Ceylon Chamber raises concern over VAT rate hike; advocates balanced fiscal approach

The Ceylon Chamber of Commerce yesterday raised concerns regarding the proposed increase of the Value Added Tax (VAT) to 18%.

While recognising the Government’s commitment to revenue enhancement in alignment with International Monetary Fund obligations, the Ceylon Chamber said it is imperative to evaluate the broader economic ramifications of such a decision.

“The current economic landscape, characterised by escalating income taxes, elevated electricity tariffs, and rise in fuel prices, suggests that an additional VAT increment will further strain consumers’ purchasing power,” the Chamber said in a statement.

As consumer spending plays a pivotal role in our GDP growth, there’s a significant risk that this tax increase could lead to a further decline in consumption. Household consumption expenditure growth has been contracting since the end of 2021. At a time when Sri Lanka’s focus should be on reviving economic growth through reform measures, such hikes may inadvertently lead to further economic contraction, potentially offsetting the intended revenue gains. In this context, the Ceylon Chamber strongly recommends that the Government explore alternative fiscal strategies, such as expenditure rationalisation.

“By refining budgetary practices and reducing undue borrowing, a more balanced and sustainable fiscal path can be charted. Furthermore, the pressing need to modernise our revenue collection mechanisms is evident,” the Chamber said.

Challenges, such as the Inland Revenue Department (IRD) issuing tax default notices spanning several decades, highlight the inefficiencies of our current system. The Revenue Administration Management Information System (RAMIS) demands further enhancement for maximum efficacy. A thorough digital transformation, leveraging systems like RAMIS, is crucial for streamlining processes and optimising revenue collection.

The Ceylon Chamber of Commerce said it remains committed to constructive dialogue with the Government on these crucial matters, aiming to achieve a fiscal approach that ensures robust and sustainable economic growth for the entire nation.