Tax & Accounting Blog

Uncertainty in VAT reforms and Sri Lanka

Blog, Indirect Tax, ONESOURCE, VAT Tax Rates, VAT-GST Management April 11, 2016

Very often countries adopt VAT reforms in order to deal with unforeseen economic circumstances and balance their budgets or to respond to political pressure from different groups. As governments try to react fast on changing circumstances, many times the details on the implementation of the reforms are not thought thoroughly, leading to uncertainty and posterior changes.

A clear example of the above is the case of Sri Lanka and the VAT reforms it has adopted in the last months, which after extended discussion and announcements, still remains a mystery.

In this sense, the Budget for 2016 approved at the end of last year by the Sri Lankan Parliament introduced a three band VAT rate of 0%, 8% and 12.5% for different products (effective from the 1st of January of 2016), replacing the previous flat VAT rate of 11%. However, the referred reform did not last long, as on January 2016 the Ministry of Finance adopted the decision that the VAT reform would not be implemented and that the VAT rate would stay the same at a flat rate of 11%. Then in March 8th, following new economic developments, the President of Sri Lanka announced in a speech before the National Parliament that due to an increase in the government deficit related to larger levels of borrowing, falling oil prices and international economic turmoil, the VAT rate applicable within the country would be increased to 15%.

The above mentioned changes are mainly motivated by an increase of the government debt that was not previously considered when drafting the 2016 Budget and that has been blamed on loan facilities contracted by the previous government and that were shown as income instead of loans. In this sense, the Prime Minister said that the previous government did not include in the calculation of the national debt the borrowing by state enterprises for an amount of Rs. 1.04 trillion. The Prime Minister also referred to other factors that have had an impact on the economy of the country and that also require the adoption of these new measures, such as the global economic crisis, the decreasing oil prices affecting consumers in Russia (drop in tourism and tea consumption), the Chinese economy slowdown and other factors.

Details on the VAT changes have not been released by the government yet, so it is not possible so far to estimate when the changes in the VAT rate and exemptions would be applicable. In relation to this, on 1st April 2016 the Department of Inland Revenue of Sri Lanka issued a Notice clarifying that the proposed amendments to VAT rate, scope of liability and exemption are subject to further notice and that the 11% VAT rate is still applicable.

After several months and the announcement of different measures:

  • three band VAT rate,
  • Standard rate of 11%, and
  • standard rate of 15%

Sri Lankan businesses and consumers still have no certainty of which will be the VAT rate and exemptions or when will it enter into force. This reflects a very common trend regarding VAT reforms worldwide, in which the details regarding the implementation of the reform are not addressed carefully at the beginning of the process, leading to posterior changes and amendments and generating uncertainty for businesses and consumers.