Can We Bridge The VAT Gap - EDITORIAL

It was the shortage of medicines, the non availability of fuel, the non availability of cooking gas, 12-hour rolling power cuts, the shortage of basic foods, and the ban on agro-chemical fertilisers which led to the ‘Aragalaya’ which started in early 2022. The assumption to the post of President by Ranil Wickremasinghe and an Indian line of credit saw a gradual entry of basics into the market which calmed an anarchic situation.

As we all know, all of these problems arose with our country’s inability to repay its foreign debts which cut off our ability to source international lines of credit. At this stage it was Wickremasinghe’s political acumen and negotiating skills, which helped arrange a restructure of debt repayments via the International Monetary Fund (IMF). However, negotiating the restructuring of debts comes with conditions imposed by agencies like the IMF which underwrite our debt repayments. 

Among the conditions is the need to show improved sources of revenue. Resultantly, the government has cut subsidies and imposed taxes on a variety of goods and services.
However, these government measures did not achieve the desired targets of revenue collection. Today, the government has imposed a new Value Added Tax (VAT) on a large number of goods, including essentials. The newly imposed VAT will increase the price of goods by 18 percent!

Successful negotiations helped reopen the country’s ability to access much needed funding. Limited essentials are now available, but with the scrapping of subsidies, they are extremely costly. The high costs have impoverished a large majority of our people.
Salaries of workers have not been increased since the COVID virus hit the country. Many businesses closed and threw at least 50,000 out of employment. Many of these people still do not have regular work, which means they now have less cash in hand for expenditure. 

UNICEF points out that an estimated 6.2 million people (28 per cent of the population) are moderately acute food insecure, while 66,000 people are severely acute food insecure. Two in five households (41.8 per cent) spend more than 75 per cent of their expenditures on purchasing food, leaving little to spend on health and education. 
What is going to be the plight of these people when the VAT price increases hit this month?
Do our rulers have an inkling of an idea of the problem ordinary folk in this country face today?
Many a worker is paid around Rs. 40,000 per month. If he/she is fortunate, a husband and wife’s joint income may amount to a total of Rs. 80,000. Most families have an average of two to three children.

A survey carried out by this paper showed the net monthly income of a family of four is around Rs. 80,000 with overtime, if two members of the family are employed.
Major expenses of a family include Household (house rent, electricity and water) cost: Rs. 29,800. Travel to and from work: Rs. 9,960. Food expenses: Rs. 45,800 (inclusive of 1 kg of chicken, 500 grams of fish and 800 grams of powdered milk). Education for two children inclusive of tuition fees costs around Rs. 28,900. The cost of clothing for a family of four (annually) is Rs. 20,000 (approximately Rs 1,500 per month),while medical expenses amount to around Rs 15,000 annually (approximately Rs. 1,000 per month).
In other words a family needs around Rs. 116,720 a month to cover the most basic essentials. These families cannot afford to go to a movie or have any recreational expenses. The children of these families now do not have the capacity to participate in sports or any extra-curricular activity. 
Yet, the monthly income of these families is merely Rs. 80,000 per month.

In other words these families are getting deeper and deeper into debt and this situation will worsen once the new VAT price hikes begin to take effect. 
What makes matters worse is children from poorer sections of the community will soon not have the capacity to study and compete in competitive exams, condemning them to a cycle of poverty and a rich source of recruitment to extremists. 
President Wickremasinghe tackled the macroeconomic problem successfully, can he work a miracle for the downtrodden?
   If he fails, we may well see food riots breakout.