Ceylon Chamber advocates for balanced fiscal approach over proposed VAT rate hike

LBO –The Ceylon Chamber of Commerce raises 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, it’s imperative to evaluate the broader economic ramifications of such a decision. The current economic landscape, characterized by escalating income taxes, elevated electricity tariffs, and rise in fuel prices, suggests that an additional VAT increment will further strain consumers’ purchasing power.

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 Chamber strongly recommends that the government explore alternative fiscal strategies, such as expenditure rationalization. By refining budgetary practices and reducing undue borrowing, a more balanced and sustainable fiscal path can be charted. Furthermore, the pressing need to modernize our revenue collection mechanisms is evident. 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 optimizing revenue collection.