📈 Court of Appeal Rules Primary Dealers Exempt from VAT on Financial Services

In a landmark ruling on 11 June 2026, the Court of Appeal allowed the appeal of Wealthtrust Securities Ltd. against the Commissioner General of Inland Revenue, establishing that primary dealers are not subject to VAT on Financial Services for core government securities operations. • Overall Ruling & Impact Core activities of licensed primary dealers—including bidding, purchasing, holding, and selling Government securities—are classified as investment activities, not a "supply of financial services". The Court ruled that primary dealers cannot be characterized as lenders to the Government of Sri Lanka, completely annulling the disputed VAT assessments for the 2012/2013 and 2013/2014 assessment years. • Key Legal & Sector Breakdowns Regulatory Prohibition: Under Central Bank regulations, primary dealers are strictly prohibited from granting loans, meaning they legally cannot be categorized as providing loans when purchasing securities. Investment vs. Loan: The Court endorsed a framework using seven criteria to distinguish investments from loans, highlighting that securities involve market-driven competitive auctions, fixed interest rates set by the Central Bank, and free transferability in the secondary market without collateral. • Procedural & Administrative Outcomes Duty to Give Reasons: The Inland Revenue Department (IRD) failed its mandatory obligation under Section 29 of the VAT Act to communicate reasons for rejecting the tax returns, rendering the assessments null and void. TAC Time Limits: The Court ruled that the Tax Appeals Commission’s (TAC) 270-day determination period is directory, not mandatory, meaning procedural delays beyond this period do not automatically invalidate a TAC jurisdiction.