VAT increase to crush demand – First Capital

The decision to increase VAT rate from 8% to 12.% will increase prices of goods and services, causing consumer demand to decline.

Moreover, the decision to increase the Telecommunication levy from 11.25% to 15 % will Increase in cost of data and voice shall negatively impact affordability and volumes. Recent tax reforms which include the reduction of personal income tax relief from Rs. 3 million to Rs. 1.8 million and reduction of tax slabs on taxable income from Rs. 3 million to Rs. 1.2 million and impose tax rates of 4 %-32 % for each slab will have an impact on the consumer services sector, retailing sector, food, beverage and tobacco sector, supermarket chains, and the construction sector.

This will reduce disposable income negatively and impact demand, according to First Capital Research’s recent report on ‘Proposed Tax Reforms and Impact’. Recent Tax reforms announced by the Government, also makes withholding Tax (WHT) mandatory, consider WHT on interest and dividends as final payments and reintroduce a relief on interest income of Rs. 1.5 million for senior citizens. In addition, it has been proposed to Impose WHT on service payments exceeding Rs. 100,000 per month made to individuals such as professionals. This will have a negative impact on all sectors due to contraction in profitability.

“Decision to increase corporate income tax rate from 24% to 30 % and increase concessionary tax rate from 14 % to 15 % will have a negative impact on all sectors due to contraction in profitability.”

Moreover, the decision to decrease the VAT registration threshold from Rs. 300 million per annum to Rs 120 million per annum will increase prices of goods and services causing consumer demand to decline. The Prime Minister’s office previously said that the low tax regime introduced by the government in late 2019 combined with the COVID-19 pandemic in 2020/2021 and related developments, led to the significant loss of tax revenues to the state coffers. Lack of revenue generation process has led to the critical situation prevailing today, the Prime Minister’s Office said.

At present,the General Treasury has to increasingly obtain Central Bank financing to make the government expenditures, including a substantial part of interest, salaries and wages, Samurdhi payments and pensions, etc.

Hence it is essential to implement a strong fiscal consolidation plan through revenue enhancement as well as expenditure rationalization measures in 2022 and beyond to ensure macroeconomic stability to support the medium to long-term economic growth objectives of the country.

Meanwhile, Director General – Chamber of International Trade and Information Centre and Head of Tax at K. Rajanathan & Co, Dr. H.I.P. Imaduwa said proposed tax reforms would badly affect inflationary pressures, add pressure on exchange rates, and economic growth too will be seriously affected.