PARLIAMENT

The Committee on Public Finance, which previously considered the Value Added Tax (Amendment) Bill that removed all VAT exemptions back in November 2023, inquired as to why the Ministry of Finance hasn’t adopted the recommendations made by the Committee regarding the VAT Amendment Bill. Accordingly, the Committee had recommended to the Ministry of Finance to reconsider VAT exemptions for medical equipment, ambulances, high-protein agro foods for children, and agricultural items, which had not been considered by the Ministry.

The aforementioned discussion took place yesterday (Feb. 20) at the Committee on Public Finance, chaired by Hon. (Dr.) Harsha de Silva.

The Value Added Tax (Amendment) Bill also increased the VAT from 15% to 18% and decreased the threshold for VAT registration from Rs. 80 million to Rs. 60 million per annum, effective from January 1, 2024, aiming to adjust tax rates and registration requirements in line with the government's goal to increase revenue to 14% of GDP in Sri Lanka. Furthermore, the committee questioned officials as to why they keep delaying the implementation of VAT on foreign digital and software providers, creating an unequal playing field for domestic digital and software providers. Even local travel booking agents are subjected to VAT while websites such as Booking.com are exempted. Since it is merely a change in the interpretation of the law, the Committee pressed officials on why they're delaying this, but officials stated that they require a new law, which is set to come into effect in April 2025. The Committee further pushed the officials to find a mechanism to collect due taxes and create an equal playing field until they draft a new VAT bill.

Additionally, the Committee deliberated on the Social Security Contribution Levy (Amendment) Bill. This amendment to the Act, which lowers the turnover threshold of registration for the Social Security Contribution Levy from one hundred and twenty million rupees to sixty million rupees per annum, effective from January 1st, 2024, was approved by the Committee.

The Chairman raised concerns regarding the necessity of maintaining two separate tax structures, citing the inherent inefficiencies and administrative burdens involved. He suggested consolidating these taxes under the Value Added Tax (VAT), which would result in an average effective rate of 22% when combined with the Social Security Contribution Levy. In response, the Ministry of Finance clarified that their objective was to meet revenue targets and that they intend to use this approach until they can transition to a more streamlined tax system that captures all taxpayers more effectively.

Furthermore, the Committee also queried the Officials about the progress of recovering the lost revenue resulting from the initial ‘sugar scam’, as highlighted in the report by the Auditor General. Officials contended that it should not be classified as a tax loss, but rather as tax foregone due to the reduction of the special commodity levy from 50 rupees to 25 cents. Despite this explanation, the Committee pressed the officials for data on certain companies that had disproportionately profited from this tax adjustment, amounting to 1.4 billion rupees from six companies, with an additional six companies yet to be investigated.

Chairman questioned why the Government couldn't recover the remaining foregone tax, especially while imposing significant tax increases such as on PAYE and VAT for the average Sri Lankan. Officials explained that they could only recoup 30% of the unduly gained tax through corporate tax, leaving the remaining 70% uncollectable within the current tax framework. Consequently, members of the COPF urged officials to explore avenues for collecting all foregone tax revenue or propose new legislation to address such situations in the future and prevent their recurrence. While both the VAT (Amendment) bill and the Social Security Contribution Levy were approved by the Committee, the Chairman notably dissented, citing the aforementioned concerns.

Members of Parliament Hon. Rauff Hakeem, Hon. Chandima Weerakkody, Hon. Nimal Lanza, Hon. Mahindananda Aluthgamage, Hon. Duminda Dissanayake, Hon. Harshana Rajakaruna, Hon. Madhura Withanage, Hon. M. W. D. Sahan Pradeep, Hon. (Dr.) Major Pradeep Undugoda, were present at the Committee meeting held.