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VAT hike will gouge consumers
View(s):The government’s plan to raise Value Added Tax (VAT) on goods and services by 4 per cent will have a ripple effect on the economy with the consumer being burdened with the extra cost, businesses said.
Although essential items will be VAT-exempt the VAT increase on all other consumer products from 11-15 per cent will push up prices of imported food, services and manufacturing and building materials, National Chamber of Commerce President Thilak Godamana said.
Imports have already been hit by a 2.5 per cent increase in port charges and with the VAT increase the cost of imported goods will skyrocket, he said.
Besides, Mr. Godamana said, the rising dollar was not helping the economy. “The dollar has gone up 12 per cent from last year and is rallying around Rs. 146-147,” he said.
Local manufacturers are also expected to be hit by the rise as all raw materials for production are imported into the country. “Even the price of local biscuits and sweets will go up in price,” Mr. Godamana said.
The VAT increase will have a greater impact on the construction industry as 90 per cent of the materials used for construction are imported, Chamber of Construction Industry
President Dr. Sarath Wickramasuriya said.
He predicted the increased VAT will be a deterrent to individuals who opt for low-cost building as the prices of materials will be high and the cost of construction would increase. He said unlike registered construction companies, the individual builder would not be able to get a VAT refund.
“Building homes is already an expensive affair and a 4 per cent increase will make a potential builder think twice,” Dr. Wickramasuriya said. “The total cost will be a big amount and will affect cash flow.”
Hotels will be passing the extra cost onto guests and anticipate no loss except for bookings already taken on the basis that the VAT fee would be 11 per cent. “Lots of bookings are made online and this could be the case for some bookings,” Sri Lanka Tourism Authority Chairman Paddy Vithana said.
The government justified its move saying it needs additional revenue to settle outstanding bills piled up at the Treasury.
Finance Secretary, Dr. R.H.S. Samaratunga, said the economy is not doing “so well” and that the Treasury needs to counter this trend.
He said world economies, except for the United States, were slowing down and Sri Lanka was no exception. “Even China is not performing as expected,” he said.
Dr. Samaratunga believes the rise in VAT would not affect commodities. He refuted claims it would cause local inflation with the prices of goods going up, saying the effect would be cushioned by falling prices in the world market.
“Take the price of milk powder: it was around $6,000 a metric tonne some time ago and it has now dropped to $2,000 per metric ton. Importers are benefiting,” he said.
Essential food items including dhal, sugar, potatoes, onions, sprats and canned fish will be exempted from VAT. There will be no VAT on electricity bills.
In a parallel move, the government announced that concessions on private education, private health and the telecommunication would be removed.
Dr. Samaratunga said that the proposal has to be passed by parliament and is expected to come into effect from April 1.