New inflation wave likely from April as one-off taxes take effect

•  Businesses unlikely to absorb the tax impact; instead will pass it down the supply chain 
• Leading finance professional estimates the potential rise in prices could be as high as 10% 
• Instead of proposed Social Security Contribution govt. urged to reinstate NBT or raise VAT 
• Tax expert says over the years SLhas narrowed its tax base instead of broadening it 

Sri Lankans may need to brace for a new wave of consumer price pressures from around April with the one-off taxes proposed in the budget for this year coming into effect, according leading finance professionals and tax experts in the country.

Deliberating on the potential impact these new taxes could have on businesses, they said there is no way businesses would absorb such taxes; instead the impact would be passed down through the supply chain. 
The budget 2022 proposed to impose a 25 percent surcharge tax on companies and individuals with taxable profit of Rs.2.0 billion with retrospective effect on the assessment years ending 2020/2021. 
Further, a new Social Security Contribution (SSC) of 2.5 percent was introduced on companies with annual revenues exceeding Rs.120 million, effective from April 1, 2022. 

While businesses lobbied against the two taxes since their announcement in November last year, the government remains determined that they be levied to recoup the revenues lost due to the pandemic in the previous two years. 
Speaking at a virtual assembly organised by KPMG Sri Lanka to discuss about the two taxes, several finance professionals said the two taxes are going to have a “definite” and a “significant” increase in consumer prices once they are enforced. 

Dilani Katipearachchi, Vice President, Corporate Finance at Aitken Spence, said the SSC is going to have a massive cascading effect through the supply chain given the nature of the tax. 
SSC being a tax on turnover, it will add a tax on tax at every level the goods and services are passed down in the supply chain with the ultimate burden befalling on the end consumer who is already burdened with decades high prices. 

Sri Lanka’s consumer prices rose by 12.1 percent last year, according to the Colombo Consumer Price Index, the highest in 12 years. 

The Central Bank last week raised interest rates by 50 basis points to guard against the brewing demand side price pressures although bulk of the inflation, according to them, is stemming from the supply side constraints. 
Hence, they continue to believe the current hotter prices are transitory and therefore the price pressures would settle on their own in the next few months. 

SSC is coming into effect from April 1, 2022, adding in what could be another wave of higher prices. 
Tax expert and the Principal for Tax at KPMG, Suresh Perera meanwhile said turnover taxes are not the best way to collect indirect taxes given their cascading effect and therefore countries try to avoid taxing the turnover. 

Aashiq Lafir, Group Finance Director at Softlogic Holdings PLC meanwhile estimated the potential rise in prices due to the SSC could be at least 10 percent as suppliers at every level in the supply chain will add the tax to their price, generating a compounding effect. 

Speaking at the same forum, Haresh Somashantha, Director Finance at Royal Ceramics Lanka PLC instead called the authorities to reinstate the Nation Building Tax (NBT) or raise the Value Added Tax (VAT) rate which will have no cascading effect. 

Sri Lanka abandoned the NBT, and slashed the VAT from 15 percent to 8 percent in 2020 under a massive tax bonanza given as a part of the new government’s fiscal stimulus package. 

Meanwhile, Somashantha responding to a question whether those tax cuts delivered the intended objective of reducing consumer prices said most businesses used the tax benefit to fend off the cost pressures that were building up at the time and therefore maintained their prices at stable levels without passing down the benefit coming from low taxes.  

KPMG’s Perera meanwhile making an assessment of Sri Lanka’s evolving tax policy over the years said the country has in fact narrowed its tax base instead of broadening it, particularly by bringing in taxes from time-to-time, including one-off retrospective taxes, which are borne by none other than the existing tax payers.