Further confusion was created yesterday over the government’s tax policy with State Minister for Finance Lakshman Yapa Abeywardena announcing that the new 15 percent value-added-tax (VAT) rate effective from May 2 will not be applicable to water, electricity and medicine. When the tax reforms were announced to the 2016 Budget this March by Prime Minister Ranil Wickremesinghe, no VAT exemptions were announced. Instead, he said the VAT exemptions available for telecommunication services, private education and private healthcare would be removed. Thus, the announcement by Abeywardena is a deviation from Wickremesinghe’s tax reforms and analysts point out that this adds to the confusion already created by a statement made by President Maithripala Sirisena a couple of days ago.

President Sirisena said he would not allow the tax burden to be felt by the public and pledged that he would chase away the economic advisors who propose tax hikes on the people. “May be the exemptions to water, electricity and medicines were what was meant by the president when he said he would not allow the tax burden to be felt by the public,” an economic analyst on grounds of anonymity told Mirror Business.

But, he pointed out that the VAT hike would be felt by the people as it applies to all retail and wholesale sectors.  

“I fear further amendments to the VAT by way of exemptions will come in the coming few days, further showing the government’s failure to stick to its policies,” he remarked. 

Policy consistency hasn’t been the forte of successive Sri Lankan governments and unfortunately it remains true with the present coalition government too. For example, many policies introduced in the two budgets in last January and November were either withdrawn or amended. 

Fiscal consolidation through cutting debt, reforming the state-owned enterprises, increasing government revenue and minimizing subsidies have been aspects emphasized by the International Monetary Fund (IMF) throughout the years and Sri Lanka is currently negotiating a 36-month facility up to US $ 1.5 billion with the IMF to overcome the financial crisis it is faced with. 

Sri Lanka’s growth was driven by the Chinese-funded mega infrastructure projects and higher inward remittances during the post-war period. In this backdrop, the country’s economy grew on an average of 7.5 to 8 percent. The then Rajapaksa government however did not capitalize on the positive developments and initiated structural reforms for the economy. Instead, they practised populist politics to maintain their power base. 

With the remittances slowing down as a result of lower oil prices and political turmoil in the Middle East and the present government’s strained relations with China, foreign direct investment is set to play a key role in Sri Lanka’s future economic growth and survival in the coming years.  

But, it appears that policy inconsistencies will stand a major obstacle in attracting such investments. The differences between the two main political parties in the coalition government could further aggravate such inconsistencies.