deal with Unilever as they are able to impose on the hapless small supplier. Unilever’s clout will give them some grace. They have enough experience in the world to deal with this type of stalemate and will come out of relatively unscathed. Food City will lose some margin, they will NOT offer many specials to the consumer and possibly lose some sales.

Remember this is a zero sum game, so if the Govt. gets Rs5B then the suppliers, consumers and the retailers all contribute to that extra tax, with the suppliers being the most hit in profitability terms, a death knell to small businesses trying to survive. All thanks to a selective application of the VAT rules for ONLY 4 Companies.

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