• Bill passes with 45 majority votes with 100 out of 225 voting in favour 
• VAT will now apply to 97 new items which were previously exempt including fuel and fertiliser
• VAT hike to increase State tax revenue to 12.5% of GDP in 2024
• Govt. attributes need for recent hike to increase in welfare expenditure

After a shaky start over the weekend, the Parliament yesterday approved the Value Added Tax (Amendment) Bill in anticipation of the International Monetary Fund’s review for the second tranche of the $ 2.9 billion bailout. This move will now raise the Value Added Tax (VAT) from the existing 15% to 18%, effective from 1 January 2024.

The Bill obtained approval with 45 majority votes as 100 Parliamentarians out of the 225-member house voted in favour, while a mere 55 Parliamentarians voted against the legislation.

The revised rates will now apply to at least 97 additional items, with items like fuel, fertiliser, and LP gas. This increase in VAT is expected to boost Government revenue by around Rs. 378 billion meeting essential targets outlined in the four-year IMF program.

Speaking in Parliament, Finance Minister Ranjith Siyambalapitiya said the new VAT increase is expected to increase state tax revenue to 12.5% of GDP in 2024, up from the current 9.1%. 

“This forms a component of several economic reforms undertaken by the Government, aiming to raise revenue to 15% of GDP by 2025. The implementation of this revenue measure is crucial for steering Sri Lanka out of its current economic challenges,” he noted.

The Minister emphasised that the nation is now at a crucial juncture to address its economic challenges with a lasting and sustainable solution, moving away from the historical reliance on short-term fixes.

Explaining the rationale behind the tax hikes, Siyambalapitiya underscored the increase in welfare expenditure from Rs. 187 billion in 2023 to Rs. 207 billion in 2024. Furthermore, he highlighted that a significant 70% of the Government’s revenue is allocated for repaying loan interest.

The crucial debate was postponed to Monday after the special parliamentary session called for Sunday to debate the Value Added Tax (Amendment) Bill was adjourned due to the lack of quorum.

The Opposition objected to rescheduling the VAT debate to Monday, citing other planned discussions on budget proposals, including irrigation. However, Speaker Mahinda Yapa Abeywardena called for a vote, where the ruling party secured a majority of 57 votes, allowing the VAT debate to proceed yesterday.

While the Main Opposition party, the Samagi Jana Balawegaya (SJB) including its leader Sajith Premadasa has strongly criticised the Bill over the week both in Parliament and outside declaring it unjust, notably, during the vote, at least 30 MPs of its 82-strong parliamentary group were conspicuously absent. 

Under the recent VAT amendment, citizens will now be required to pay taxes on 97 out of the 138 goods that were previously exempted. Notably, certain essential items such as medicines, equipment designed for disabled persons, rice flour, wheat flour, vegetables, fruits, liquid milk, and the 1990 ambulance service will remain exempt from VAT.

The Cabinet approved the VAT hike in October. Cabinet spokesman Minister Bandula Gunawardene at the time noted that while state revenue has surged to Rs. 1.7 trillion in the first nine months compared to the previous year, which is just enough to cover public sector salaries, welfare payments, and other recurring expenses. 

Acknowledging the challenges faced by the public, he added, “We understand the difficulties the public is going through, and although it’s not our preference, we find ourselves compelled to increase taxes.”

VAT to drive revenue growth in 2024