Sri Lanka’s Value Added Tax (VAT) increase to 18% from January 2024 onwards along with reduction of VAT threshold to Rs. 60 million and removal of VAT exemptions from 97 items out of 138 goods is expected to increase the inflation by 2.5%, State Minister of Finance Ranjith Siyambalapitiya said.

Presenting the proposed VAT yesterday (12) at Parliament, the State Minister made these remarks, as per the information from the Economic Research Unit of the Central Bank of Sri Lanka (CBSL).

He said bringing the VAT threshold to Rs. 60 million from Rs 80 million, the Treasury is expecting a 0.15% growth in Gross Domestic Product (GDP) or Rs. 40 billion addition to the state revenue.

Moreover, he said that from increasing the VAT to 18% from 15% there will be an increase in revenue by 0.72% of GDP or Rs. 227 billion to the State. 

Siyambalapitiya said that with the expected increase in inflation by 2.5%, the inflation will surpass the CBSL target of 5% as inflation in November stood at 3.4%.

However, he said that the Government is expecting revision of fuel prices in the next month relative to the drop in global oil prices and a revision on electricity rates as the Ceylon Electricity Board (CEB) has maximised the use of hydropower in power generation in the past few weeks, which will balance off the increase in inflation due to VAT.

The Budget 2024 said that the VAT rate will be increased up to 18% in January 2024 along with elimination of VAT exemptions other than for products relating to health, education, and a few essential foods. This brings Sri Lanka in line with regional peers including India and Pakistan, in terms of standard VAT rate.

“Once the resulting VAT collections enable overall tax targets to be met, it will be possible to phase out other indirect taxes such as the Social Security Contribution levy (SSCL) and rationalise the Special Commodity levy (SCL), which are distortive in nature.” the Budget 2024 statement said.

Further, the State Minister said that the Government is expecting to receive the second disbursement of the IMF by next week.