Daily News Editorial

Making VAT work

02 November 2016

They say that only two things are really unavoidable in life – death and taxes. Practically all countries levy taxes and it is no exaggeration to say that taxes make our modern lives possible. From education to transport, most public services are funded by money raised from direct and indirect taxes.

There are many tax systems in use throughout the world and Value Added Tax (VAT) is one of the most prevalent. A tax levied on goods and services, VAT is applicable to everyone across the board, being an indirect tax. Sri Lanka initially had the Goods and Services Tax (GST), a version of VAT, before VAT became entrenched in the law books and the economy. VAT in Sri Lanka had ranged from 10 percent to 20 percent, though the latter rate has now been forgotten by most commentators who decry the new 15 percent rate. Some countries have an even higher VAT rate.

VAT remained at 11 percent until a few months ago when the Government raised it to 15 percent, but due to technical and procedural faults in the implementation, the Supreme Court gave a verdict that it should be put on hold until the VAT Bill can be presented properly. Unlike on the other occasions when VAT was imposed, there was an intense debate on VAT (and taxation in general) when the Government announced the 15 percent VAT rate. Now the Government has corrected all the technicalities in the Bill, which the Supreme Court has decided is not inconsistent with the Constitution and presented it to Parliament last week. The Bill was duly passed in Parliament and the new VAT rate of 15 percent became effective from yesterday.

The Government argued that VAT was necessary to recover at least some of the massive debts incurred by the Mahinda Rajapaksa regime of 2005-2015. While it is naïve to think that VAT alone (an anticipated additional revenue of Rs.10 billion per year) could help offset the Rs. 9.5 trillion debt left behind by that regime, the higher rate will help the Government to earn more revenue for essential services.

There is another reason why indirect taxes such as VAT have gained prominence in Sri Lanka over direct taxes such as Income Tax. The reality is that less than one million out 20 million Sri Lankans (and 13 million in the employable age group) pay any form of income tax. There are less than 700,000 tax files at the Inland Revenue Department (IRD). This situation is simply untenable – we need at least two million direct tax payers. In most regional countries, at least 10 percent of the population pays direct taxes. However, as a start the IRD is looking at having least 1.4 million taxpayers in the short term. If there are more direct tax payers, it will indeed be possible to lessen our dependence on indirect taxes one day.

There are both merits and demerits in the new VAT rate. No one will grudge imposing the VAT on alcohol and tobacco, two vices that have a huge health and social cost. The Government has also exempted 82 varieties of goods and services from VAT. Households will be relieved to know that many day to day items are not subjected to VAT. Moreover, by exempting items such as solar power equipment and computers, the Government has taken future trends into account.

There are several product and service categories on which the increased VAT will be levied for the first time, which has led to a raging debate in the media and society. Telecom services and health services are among the most prominent among them. It is debatable whether it is possible for telcos to earn any more by way of taxes in these days of Wi-Fi, Viber and What’s App. Higher taxes might compel users to bypass the traditional networks and use these cloud-based services over Wi-Fi where available which may actually lead to a loss of revenue.

The Government has listened to public opinion and decided not to levy VAT on pharmaceuticals (the prices of some varieties have already decreased following a recent Government decision), surgeries, diagnostic tests and dialysis. Channeling of doctors and in-patient room charges will now be liable for VAT, which will see a rise in hospital bills. While outpatient treatment (OPD) has apparently been excluded from VAT, some ambiguity remains because channeling can sometimes be part of OPD treatment. In any case, the Government should reconsider the VAT imposed on the health sector. After all, a large number of poor and middle class patients also obtain the services of private medical establishments and they will be affected by the new measure.

Now that VAT is here to stay, we hope that the Government will make maximum use of the funds obtained through it. For example, more Government hospitals can be developed from the VAT imposed on private sector health facilities. It is imperative to use VAT and other taxes to balance the interests of both the public and the economy.