As 2024 draws near, Sri Lankans are bracing for a significant change slated to commence on 1 January – the Value Added Tax (VAT) which is set to increase from its current 15% to 18%. However, it’s not just the uptick in tax percentage that awaits – there’s also an expansion in the range of items intended to fall under VAT.
Amidst the looming tax hike, there’s a noticeable rush among the public to make big financial decisions before the arrival of 2024. Many are opting to make various purchases, both minor and major, in a bid to sidestep the additional 3% tax that will come into effect with the new year.
A massive impact
Speaking to The Sunday Morning Business, Sri Lanka Retailers’ Association (SLRA) Founder Chairman Sadique Hussain noted that while the retail sector may not experience a significant surge in consumer purchases of Fast-Moving Consumer Goods (FMCG) prior to the VAT hike, there could be a notable increase in consumer interest in major capital expenditures such as apartments and lands.
“People may rush to purchase properties now since a 3% increase in tax for transactions worth millions of rupees will have a huge impact on the consumer,” Hussain noted.
Furthermore, he suggested that maintaining VAT at a single-digit rate would have been conducive to economic growth, emphasising that even retaining the previous 12% in the short term would have been preferable. In the worst-case scenario, the Government could have adhered to the existing 15% rate instead of raising it to 18%, a significant hike that may incentivise people to evade taxes, he added.
Some of the items that come under VAT are mobile phones, electrical goods, packing material, pearls, diamonds, books, magazines, construction machinery, sugar, jewellery, imported and unprocessed timber logs, film distribution, condominium residential apartments, and many more.
Visible hike in property purchases
Past President of the Chamber of Construction Industry (CCI) Major General Eng. Ranjith Gunatilleke confirmed to The Sunday Morning Business that theoretically, a hike in inquiries and purchases of properties from buyers was visible.
“This is because they have to pay an extra 3% if they do not buy before January 2024. I believe that from January, VAT will be imposed on certain types of properties that previously did not come under VAT, meaning that a customer may have to pay a tax of 18%,” he explained.
However, he added that customers would be bearing the burden unless developers shouldered the VAT without letting it affect their profit margins.
Uptick in inquiries for vehicles
Meanwhile, Ceylon Motor Traders’ Association (CMTA) Chairman Charaka Perera acknowledged a slight uptick in inquiries about vehicle purchases over the past few days. However, he highlighted that it remained to be seen whether these inquiries would materialise into actual decisions.
“There are about two weeks left before the 18% VAT kicks in and there will definitely be an uptick in sales before January 2024,” he confirmed.
Moreover, he pointed out the potential for a thriving black market in the wake of high taxes. Companies selling vehicles will need to increase their prices due to the VAT hike, as they will be liable to pay taxes. Conversely, individuals selling vehicles are not bound by the same tax obligations and can exploit this situation to attract more business. He emphasised that this scenario would significantly disadvantage registered, legitimate businesses.
Online spending remains unchanged
Daraz Sri Lanka Chief Commercial Officer Oshan Ranatunga told The Sunday Morning Business that the anticipated VAT increase had not significantly altered online consumer behaviour.
“While there was a notable surge in online spending during November, particularly during major sale events like 11.11, spending patterns have since reverted to typical levels for December this year,” he added.
Economic ripples of taxes
It is also intriguing to note that certain businesses, such as popular e-commerce brands, have initiated campaigns targeting the VAT increase. They are encouraging customers to make purchases at pre-VAT prices. This trend is visible among residential apartment businesses as well, where a substantial increase in prices is anticipated from January 2024.
One prominent behaviour observed before such tax hikes is a surge in consumer spending on essential and non-essential goods. People often rush to purchase items ranging from electronics and household goods to luxury items such as vehicles, jewellery, and property. The fear of paying higher prices due to increased taxes motivates individuals to make these purchases beforehand.
The phenomenon isn’t unique to Sri Lanka. Across the globe, from Europe to Asia and the Americas, similar behaviours emerge whenever a tax hike is on the horizon. Whether it’s a rise in the Goods and Services Tax (GST), VAT, or sales tax, people’s reactions are often consistent: a rush to purchase, invest, or finalise deals before the higher tax rates kick in.
These trends highlight the impact that tax policies have on consumer behaviour and financial decision-making. Governments’ tax adjustments not only affect revenue but also influence how individuals spend and invest their money, creating ripples across various sectors of the economy.
A brief summary of SL’s VAT
- This is not the first time VAT has been set at 18%; in 2022, VAT on financial services stood at 18%
- The Yahapalana Government set VAT at 15%
- The Gotabaya Rajapaksa-led Government brought VAT down to 8%
- The VAT registration threshold is set at Rs. 60 million per annum from the previous Rs. 80 million
- 97 new items have been added to the list of products/services under VAT, with effect from January 2024
- 43 items are VAT exempted, including infant milk, crude oil, and pharmaceutical products
- The International Monetary Fund (IMF) defended the 18% VAT hike during the press briefing conducted last week
- The Ministry of Finance foresees a 2.5% hike in inflation post 18% VAT hike