What is VAT?

A Value Added Tax (VAT) is an indirect consumption tax added to a product’s sales price. Under a VAT taxation system, all sellers collect the tax and then pay it to the government.

VAT was initially introduced in our country through the Value Added Tax Act No.14 of 2002 under former President Chandrika Kumaratunga’s government and has been functioning since 1st August 2002. Present Prime Minister, Ranil Wickramasinghe was in office as Prime Minister during this induction alongside the then Minister of Finance, K. N. Choksy.

This act replaced the Goods and Services Tax (GST) which was an almost congruent tax on the consumption of goods and services. The GST was established in 1998 which was also during Chandrika Kumaratunga’s term as President and Finance Minister together with her mother, Prime Minister Sirimavo Bandaranaike.
When did this all start?

With the chatter among Lankans regarding the hike in VAT, we all know that the latest proposed increment was to raise the previous 11% to 15%.
Since the formation of the new government in early 2015, the matter of VAT has been discussed many a time until this very day. To recap when this all began, we need to rewind to the 20th of November 2015. This particular day was Budget Day and Minister of Finance, Ravi Karunanayake presented the Budget for the year 2016.
In a nutshell, amid other matters, the reading of the Budget for 2016 put forward that the single rate of 11% would be revised into three separate bands;
• 0% for exports and provision of services for payment in foreign currency outside Sri Lanka.

• 8% which was the proposed rate for the manufacturing or import and sale of goods.
• 12.5% which was the higher rate bound for the service sector.

Furthermore, it was stated that these changes would take effect from 1st January 2016.
It was also mentioned that wholesale and retail trade (other than by a manufacturer or importer) will be excluded from VAT.
The Finance Minister also declared that current exemptions would be removed on the following:
• The import or supply of telecom equipment or machinery.
• High-tech equipment for the telecom industry.
Why escalate VAT?

At the Budget reading, Minister Karunanayake mentioned that the reduction in the securing of VAT collections played a main role in the reason behind the fall in tax revenue that the government received.
He also went on to say that 41% of the entirety of tax revenue was accounted for by the collection of VAT in the year 2005 and this figure reduced to 26% in 2014.
In the Fiscal Management Report for 2016, it aforementioned that The Variance Analysis of Government Revenue observed that the decision to nullify the VAT placed on importing motor vehicles and on the import and manufacturing of liquor, tobacco and cigarettes in 2014 adversely affected revenue attained from the collecting of VAT.
The dawn of the topsy-turvy VAT amendments

With the election of President Maithripala Sirisena as the 7th President of the Democratic Socialist Republic of Sri Lanka in January 2015, our country was sent into a state of political purging as suggested by the elected. It began the road towards redemption through attempts to effectuate election promises which included fighting corruption and investigating allegations of war crimes from 2009. A brand new parliament was voted for and the work towards economically and politically bettering our country commenced.
On the last day of 2015, the Finance ministry announced that the proposed amendments made in the 2016 Budget to VAT, Nation Building Tax as well as land taxes would be effective with the start of the New Year. However, it was declared in mid-January that these changes would halt.

Later on in March, Prime Minister Ranil Wickramasinghe discussed details on the proposed tax changes in Parliament and it was concluded that the three proposed rates would be simplified to a single rate of 15% and essential commodities and electricity will not be subject to this change.
The Department of Inland Revenue, on the other hand, announced that the applicable VAT will remain at 11%. Confusion started growing in the midst of our nation as it was beginning to appear as if the government could not come to a finalized verdict on VAT.
Mid-April witnessed the announcement that VAT would be raised to 15% on the 2nd of May and that the health and telecommunication industries would also be included in this VAT hike. This decision greatly caused a stir among citizens as it was believed that the cost of living would be made even more difficult for some. With dengue fever on the move, this was deemed to be disadvantageous to people as paying their dues would be put on a much higher pedestal which some people can barely reach as it is, even on tip-toe.
Lanka finally saw the first official imposition of the 15% VAT rate on the 2nd of May 2016 and the government announced a full list of exempted goods and services.

