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Is there value in hiking the Value-Added Tax?

01 May 2022

  • Small business owners and consumers dread the inevitable VAT increase
By Sumudu Chamara The economic crisis has crippled almost every sector that has a direct impact on the general public’s lives, and the Government seems to be taking some measures to face the crisis and alleviate its impacts. While foreign assistance, especially loans and credit lines, are obvious immediate solutions, the Government has now paid attention to long-term, domestic solutions to prevent the further collapse of the economy. Amidst this crisis, Finance and Justice Minister Ali Sabry PC last week told BBC that the Sri Lankan Government has no choice but to increase taxes, especially the Value-Added Tax (VAT). He has further admitted that the incumbent Government made a mistake when it almost halved the VAT rate to 8% in 2019. During an interview with BBC, Sabry had further stated that the current level of VAT is “definitely not sustainable” for a country like Sri Lanka, which is dependent on the imports of essentials, and that the rate should be raised to 13% or 14%. Sri Lanka will soon increase taxes, and as consequently, inflation-hit consumers as well as shop owners that charge VAT are likely to face a challenging time in the foreseeable future. To discuss their thoughts on the Government’s plan, The Morning spoke to several shop owners who charge VAT. Impact on restaurant industry V.K.C.L. Chandrasena, a 57-year-old restaurant owner, pointed out the importance of taking into account customers’ responses and the situation of restaurants when increasing VAT amidst rising inflation, because a sudden and massive VAT hike may further cripple the restaurant sector. He explained: “We have already lost a lot of regular customers due to increased prices of goods. While some customers have completely stopped visiting our restaurant, some who used to come around three to five times a week, come only once or twice a week now. We have also observed that most of our customers are highly conscious about how much they spend.  “The issue is, due to increasing prices of ingredients, especially imported food items, and also lack of availability of other essential goods such as liquefied petroleum gas (LPG), the prices of some of our products have already been increased by 250%. We have had to increase our employees’ salaries and other perks too, which were also done through increasing prices. “In this context, if the VAT was increased to the previous rate, the said situation will most certainly get worse, and a lot of sectors including the restaurant sector will have to face bigger financial issues than they are facing at present. Without adequate customers, no amount of tax hikes are going to help either restaurants, or any sector that pays/charges VAT for that matter, or the national economy.” Chandrasena underscored the importance of ensuring that an adequate number of customers purchase goods that are subjected to VAT, while also increasing VAT. To achieve it and to protect the customer base, he proposed that the Government increase VAT gradually over time, while also giving special concessions to the restaurant industry in order to reduce costs. “These are the only two solutions I think are available and practical. If the Government takes steps to balance the two sides, a tax increase would not be an issue,” he opined. Effective use of tax money Meanwhile, another restaurant owner, who did not wish to mention her name, questioned the effective use of VAT and its true benefits. She said: “I understand that the Government has to increase the prices of almost everything to cover its costs, and thus tax hikes are inevitable and are important. However, the main issue Sri Lanka is facing at present is a foreign reserves crisis, not a Sri Lankan rupee crisis. We charge taxes in rupees, and therefore, I do not think that increasing domestic taxes would considerably help manage the overall economic situation, because the main issue lies in the lack of United States dollars. That is not to say that taxes collected in rupees are not important. But we have to understand that we need US dollars more than we need rupees.” At the same time, she raised concerns about to what extent and in what way increased VAT would help the Government’s expenses. “If the Government is determined to collect more money in taxes from the people and save the economy, the collected money should be spent wisely. I do not think the current Government has that kind of priority. Despite all the economic issues, it still keeps building roads and other infrastructure facilities, some of which do not have a direct and immediate contribution to the national economy. I think this is not a good time to use people’s tax money on projects that have only long-term benefits. The Government must understand that we need short or mid-term solutions before anything else, and tax money should be used to achieve such objectives.” She further stressed: “If the Government increases VAT only for politicians to steal or use as they want, there would be no point in increasing taxes, and the only thing it is going to result in is increased economic burden on the general public. These are valid concerns, because this Government has not shown satisfactory competence in putting people’s tax to good use. The people do not want to feed corrupt politicians anymore.” The Government’s tax policies Meanwhile, Kalinga Sampath, a 29-year-old consumer, questioned the Government’s changing tax policies, adding that a government being unclear about the seriousness of its tax policies and changing tax policies in a short period of time is not a sign of farsighted governance. Adding that the Government’s imprudent tax-related decisions are among the reasons behind the prevailing economic crisis, and that it was not something that was created solely by the Covid-19 pandemic, he alleged that the Government significantly reduced VAT rate after coming to power in 2019 in order to help its supporters and to give the people a false assurance of a prosperous future. That, he said, has now contributed to creating a crisis, during which time increasing taxes is not an advisable step. “Look what has happened now. That mistake has paved the way for a bigger, more complex, and more long-term issue. Even if the Government increased VAT to the previous rate that existed before the tax cut in 2019, that will not be welcomed by the people. The people had better economic situations before and they could afford to pay the previous VAT rate. However, the present situation is completely different, and having to pay more taxes, regardless of the nature and amount, is an unbearable burden to the people.” He added that if taxes were raised, be it VAT or some other tax, he would take to the streets to express opposition against the Government and the Finance Minister against the decision, because it is due to the Government’s fault that a need has arisen to raise taxes amidst an economic crisis. Direct taxes Speaking with The Morning, Sampath Samarasekara, another consumer, said that even though increasing VAT could help the Government collect a considerable amount of money, like several past governments, this Government is yet to pay enough attention to strengthening income generated through direct taxes. “Sri Lankan governments are always so enthusiastic when it comes to collecting taxes from ordinary consumers. These are people who struggle to earn Rs 1,000-2,000 a day and somehow make ends meet with such a meagre amount of money. They already pay enough and more money to the Government as taxes, and more money to profit-making businesses. Increasing taxes such as VAT directly affects people who are already struggling to deal with skyrocketing inflation.” In this context, he opined, perhaps the Government must pay more attention to direct taxes. “Many governments have conveniently ignored direct taxes, and have let businessmen who financially supported politicians’ election campaigns enjoy low direct taxes. This is not a practice that should go on if Sri Lanka truly wants to revive its economy. It is also important to note that during the pandemic, many businessmen started making massive profits. Among them are those who sell food, fuel, and imported goods. Like previous governments did, what the present Government is trying to do is to charge more money from consumers as taxes, instead of encouraging businessmen who make massive profits to pay direct taxes.” He said that the culture of supporting the wealthy backers of politicians should come to an end, and most importantly, proper measures need to be taken to charge taxes from politicians who operate undisclosed businesses. “There are a lot of politicians who suddenly became rich when they entered Parliament. A lot of politicians operate businesses, and also, we know very little about the undisclosed and sometimes illegal businesses politicians own. Without learning the nature of the size of their businesses, we will not be able to find out whether they pay taxes properly. Who is going to look into this? Like previous governments, this Government also protects its tax-evading members, and the amount of taxes they avoid paying cannot be a small amount,” he charged. The country’s business sector has already been massively affected due to the economic situation, including the skyrocketing prices and scarcity of both local and imported goods, and the decreased purchasing power of consumers. While increasing prices is the most obvious solution to manage the situation, according to shop owners, there is a certain limit to which prices and taxes can be increased, and when customers reach the level where they cannot afford the goods or services in question anymore, they tend to reduce purchasing goods or services and/or seek alternative goods or services. These concerns need to be taken into consideration when hiking taxes. Otherwise, as some who spoke with us said, increasing the VAT rate will not result in anything beneficial to the general public.


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