After VAT comes policy challenge

Monday, 3 October 2016 00:01 - - {{hitsCtrl.values.hits}}

After many months of uncertainty and political wrangling Finance Minister Ravi Karunanayake will present the Value Added Tax (Amendment) Bill to Parliament on Tuesday hopefully ticking off a key need for fiscal consolidation.

This is the second time the Bill is being presented to the House. The Supreme Court ruled in early August that the previous Bill presented by the Minister to the House did not signify Cabinet approval, as is the constitutional requirement and hence could not be proceeded with.

The new Bill, approved by the Cabinet on 13 September, also includes several amendments to the Bill previously presented to the House. The new rate will also be imposed on private health services other than diagnostic tests, dialysis and OPD services excluding medical consultation, telecommunication services, tobacco products and powdered milk which contains added sugar or other sweetening matter.

The passage of VAT is expected to be followed by the long-awaited policy framework to be outlined in Parliament by Prime Minister Ranil Wickremesinghe. The policy statement, which has been delayed several months, will outline the Government’s broad economic plan for the next five years ahead of the Budget for 2017 that will be presented on 10 November.

A similar exercise took place last year where the Prime Minister’s statement on simplified tax laws, more direct taxes, a reduction in budget deficit and emphasis on economic liberalisation earned much applause. Disappointingly there was a massive mismatch between the policy statement and the Budget clauses resulting in confusion and policy inconsistency leading to dampened private sector sentiment.

The consensus that the Government is making policy at “33,000 feet” without considering the ground realities continues to pervade and together with increasing debt burdens and a lacklustre external environment poses a tough 2017. For now the Government has decided to flex its muscles and ordered all United National Party (UNP) members to occupy their seats in the House to push through the unpopular VAT increase. It is fortuitous that the Government has the political will to move ahead with its fiscal consolidation program but with another election year looming it is doubtful whether it can stay the course.

If VAT is passed this week with minimum fuss it would give a chance for many to heave a sigh of relief. Unfortunately this relief will be short-lived as the Government will have to move forward fast with stronger reform such as increasing direct taxes and liberalising the economy, which will be met with stiff resistance from many in the private sector.

The nexus of power between politicians and businessmen is very close in Sri Lanka and vested interests tend to dominate with favours being dished out to loyalists. For tangible reform to be felt on the ground the Government will have to roll up its sleeves and dig in its heels on the policy front and ensure a principled transition to a liberalised market based on exports and investment. The time has come for Sri Lanka to make it or break it!