Govt. says measures underway to mitigate effects of new VAT regime

Ministry of Finance, Tax Policy Adviser Thanuja Perera (centre) at the media briefing on Thursday. Inland Revenue Commissioner’s Department Commissioner A.M. Nafeer, President’s Office State Revenue Unit Director General M.J. Gunasiri, Director K.K.I. Eranda and Central Bank Economic Research Department Deputy Director Janaka Edirisinghe are also present

The Government on Thursday assured a raft of measures to mitigate any adverse effect from a new Value Added Tax (VAT) regime from 1 January 2024.

Ministry of Finance, Tax Policy Adviser Thanuja Perera said that the Government is diligently addressing the impact of the Value Added Tax (VAT) revision. This involves the elimination of additional taxes on goods and services under VAT and implementing necessary tax adjustments.

Perera conveyed this information during her participation in the special press conference held at the Presidential Media Centre (PMC), under the theme “Value Added Tax (VAT) Amendment Act and its impact.”

It was highlighted that even individuals with expertise in economics are circulating a misconception, suggesting that family monthly expenses will increase by an additional Rs. 40,000 post the VAT implementation on 1 January.

Moreover, it was emphasised that nearly 90 types of items, including educational services, electricity, health, medicine, passenger transportation, as well as all vegetables and fruits, are exempt from VAT. Additionally, VAT does not apply to 65 types of items subject to the Special Commodity Levy.

Inland Revenue Commissioner’s Deprtment Commis-sioner A.M. Nafeer; President’s Office State Revenue Unit Director General M.J. Gunasiri; Director K.K.I. Eranda and Central Bank Economic Research Department Deputy Director Janaka Edirisinghe, were participants in this press conference.

Perera said the VAT was initially introduced in Sri Lanka through Act No. 14 of 2002, marking two decades since its inception. Originally set at two rates, it was later revised to three rates. The VAT rate underwent various changes and was reduced to 8% in 2019, resulting in a significant decline in State income. Subsequently, it was raised to 15%. 

The VAT Amendment Act, presented to Parliament last month, further increases the VAT rate from 15% to 18%, effective 1 January 2024. It is challenging for us to continue relying on concessions. It must be emphasised that this tax amendment has been implemented to address the crucial matter of increasing State income.

Several vital tax reforms have been implemented in the past, including adjustments to the VAT registration limit. From 2019, the limit stood at Rs. 15 million, increased to Rs. 300 million on 1 January 2020, rendering many VAT-registered files inactive. However, the limit was later reduced to Rs. 80 million and, as per the recent amendment, lowered to Rs. 60 million from 1 January 2024.

Additionally, the new amendment eliminates numerous tax exemptions, aiming to recover substantial revenue lost by the Government.

However, certain individuals are circulating misconceptions about this measure. There are claims that life will become challenging from 1 January, and families will face substantial expenses due to the tax revision. It is important to clarify that while there will be some additional expenses resulting from the tax reform, they may not be as significant as some are suggesting. Additionally, the Government is actively taking measures to alleviate the burden on the public by eliminating other taxes imposed on goods and services subject to VAT and making appropriate tax adjustments.

For instance, currently, port and airport taxes are levied on specific imported goods. To mitigate the impact of the VAT increase, positive measures are being implemented, including the removal of port and airport taxes on these goods, with only VAT being maintained.

The President’s Office State Revenue Unit Director K.K.I Eranda highlighted the significance of the VAT as a primary revenue generation tool for the country. The initial expectation for VAT revenue in 2023 was over Rs. 600 billion, but only around Rs. 450 billion have been collected. Anticipating an income of about Rs.1400 billion through VAT in 2024, the Government has identified tax leakage factors, both external and internal, as well as tax exemptions, contributing to the revenue shortfall. Consequently, efforts are being made to increase the number of taxpayers and reduce tax exemptions.

It is noted that certain essential items and services impact the public significantly, such as educational services, electricity, health, medicine, passenger transportation and nearly 90 % of various food items, including vegetables and fruits, continue to be exempt from VAT. Furthermore, 65 items subject to Special Commodity Levy, such as sprats, large onions and dried fruit, are not subject to VAT. These measures aim to strike a balance between revenue generation and minimising the impact on essential goods and services.

Central Bank Economic Research Department Deputy Director Janaka Edirisinghe emphasised the primary objective of the Central Bank of Sri Lanka, which is to maintain domestic price stability.

Under the new Central Bank Act, the Central Bank, in collaboration with the Government, has announced through a Gazette that the country’s inflation should be maintained at a rate of 3-7% on a quarterly basis, with the target of keeping inflation around 5%. Edirisinghe noted that tax reforms can impact inflation and as of November, inflation was recorded at 3.4%.

Taking a family with an average of four members into consideration, the average monthly expenditure in November was reported as Rs. 177,687.44, according to the Department of Population and Statistics. Edirisinghe highlighted that it’s essential to understand that the total cost for an average family cannot increase by Rs. 40,000.

By comparing inflation forecasts before and after the tax revision estimated by the Central Bank, it is projected that inflation will increase by 2-3% due to rising prices. However, he mentioned that the Ministry of Finance and the Inland Revenue Department are actively working to provide relief by removing other taxes on goods and services subject to value-added tax and making necessary tax adjustments. As a result, there is a possibility that the predicted rate of increase in inflation may decrease further.

Edirisinghe stated that the monthly expenses of a family cannot increase by Rs. 40,000 in January compared to December, and expressed regret for any statements suggesting otherwise.

President’s Office Director General of the State Revenue Unit M.J. Gunasiri, provided insights into the Government’s fiscal performance for the current year. He reported that the Government’s income has already exceeded the expected goal of around Rs. 2,850 million for this year, reaching nearly three trillion rupees.

Despite the challenges posed by taxes imposed in 2023, efforts have been made to ensure the provision of essential services to the public without any shortcomings. Gunasiri emphasised that if individuals or businesses are unreasonably increasing the prices of goods, both the Government and the public have the means to take necessary measures in response.

Comparing global standards, Gunasiri highlighted that in many countries, VAT revenue constitutes between 6-8% of the Gross Domestic Product (GDP). However, in Sri Lanka, the VAT revenue for the current year is at 2.2% of GDP. The expectation is to increase VAT revenue to around 4% of GDP in 2024. While acknowledging that this is not an optimal level, Gunasiri stressed the importance of implementing mechanisms for sustained economic activities. To achieve this, the 2024 budget has proposed a comprehensive program for the digitisation and integration of all institutions.