VAT hike to net Rs. 100 b extra

By Charumini de Silva

With the Value Added Tax (VAT) changes which came into effect from yesterday, the Government expects to boost tax revenue by Rs. 100 billion this year, Finance Minister Ravi Karunanayake said.

The Government increased VAT by around 36% or four basis points from 11% to 15% with effect from 2 May. 

“We are being put under the spotlight for the previous regime’s economic mismanagement, so we can call this VAT increase ‘Rajapaksa’s Corruption Tax,’” said Minister Karunanayake.

“We are expecting an increase of Rs. 100 billion or 0.75% of Gross Domestic Product (GDP). In total we are looking at a 12.7% increase in Government tax revenue this year,” he told journalists on Sunday. 

The Minister said last year the Government managed to increase tax revenue from 2% to 10.4% of GDP.

Asked if the risk of getting into a Balance of Payment (BOP) crisis had faded with Sri Lanka reaching an agreement for a $ 1.5 billion IMF bailout, the Minister said: “Frankly we never had one, but it was with an abundance of caution that we went for the IMF facility. Even if the IMF facility hadn’t come through, that doesn’t mean we have a BOP problem. Our quota is 435% of our country requirement. But the IMF told us that we are not in jeopardy and if they give more people will speculate that the country is in a dire state. We have six months of imports. This is why the IMF gave only $ 1.5 billion, because it wasn’t a crisis situation.”

However, according to data, the budget deficit has almost doubled to 7.4% of GDP from an original forecast of 4.4% due to heavy debts incurred by the previous Government. 

The Minister revealed that in addition to the IMF’s $1.5 billion, the Asian Development Bank (ADB), World Bank (WB) and Asian Infrastructure Investment Bank (AIIB) have brought in a consolidated approach where Sri Lanka could probably get around $ 750 million. 

“We believe that we can push it up to about a $ 1 billion and the results will be felt. It was an endorsement we looked at from the IMF,” Karunanayake said.

Commenting on the debt-ridden SriLankan Airlines, he said that they were yet to take a decision on whether to include it in the budget deficit. “I don’t want to disclose at this stage, but we will have a discussion on how to deal with it via an innovative approach,” Karunanayake added.