The Hon. (Dr.) Harshana Suriyapperuma - Deputy Minister of Finance and Planning

¶ 01 Hon. Deputy Speaker, today’s debate concerns amendments to the Value Added Tax Act, No. 14 of 2002, and consequential changes to the Inland Revenue Act, No. 24 of 2017.

¶ 02 Broadly, the amendments fall into three parts: 1) Fixing shortcomings in the VAT regime introduced with effect from 1 January 2024. 2) Aligning tax measures with the current Government’s programme. 3) Incidental drafting/clarificatory changes.

¶ 03 First, on correcting the 1 January 2024 VAT issues: due to past policy errors and inattention when drafting, necessary revenue could not be collected while taxpayers were unnecessarily burdened. We are now rectifying those.

¶ 04 Example 1: Employer-provided free meals and transport to employees had become VAT-able supplies from 1 Jan 2024, creating hardship for manufacturers and service providers. After consultations, we have removed this VAT, providing relief to workers and responding to enterprise requests.

¶ 05 Example 2: VAT on unused postage and revenue stamps based on face value created impracticality and confusion. We have zero-rated that item.

¶ 06 Example 3: Reinsurance commissions/consideration received in foreign exchange by local insurers from overseas reinsurers had been made VAT liable, which would increase insurance premiums. We have removed that VAT to support sector development.

¶ 07 Example 4: HS headings covering aircraft engines and parts had been captured inadvertently as VAT-able; we have corrected this to the prior non-VATable status.

¶ 08 Example 5: Definition issues around “unprocessed agricultural products” led to confusion, including on eggs and poultry products. For clarity: VAT on eggs at the time of sale has been payable under the law since 1 Jan 2024. During IMF discussions, the Hon. President sought a VAT exemption on eggs; it was not granted. Some allege the current Government newly imposed VAT on eggs—this is false. We are only clarifying definitions. VAT registration thresholds still apply: annual turnover above Rs. 60 million, or Rs. 15 million per quarter, or Rs. 5 million per month. Producers below thresholds can voluntarily register to claim input credits (e.g., VAT on feed) to reduce costs.

¶ 09 Example 6: Chemical naphtha used by the CEB is sourced both domestically (refined) and via import. One stream was VATed and the other not; we are harmonizing this to remove the anomaly.

¶ 10 Second, measures of the present Government: - Domestic liquid milk and yoghurt: VAT had been charged since 1 Jan 2024. Following discussions, despite being in an IMF programme, we secured relief and removed VAT on domestic liquid milk and yoghurt. Some producers have already announced price reductions from 1 April; others should pass the full 18 per cent VAT relief to consumers. - Level playing field for digital services: Non-resident suppliers providing e-services into Sri Lanka will now be subject to VAT, ensuring parity with resident suppliers who already charge 18 per cent. - SVAT reform: The simplified VAT system for exporters currently operates manually and affects cash flows and transparency. We are digitizing SVAT with risk-based, criteria-driven processing, automatic matching to curb leakage to the domestic market, and time-bound refunds—aiming to pay eligible low/medium risk refunds within a maximum of 45 days. This will restore exporter confidence, enhance transparency, and reduce scope for fraud and corruption.

¶ 11 Thank you, Hon. Deputy Speaker.