The VAT Hike, Political Parties, The IMF And COL - EDITORIAL

On Sunday, Parliament approved the Value Added Tax (VAT) Amendment Bill at a time most of our citizens are struggling to provide their families with three square meals a day. We also know the bill was rushed through in an effort to fulfill requirements to receive the second tranche of the $2.9 million bailout from the IMF.
The bill raises the VAT from 13% to 18%. In addition, the revised tax will now cover 97 additional items which were not covered under the previous legislation. VAT on these new items will be 18 percent! 

Among the items on which the VAT will be applied are fuel - petrol, diesel - LP gas and fertiliser. 
According to State Minister of Finance, Ranjith Siyambalapitiya, the new VAT increase is expected to increase state tax revenue to 12.5% of the GDP in 2024, up from the current 9.1%, with the aim of raising revenue to 15% of GDP by 2025 - one of the clauses included in the IMF bailout package. 

The State Minister tried to justify the imposition of increased VAT and the 95 additional items brought under the VAT as being due to an increase in welfare expenditure in the 2024 budget, and a significant proportion of government expenditure being allocated to the repayment of the government’s loan interests.
However, certain essential items such as medicines, equipment designed for disabled persons, rice flour, wheat flour, vegetables, fruits, liquid milk, and the free ambulance service will remain exempt from the new Value Added Tax. 

The Central Bank report of 2022 shows, rising malnutrition among children has become a major concern amidst the heightened food insecurity of households. A UNICEF report highlights, 2.3 million children in Sri Lanka don’t have enough to eat, while Save the Children reported, half of the households interviewed said they are cutting down on their children’s food intake, whilst 27% reported of adults skipping meals to feed their children. 

Data collected by this publication shows, it costs approximately Rs. 120,000 for a family of four to have three meals a day without fish or beef.
Yet wages have remained static. In urban areas salaries on an average range from Rs. 40,000 to Rs. 50,000 per month. In the estate areas, workers are still paid less than Rs. 1,000 per day.
As mentioned earlier, the new value added tax of 18 percent will now apply to petrol, diesel LP gas and fertiliser. The increase in the cost of fuel will have a cascading effect on all goods and services. In turn, this means families will have to further reduce their food intake leading to further malnutrition and associated ailments.
Acknowledging the problems faced by the public, Cabinet Spokesman Bandula Gunawardena claimed that the government understood the problems the people are facing, but has been compelled to raise taxes.

Parties in the Opposition, though vociferously condemning the new taxes, have not said they will do away with the same if they were to come to power. Interestingly a large number of MPs from the Opposition were not in Parliament when voting took place!
The government’s problem is that it has no alternative but to meet the IMF and creditor demands on increasing government revenue. 
‘Public Finance.lk’ shows, the country’s official remittances surged to $517.4 million, a 46% increase from a year prior, attributed to improved exchange rates and expatriates sending more earnings. 

Overall in the first 10 months of 2023, Sri Lanka received $4,862.5 million through official channels, a 66% increase from the same period in 2022, also attributed to improved exchange rates and expatriates sending more earnings, in addition to the tourist industry beginning to flourish. Revenue earned from tourism increased to $205.3 million in November 2023 which is over twice the revenue in November 2022, according to the latest data.  
If this trend continues and earnings of other major exports expand, the government’s income too will increase. Hopefully, it will lead to a gradual reduction in taxes.
Let’s keep our fingers crossed.