Hike in goods & services disproportionate to VAT change
The Value Added Tax (VAT) rate increase at Tuesday’s budget will see traders arbitrarily increasing prices, analysts say noting that the country needs an anti-profiteering law in this regard.
The rate fell to 8 per cent from 15 per cent to 8 per cent on December 2019 at a significant loss of VAT revenue to the Government but did not result in suppliers of goods and services reducing prices. Hence there was no benefit to the consumers. Traders profited at the expense of the Government.
On the other hand restoring the original 15 per cent in two stages, as opposed to increase of the 8 per cent to 15 per cent in one move, also causes an advantage to the traders. On June 2022 the rate was increased to 12 per cent from 8 per cent.
“It’s a common occurrence that most of the suppliers increase the prices, citing VAT hike, 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 reverts back to 15 per cent from September 1, again an opportunity is presented to the suppliers to hike prices disproportionately to VAT rate increase to make an additional profit.
At the end it is the consumers who will be at the receiving end, due to these price hikes because of unwarranted frequent changes of VAT rate.
International VAT Academics point out that once a VAT rate is introduced, it should not be changed frequently. First time introduction of the VAT rate results in prices of goods and services going up but achieving a price stabilisation in the long run. Frequent changes of the VAT rate results in extraordinary price hikes due to the behaviour of the traders.
Mr. Perera also said that Sri Lankan VAT Act is badly in need of an “Anti- profiteering clause” akin to India to control the profiteering measures of the traders at the times VAT rate changes.
The budget also introduced all individuals above the age of 18 as required to register with the Inland Revenue Department (IRD) to widen the tax base.
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