Financial VAT hike nothing to do with proposed Social Security Contribution- FinMin sources

•  Say the proposed 2.5% tax may come into effect soon after receiving parliamentary approval
• There were calls to adjust existing VAT rate instead bringing in the 2.5% proposed tax
• The last budget proposed 2.5 percent tax on companies with an annual turnover exceeding Rs.120mn titled, ‘Social Security Contribution’

The hike in Financial Services Value Added Tax (FSVAT) is separate from the proposed Social Security Contribution (SSC) in the budget for this year and the latter could also come as soon as from next month. 
The Committee on Public Finance last week approved amendments to the VAT Act to raise the FSVAT by 3 percent to 18 percent. 

The date the higher tax rate will come into effect isn’t known yet and perhaps it could come by way of a gazette after obtaining parliamentary approval for the amendment. 

Although the general VAT rate was brought down in 2019 December from 15 percent to 8 percent to provide fiscal stimulus to businesses and individuals who had been under enormous burden from multitude of direct and indirect taxes since 2016 under an International Monetary Fund backed programme, the FSVAT was left unchanged. 

The increase however came as an amendment outside the budget 2022 in a sign that policymakers may be scrambling to find ways and means to raise tax revenues to fund the massive expenditure of the government. 

A debate is raging between factions whether the steeper tax cuts afforded in 2019 December is directly responsible for the current massive gap in the fiscal account. 

However, during the brief period from January to March in 2021, the Sri Lankan economy burst into activity, though with relative slowdown in tourism, entertainment and education, achieving 99 percent of its budgeted tax revenues just prior to the resurgence of the pandemic which forced the policymakers to lockdown the country again. 

Pandemic is the leading cause of the current economic malaise as it dealt a severe blow to the country’s external sector as well as the domestic sector as the resulting lockdowns erased nearly US$ 20 billion worth foreign inflows from multiple sources during the two years of the pandemic, while the domestic economy was massively plagued by the negative productivity that came from sustaining a large chunk of the populace on printed money.   

Although there were calls to adjust the existing VAT rate instead bringing in the 2.5 percent SSC, this week’s FSVAT rate amendment has nothing to do with the proposed SSC, according to Finance Ministry sources. 

They said SSC could potentially come into effect from next month onwards after the parliament gives the approval. 
The budget presented in November proposed to impose a 2.5 percent tax on companies with an annual turnover exceeding Rs.120 million, titled, ‘Social Security Contribution’, and was set to come into effect from April with the aim of raking in Rs.140 billion.