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Cabinet Co-Spokesman and Minister Bandula Gunawardena
By Charumini de Silva
In a bid to boost tax receipts by eliminating tax exemptions, the Cabinet of Ministers has approved revising the Value Added Tax (VAT) law.
“The move is expected to increase the tax revenue by 1.2% of the gross domestic product (GDP) by reactivating the existing law,” Cabinet Co-Spokesman and Minister Bandula Gunawardena said at the post-Cabinet meeting media briefing yesterday.
It was also noted that the Simplified Value Added Tax (SVAT) methodology will be discontinued with effect from 1 January 2024.
He said several items currently exempted from the VAT will be eliminated to boost revenue, but health, education, agriculture and items affecting low-income families to secure fundamentals, will not be excluded.
Gunawardena said creating a comprehensive mechanism to pay VAT and bringing those absconding the payments to the tax net are key objectives of revising the law.
According to the International Monetary Fund’s (IMF) extended funding facility (EFF), two significant changes to the VAT should be implemented. Under that, the Government should eliminate the majority of exemptions and revise the VAT scheme and discontinue the SVAT approach.
The proposal to instruct the Legal Draftsman to prepare a draft Bill for the purpose submitted by President Ranil Wickremesinghe in his capacity as the Finance, Economic Stabilisation and National Policies Minister was approved by the Cabinet of Ministers at its meeting on Monday.
VAT revenue in 2022 was Rs. 463 billion (1.9% of GDP) up by 50% from Rs. 308 billion (1.8% of GDP) in the previous year. VAT’s share within tax revenue was 26.4% in 2022 up from 23.7% in 2021. Revision of VAT rates brought in Rs. 155 billion in extra revenue in 2022.
Revenue from VAT on domestic services increased to Rs. 291.6 billion in 2022, compared to Rs. 185.5 billion in 2021, while revenue from VAT on import related activities increased to Rs. 171.5 billion in 2022 in comparison to Rs. 122.8 billion in the previous year.
Last year VAT rate on Financial Services was increased from 15% to 18% effective from January 2022, and the increase of general VAT rate from 8 to 12% effective from June 1, 2022 and further to 15% effective from September 1, 2022.
The revenue base for VAT has been widened with the lowering of the VAT registration threshold from Rs. 300 million per annum to Rs. 80 million per annum with effect from October 1, 2022. VAT exemptions on condominium housing apartments was removed with effect from January 01, 2023.
