Sugath Kulatunga

The recent increase of VAT from 12 to 18 percent has become the target of severe criticism by the opposition particularly by the political economists and of course the leader of the opposition. The main plank of the criticism is that it will increase inflation and the cost of living and will be an unbearable burden on small and medium scale industries. A non-economist would believe that the converse would be true in the lowering of the VAT rate resulting in reduced inflation an lower cost of living. But on Gotabaya regime’s reduction of the VAT rate from 12 to 8 the critics said that it was the cause of the economic crisis.

 The argument for the reduction of the rate was to stimulate the economy which was stagnant.

It did not work as the Covid 19 played havoc in the economy. Production was slowed down and the makets collapsed. An International Labour Organisation (ILO) survey has found that the COVID-19 pandemic severely impacted the business operations of nearly 80 percent of surviving Micro, Small, and Medium Enterprises (MSMEs) in Sri Lanka.

But the Rajapaksa haters continue to disregard the impact of Covid pandemic just as they dismiss the economic and social ramifications of the war against the LTTE.

(A former National Security Adviser and Foreign Secretary, Shivshankar Menon has mentioned that the war cost the country around US$ 200 billion. https://www.newindianexpress.com/…/sri-lankas-internal.... )

Burden of any tax finally has to be borne by the consumer or the end user. Lower VAT benefits them, and any savings accrued will be invested or increase their consumption. Increase in consumption/ demand stimulates production. It is a home truth that private investment has a high positive ROI which in the public sector is often negative. A lower rate of tax tends to increase tax compliance. Tax policy should be for a broader tax base with lower tax rate.

All governments like to increase revenue but rarely consider reduction of costs of running the government. High costs are the result of corruption and inefficiency. At last the IMF has made the control of corruption as a fundamental conditionality.  The root of both corruption and inefficiency is at the political level. It has now spread into the bureaucratic henchmen. Politicians allow the private sector to exploit the revenue sources. Successive governments have made rules and regulations corruption friendly rather than business friendly.

Sugath Kulatunga