Sri Lanka President intervenes in VAT hike

ECONOMYNEXT – Sri Lanka’s President Maithripala Sirisena is intervening directly in a recent value added tax hike made without parliamentary debate and minimal public communication, following protests from traders as well as anger among sick people.

President Sirisena has called a meeting of Treasury and Inland Revenue officials for a meeting after earlier saying in public that some relief will be given for VAT, in a sign that he is getting directly involved in economic policy making.

He has promised relief, though it is not clear what will happen at this point.

Under Sri Lanka’s dual leadership, economic policy was left in the hands of the Prime Minister Ranil Wickremesinghe’s United National Party, which until 2015 had a strong reputation for good economic management.

But a series of miss-steps ad hoc measures sprung up without evidence-based policy making as well as a currency collapse had left its reputation and standing in tatters, critics say.

A controversy over handling of alleged scams at the central bank had also undermined the credibility of the UNP in public eyes.

Partly due to bad communication many, small traders – who do not actually pay VAT as it is collected from the customers- are now protesting because the threshold was brought down.

Analysts say many small traders, do not have the accounting systems to cope with VAT and they do not seem to understand that VAT can be readily collected from customers, due to bad communication, an analyst said.

As exempt businesses, smaller traders were already paying VAT to their suppliers (input tax) before the threshold was cut, and they do not have to raise prices by 15 percent to recover taxes, as most traders seem to believe.

However analysts say many small traders do not have accounting systems and were used to under-reporting revenues and income taxes as well, but VAT would bring their accounts in to the open.





"The problem with charging VAT from smaller traders is not just the VAT itself but also the fact that they would not have to pay income tax, with better accounting systems," the tax analyst said.

State Minister for Finance Lakshman Yapa Abeywardene said last week, that the VAT threshold can be lowered to take out smaller traders from the net.

Meanwhile the current administration has also incurred the displeasure of the weakest sections of society by charging VAT on healthcare, taxing the old and sick in their time of misfortune.

In developed countries both healthcare and funeral services are exempt from tax. In the UK, healthcare is zero rated.

The current administration sharply raised state salaries and subsidies in 2015 and now has to collect more taxes from ordinary people to pay them.

They also believe that there are vast amounts of unpaid taxes that can be collected to push revenue to GDP up, at a time when there are doubts whether the national output data itself is inflated. (Colombo/July04/2016)

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