VAT exemption for 3 days: what are the difficulties?

The measure requires compliance with 3 special requirements, which will cause sellers and buyers to face at least 6 major difficulties.

In addition, this exemption will require the mandatory use of electronic invoicing and payment through financial channels.

Articles 22 to 26 and 160 of Law 2010 of December 27, 2019 established that during the thirteen months between July 1, 2020 and July 30, 2021, the Dian may set up to 3 days in which the goods mentioned in such rules (finished clothing, some complements of human clothing, school supplies, toys, sports equipment and certain household appliances) will be sold as VAT exempt goods, i.e., taxed at zero rate, but with the right to take as deductible the total VAT that the producer or marketer has paid first in its purchases, costs and expenses. This, as long as they are marketed in departments where the sale of such goods is made as VAT taxed goods (which leaves out San Andres, Providencia and Amazonas, where such goods are always sold as excluded throughout the year).

“The rule warns that the possible balance in favor that may be formed in the VAT return due to exempt sales in the 3 days without VAT may not be requested as a refund.”

The rule warns that it will not be possible to request a refund of the possible credit balance that may be formed in the VAT return due to exempt sales in the 3 days without VAT.

This type of measure (which has already been used temporarily on other occasions, for example to help a municipality such as Mocoa affected by a natural tragedy, or the municipalities on the border with Venezuela affected by the political and economic crisis in that country) seeks that those who are responsible for VAT on the sale of the aforementioned goods (regardless of whether they are individuals or legal entities, or whether they belong to the ordinary, special or SIMPLE regime) stop charging VAT so they can increase their sales and consumers get a better return on their money.

In order to achieve this, this time the regulation demands compliance with multiple requirements, which will make the application of the measure difficult, among which are:

a. The benefited items must have a price before VAT that does not exceed the respective values in UVT mentioned in Article 24 of Law 2010 of 2019 (values ranging between 3 and 40 UVT depending on the category to which the item belongs). In addition, goods that are normally sold in pairs (example a pair of shoes), may not be separated to then claim that each unit of that pair falls below the UVT mentioned above.

“The sale can only be made in person and only to natural persons who are final consumers of the goods, who may only cancel their purchases with debit or credit cards.”

b. The sale may only be made in person and only to natural persons who are final consumers of the goods, who may only cancel their purchases with debit or credit cards (or any other electronic means in which an entity supervised by Superfinanciera is involved). Additionally, they may only purchase in the same establishment up to 3 units of the same article. In any case, the rule does not prevent the same card from being used to pay for the purchases of different persons.

c. The sale must be supported by an electronic invoice, which must include the buyer’s data. This implies that they cannot be supported in tickets from cash register machines.

Defects in the regulations

Based on the above, the following negative points can be highlighted in the regulations that will govern this process:

1. It is not a benefit for the entire population.

The measure will only benefit buyers who normally go to establishments that are responsible for VAT. Therefore, those who only buy in establishments that are not liable for VAT (for example, people who live in poor neighborhoods or small towns and who only go to stores or mini-markets under the simple regime, or to stores and mini-markets of individuals under the ordinary income tax regime, but which at the same time operate as not liable for VAT), will not feel any change in the final sale price to the consumer during the “3 days without VAT”.

2. There will not necessarily be an increase in sales but a more active season.

Many people who are able to postpone the purchase of their toys, clothes, supplies and appliances, will not buy on the days when sales are made with VAT and will wait until the VAT-free day arrives. Therefore, the measure will not necessarily help to increase sales of the aforementioned goods during the year, but it will change the time of purchase of such goods. Thus, in the end, the State will no longer receive a considerable amount of VAT in a timely manner.

3. Not all Colombians have access to electronic means of payment.

The regulation states that sales without VAT may only be made to individuals who pay by electronic means (debit, credit or prepaid cards, etc.). This measure seeks to prove the reality of the sale and, at the same time, to prevent that those sales with VAT of previous days, without invoicing, are registered only on the day without VAT. However, buyers who intended to pay with cash, check, gift cards or with merchandise exchanges, etc., will not be able to benefit from the reduction in the sale price.