Outraged by this increase, NFF leader Wimal Weerawansa, along with two other persons filed a petition with the Supreme Court and this petition sought to revoke the decision to increase the VAT rate. Weeks later, the Supreme Court decided to move forward with the appeal.
Further bewilderment was roused due to the fact that people were now seemingly confused about whether this rate would return back to the initial 11% or whether further alterations would be made.
However, doubt was cleared on the 11th of this month when an interim order was issued by the Supreme Court stating that the boost in the VAT rate should be suspended. Minister of Finance Ravi Karunanayake additionally made an official declaration that the VAT rate would remain unchanged at 11%. Nevertheless, Minister Gayantha Karunathilake further went on to say that the government would come to a conclusion on the verdict adjudged by the Supreme Court on the 20th of July. In spite of this revelation, tabling of the VAT amendment bill in Parliament was said to be postponed, last Friday.
Was the increase kept strictly to regulation?

This question has been raised by some, particularly by former minister Professor G L Peiris.
In May this year, subsequent to the imposition of the 15% VAT rate, Professor Peiris believed that Parliament approval is a must before actually increasing the rate of the particular tax. He further went on to say that people are not obliged to pay more.”
In addition, following the interim order issued by the Supreme Court, Professor Peiris said that if VAT continues to remain at the initial 11%, the public should be reimbursed for the extra amount that they spent since the pronouncement of the 15% VAT rate in May.

Protests and shut-downs Island wide
As we mentioned previously, there were certain ordeals with regard to the discussion on the change in VAT. Although the hike troubled a few right from the very beginning, one of the first major objections took place at the end of June. Proprietors in Kiribathgoda, Kadawatha, Kelaniya, Anuradhapura, Badulla, Bandarawela and Katugastota closed down their stores of trade and staged strikes against the decision to increase VAT.

Earlier this month, shops shut down in Hambantota as well in order to declare their disagreement to the hike.
Last Friday caught a glimpse of one of the biggest protests as a result of the increment of VAT. Pettah faced a massive traffic jam due to this protest and according to ex-minister Bandula Gunawardena, the last time shops in Pettah closed down was over three decades ago during the riots in July 1983.

How can VAT affect our future?
Minister Ajith Perera stated that in order to provide subsidies for education, health and water for the people who cannot afford those, taxes need to be paid. He also said that the average person’s needs are not affected as several exemptions have been made on products such as vegetables, fruit, bread, eggs, tea.etc.
Further, he observed that the increase in VAT from 11% to 15% is actually a bearable burden and in the end, he said, the collections made are ultimately given to the less fortunate.

When looking at how the VAT system can benefit us, it has been pointed out that;
• This system could contribute to the reduction of tax evasion because it presents s a catch-up effect”.
• VAT is reckoned to be transparent and has minimum burden to consumers as it is collected in lesser fragments at different stages of production and distribution.
• Some believe that VAT could, somehow, possibly reduce a trade deficit. Nonetheless, there are adverse impacts as well and this is what seems to be an immense worry for many.
• Increasing VAT raises the tax burden people face, in turn, thus making their cost of living expensive.
• It is argued that elevating VAT could inadvertently hike income taxes as well and this is not something the people would welcome with open arms.
• Businesses have said that the increment can lead to consumers having to face a higher cost.
• The hike will increase prices of imports and for people who have inelastic demand for imported products, the rise in price would supposedly be adverse. This would also be proved difficult for businesses in the construction industry as raw materials used are widely imported.
In conclusion…..
If the hike in this tax would pave the way to a higher cost of living, of course, it can be said that this raise would be unfavorable and not what the people desire. Paying bills will be an even more difficult and strenuous task for us and perhaps, we may have to figure how to grow money on trees!
Furthermore, a final decision has to be made regarding this issue. Confusing the Lankans further would not be wise and indecisiveness could possibly raise doubt in the government and this is definitely not what we want. The people and the government should make an effort to be on the same page when it comes to nurturing our motherland.
On the other hand, all of us need to take a step back and look at the bigger picture as well. There is no doubt that our personal matters fill the slot of highest priority on our lists. Nevertheless, we need to understand that increasing the revenue the government earns through VAT collections, is the open window that we have been searching for in order to crawl out of this debt our country seems to be sinking in.
Furthermore, if our government allocates funds including collections from VAT in order to contribute to the development of our country, this hike may as well be worth it.
Optimistically, this will be the end to this indecisive story.