Tax & Accounting Blog

The Mysterious VAT of Sri Lanka

Blog, Indirect Tax, ONESOURCE, Reuters Tax & Accounting News July 25, 2016

Can the “National Unity” Government“VAT” be a completely new VAT?

Apparently it can!

Due to extreme financial hardship that the people of Sri Lanka have experienced under the previous and most recent government, it is not surprising that the latest VAT rate increase has been highly politicized and sold to the people as a brand new tax levy. Somehow official government communication was misinterpreted and businesses began to apply random price increases to goods and services, which they claimed were a result of a the ¨new¨ tax levy. The country erupted into protest against the levy and consumers were given the impression that the VAT increase was indeed a new tax that did not exist under the previous government.

Unfortunately, the Government  levied the Tax Hike without Parliamentary approval, which violates the Sri Lankan constitution. The Government had no right to pass legislation without proper legislative approval from Parliament. On July 11th, the Supreme Court issued an interim order to suspend the VAT increase based on a petition filed by the “National Freedom Front” leader.

The VAT increase was in effect as of May 2, 2016. The Standard Rate was increased from 11% to 15%, but was reversed by the Supreme Court’s decision back to 11% on July 11, 2016.

Prime Minister Ranil Wickremesinghe was quick to respond with a statement that the Supreme Court decision will not affect government revenue and the Parliament will pass an increase no later than end of July.

The increase to the VAT rate has yet to pass, but measures have been put in place to prevent random price hikes of essential goods and services. The recent VAT changes in Sri Lanka have been ineffective and damaging to the current government. To avoid further loss of popularity the government is putting VAT increase on hold possibly until 2017.