Therefore, many low-income people will not be able to benefit from the measure, since they do not use any of the electronic means of payment mentioned in the regulation.

4. There are no mechanisms to control that the buyers are the final consumers.

Although the regulation states that the sale without VAT must only be made to the natural person who is the “final consumer”, it will happen that even natural persons who are not responsible for VAT (former simplified regime) will pretend to be the “final consumer” (since no one will be able to control this situation). Therefore, if such a trader takes the opportunity to make purchases on the VAT-free day, what he will do is to appropriate merchandise that he can then resell for the rest of the year at lower prices than normal.

Suppose that such a merchant is able to buy on the same day 3 household appliances with an individual value of $1,300,000 plus 0% VAT. This merchant will then resell these goods at a smaller final price, since he will only take the $1,300,000 and add a profit margin, for example 10%, and resell them for $1,430,000. This price is much smaller than the one that the merchant would have to calculate if he had had to pay VAT first, since he would have had to buy the merchandise with the VAT of 19%, which implied that the total cost of his purchase would go from $1,300,000 to $1,547,000, and on that value he would have had to add his profit margin of 10%; thus, the resale price would have been $1,701,700.

Therefore, if that natural person merchant not liable for VAT manages to lower the final price of his subsequent sales, what will occur is a strong competition with his prices against merchants who sell the same product, being liable for VAT, with the obligation to add 19% to their sales. In addition, it will also lower its industry and commerce tax.

5. Significant logistical wear and tear is generated for department stores and supermarkets.

Businesses such as, for example, large supermarkets of legal or natural persons, which are responsible for VAT, keep posted throughout the year on their shelves the notices with the final sale price of the article, which includes the value of VAT. However, if the Dian establishes a single day for sales with a 0% VAT rate, the question arises: how will the aforementioned supermarkets make a price change on all shelves if the change in the final price to the consumer would only apply for that single day? Changing all the price tags to publish a new price that will only be valid for one day would be a total waste of time.

The only really practical thing that such supermarkets could do is to place a physical billboard next to the clothes, or toys, etc., indicating the final price, which would not include VAT, which must be registered at the checkout (and only if the buyer pays with debit or credit cards). The billboard would have to publish a final price lower than the one on the label that was on the shelf. However, it is possible that many supermarkets take advantage of the ignorance of people unaware of the rules (for example, a foreigner passing through Colombia) and do not have such billboards; therefore, at the cash register they would charge them the same selling price mentioned on the label, but saying that it does not include VAT, which would mean that the supermarket earns as its own income what used to correspond to VAT. If nobody denounces this situation, the Dian will not be able to apply the “anti-abuse rule” mentioned in numeral 5 of article 24 of Law 2010 of 2019.

6. There is no guarantee that the Dian will be able to support the validation of such high demand for electronic invoices.

The regulation indicates that it is mandatory that the sale without VAT is supported by an electronic invoice (currently with all and “previous validation”) in which the buyer’s data is identified. Therefore, it is clear that it could not be supported in a cash register ticket. Then, it will be necessary for the Dian platforms to work correctly on that day, without collapsing, since the number of electronic invoices to which the “previous validation” will have to be done will increase during the same day. At present, this type of collapse does not occur, since supermarkets are operating normally with cash register tickets, and only when the buyer requests that the ticket be changed for an “electronic invoice with prior validation”, the respective process is carried out. But, in order to exchange the cash register ticket for an “electronic invoice with previous validation”, many supermarkets are forcing the buyer to first enter the seller’s web page and register in a special area. So there, complications may arise if people who do not know anything about registrations on internet pages are forced to do that kind of process, so that on the day of the VAT-free sale they can be given their respective electronic invoice.

Source: Actualícese