‘VAT increase should have been done in one go’

Sri Lanka’s VAT Act doesn’t contain anti-profiteering clauses whereas in India, the concept of anti-profiteering clauses is embedded in the GST statute itself, Suresh Perera - KPMG Sri Lanka Principal, Tax and Regulatory said.

Noting that there is a separate authority in India to punish and to curb the excess profit gained by traders due to reduction of tax, Perera said India also has a methodology to recover ill-gotten profits made by traders where as Sri Lanka does not have a methodology as such, Perera told a webinar, organised by the Institute of Certified Management Accountants(CMA) of Sri Lanka.

Perera explained that when the VAT rate was reduced in 2019 from 15 % to 8 % in Sri Lanka, none of the traders reduced the prices and consumers did not receive any benefit from the huge revenue loss that was experienced by the government, who benefited the traders.

“On the other hand we will have to keep in mind that when the rate increased in June from 8 to 12 % ,what happened is that traders tried to make a profit at the time of the increase of the VAT rate.”

In that context, then efforts were made to restore the VAT rate to 15 %, Suresh said it should have been done in one go; that means in June itself.

“We should have gone from 8 to 15 % rather than doing it in two stages. The moment you try to do it at those two stages; the traders, suppliers get an opportunity to make a profit at the expense of the consumers. I think that’s something that policy makers have to be mindful of.”

As per the VAT academics, when the VAT is being introduced in a country for the first time, it results in an increase in the goods and the services, subsequently it stabilizes thereafter.

Explaining further Perera stated that it is not correct to change the VAT rate frequently.

When the VAT rates are being changed frequently, that would result in the prices of the goods and services going up. And that creates inflation at the marketplace, he said.

Perera said further that the country is planning to regain the VAT base and the income tax base by bringing down the liability threshold.