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Excise levies dominate as VAT regime further diluted in Sri Lanka

ECONOMYNEXT – Dilution of Sri Lanka’s value added tax regime reached a new low in the first eight months of 2015 with excise taxes overtaking and almost doubling to become the top source of taxes for the state.

Excise, which is levied per weight or unit of product is charged on tobacco and cigarettes and increasingly on imports including cars.

So-called cess and a special commodity levy are also charged on imports.

Unlike VAT which is neutral, taxes charged on imports gives protection to domestic or ‘import substitution’ producers, who collect or ‘arbitrage’ the tax that would have otherwise have gone to the state in the similar way smugglers do.

In the first six months of the year, excise taxes rose to 256.3 billion rupees from 112.4 billion rupees a year earlier while VAT fell to 123.2 billion rupees from 133.3 billion, according to data released by the Central Bank.

In addition to exemptions given on political patronage over several years, last year in key areas like alcohol VAT was consolidated into excise.

Import duty collections rose to 53.7 billion rupees from 40.4 billion rupees, but the numbers understate the actual barriers to trading.

Other taxes including special commodity levy (31 billion rupees), ports and airport levy and excise itself are charged on imports.

Sri Lanka stopped cascading turnover tax and moved to Goods and Service Tax in the late 1990s but an administration headed by currency Prime Minister Ranil Wickremesinghe that came to power in 2001 promising to abolish the tax, changed its name to VAT.

The tax was also not imposed at 17.5 percent as the recommended rate. The 2001 administration started multiple rates which made the system cumbersome and the subsequent Rajapaksa administration gave many exemptions.

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