COLOMBO: Economist and Executive Director Verite Research Dr Nishan de Mel told The Island Financial Review, commenting on a Moody’s report, that the government should collect taxes “in a smart manner” in order to reduce the burden on the poor.
” Government revenue collection has gone down during the last couple of years and with the VAT increase it could achieve its revenue targets. But most important factor is it should tax in a smart manner in order to minimize the burden to the people, de Mel elaborated. He said that for the first time in two years, cigarettes have been included under VAT, “which is a good move.”
Reinstating the VAT rate hike is an important step toward achieving the government’s revenue objectives, but meeting the IMF or government objectives will involve additional revenue measures, a Moody’s Asia Pacific Report said.
“The government aims to broaden the tax base via a new Inland Revenue Act and strengthen revenue collection and administration. The government expects fiscal consolidation to continue, although at a gradual pace, given implementation risks and the country’s long track record of poor revenue collection and tax exemptions, which will take several years to change significantly. We forecast a budget deficit of 6.0 percent of GDP this year and 5.5 percent in 2017, Moody’s Asia Pacific Report revealed.
Parliament voted in favor of amendments to the Value Added Tax (VAT) Bill, which will increase the VAT tax rate to 15 percent from 11 percent, paving the way for higher government revenues and adherence to International Monetary Fund (IMF) program commitments.
“This is credit worthy because a higher VAT rate will facilitate fiscal consolidation by strengthening Sri Lanka’s low revenue-to GDP ratio, which is a key credit constraint, de Mel said.
“Fiscal consolidation is a major focus of the IMF program with a reduction in the deficit to 5.4 percent of GDP this year and 3.5 percent by 2020, from 6.9 percent in 2015, including one-off expenses. In the first-half of 2016, government revenues, including grants, rose a robust 27.3 percent year on year, while expenditures increased 7.1 percent. Revenue growth was broad-based, with increases in VAT, the national building tax and custom duties. As a result, the primary balance, which excludes interest payments, was in deficit of Rs 38.6 billion by June 2016, ahead of the IMF program target of Rs 46 billion.
“Despite a favorable first half of the year, the primary deficit widened markedly in July. The VAT hiatus makes meeting primary deficit targets challenging, at Rs 85 billion for September and Rs 97 billion for December, observers said.
