Govt. to boost tax revenue by removing VAT exemptions
Expects to boost tax revenue by 1.2% of GDP by removing VAT exemptions and abolishing SVAT methodology
Current SVAT methodology to be replaced with a more formal methodology
VAT exemptions granted on health, education, agriculture as well as products and services impacting low-income families to remain intact
The government is planning to boost tax revenue by 1.2 percent of gross domestic product (GDP) by removing most of the Value-added Tax (VAT) exemptions and abolishing the Simplified Value Added Tax (SVAT) methodology.
President Ranil Wickremesinghe in his capacity as the Minister of Finance, Economic Stabilisation and National Policies on Monday sought the approval of the Cabinet of Ministers to remove majority of the VAT exemptions granted and to replace the current SVAT methodology with a more formal methodology.
Accordingly, the Legal Draftsman has been instructed to prepare a draft bill to amend the provisions in Inland Revenue Department (IRD) Act for this purpose.
However, Cabinet Spokesperson Minister Bandula Gunawardana noted that VAT exemptions granted on health, education, agriculture as well as products and services impacting low-income families would remain intact.
The SVAT methodology is set to be terminated with effect from January 1, 2024, which would be replaced by a “more formal methodology” for the repayment of VAT, according to the Department of Government Information.
Gunawardana pointed out that SVAT methodology has created in loopholes in the system leading to tax evasion. He said the proposed new methodology would enable the IRD to roll out a more strict and effective tax regime.
The two tax reforms are commitments listed under Sri Lanka’s US$ 3 billion International Monetary Fund (IMF) programme.
The IMF Deputy Managing Director Kenji Okamura in a recent visit to Sri Lanka emphasised on boosting tax revenue in order for the country to return to macroeconomic stability.
Sri Lanka has granted VAT exemptions for a range of products and services, including locally produced dairy, electronic items, mobile phones, sea sand and unprocessed prawns.
According to World Bank (WB) estimates, there is a wide gap of around 6 percent of GDP between the VAT capacity and performance. The local tax experts believe that the country could easily boost the tax revenue by Rs.200 billion by removing these exemptions.
In the first quarter of the year, IRD collected Rs.113.5 billion from VAT, up from Rs.60.6 billion in the corresponding period of 2022, as the government increased the VAT rate to 15 percent from 12 percent.