Higher taxes on essential goods will lead to inflation
Abolishing the special commodity levy and imposing a value-added tax on essential goods will cause price hikes to lead to inflation, tax experts say.
The Special Commodity Levy (SCL) was introduced as a composite tax replacing all import duties such as Customs Duty, CESS, Excise Duty etc including 5 per cent basic VAT applicable on essential goods such as Onions, Potatoes, Sugar, Dhal, Dried Fish, Chilies, canned fish, green gram, chick peas etc.
Due to the tendency to lead to corruption, the International Monetary Fund (IMF) in its diagnostic report issued in September 2023, recommended to abolish discretionary taxes. As per the mechanism of the SCL Act, the Minister of Finance has the discretion to increase or reduce the SCL rate by issuance of the order published by way of a Gazette. It is alleged that this has caused substantial loss of revenue to the State due to scams such as the sugar importation.
The recent IMF report pertaining to the second review has referred to the abolition of SCL and imposing VAT at the rate of 18 per cent on these baskets of essential goods.
“Whilst removing of SCL and inclusion of importation of essential goods under the VAT regime is the right move, but the policy makers should be mindful that subjecting the essential goods at the rate of 18 per cent and the consequential import taxes such as customs duty, CESS and Excise will have direct impact on the price hike of the goods which will lead to inflation,” Suresh Perera, Principal Tax & Regulatory Division, KPMG told The Sunday Times Business on Friday.
Thus, it is imperative that VAT to be imposed on these items not at the rate of 18 per cent but at a lower VAT rate of 5 per cent and provision of exemptions in relation to other import duties as appropriately, he added.
“The removal of SCL and subjecting these essential food items to VAT at the point of importation would enhance the efficiency of the VAT mechanism in the country, as it permits the importers to claim the input VAT. However, the policy makers would have to be mindful with regard to adjusting appropriately the right to claim input VAT rules, whilst creation of a lower VAT rate such as 5 per cent to be applicable for this basket of essential goods.”
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