Analysts believe that the increase in VAT rates in Tuesday’s budget will result in traders arbitrarily raising prices, and that the country needs an anti-profiteering law in this regard.
The rate was reduced from 15% to 8% in December 2019, resulting in a significant loss of VAT revenue for the government but no price reductions by suppliers of goods and services. As a result, there was no benefit to the consumers. Traders profited at the government’s expense.
However, traders benefit from restoring the original 15% in two stages rather than increasing it from 8% to 15% in one move. The rate was raised to 12% in June 2022, up from 8% previously.
“It’s common for most suppliers to raise prices, citing VAT hikes, not in proportion to the tax increase but at a higher percentage to make an additional profit,” Suresh Perera, Principal KPMG, told the Business Times on Thursday. He added that when the VAT rate returns to 15% on September 1, suppliers will have another opportunity to raise prices disproportionately to the VAT rate increase in order to make an additional profit.
Consumers will ultimately bear the brunt of these price increases caused by unjustified frequent changes in VAT rates.
According to international VAT academics, once a VAT rate is implemented, it should not be changed frequently. The first time the VAT rate is introduced, prices of goods and services rise, but prices stabilise in the long run. Because of the traders’ behaviour, frequent changes in the VAT rate result in extraordinary price increases.
Mr. Perera also stated that the Sri Lankan VAT Act is in desperate need of a “Anti-profiteering clause” akin to India to control traders’ profiteering measures when the VAT rate changes.
The budget also mandated that all individuals over the age of 18 register with the Inland Revenue Department (IRD) in order to broaden the tax base.
(Curtesy Sunday times)