The Hon. Chathuranga Abeysinghe - Deputy Minister of Industry and Entrepreneurship Development

¶ 01 Hon. Deputy Chairperson, today’s debate is on the VAT (Amendment) Bill. Yet much of what we heard focused on the U.S. unilateral tariff rather than on VAT’s longstanding weaknesses. The U.S. tariff is not targeted at Sri Lanka alone; it is a new construct—applying a share of the bilateral trade deficit divided by import volume as a surcharge—an unprecedented, impractical policy. Big economies like Canada, the EU, and China are retaliating; for smaller economies like ours, the realistic tactic is “negotiate,” not “retaliate.” Those negotiations have been initiated by the President; we need not waste this House’s time detailing them today while we focus on VAT.

¶ 02 VAT works best in economies with developed systems. Our rate went from 12/15% to 18% in 2024 under the IMF program, and VAT was extended to many items, including essentials. Our responsibility is to continuously pull VAT off critical items—indeed, we removed it from liquid milk and yogurt this quarter—and, over time, reduce reliance on indirect taxes and increase direct taxes. The current problem is inefficiency in collection. In many countries VAT yields about 6%–8% of GDP; in Sri Lanka it was 1.9% in 2019 and 2.5% last year. Our target is 5% of GDP—not by raising rates, but by improving efficiency: registering those outside the net, reducing evasion, and plugging leakages. The Bill brings measures for this.

¶ 03 We also include VAT on foreign digital services to level the playing field with domestic providers. On SVAT, we understand exporters’ concerns; hence implementation was moved from June to October to allow the new digital system to deliver fast refunds. We aim for quick verification and repayment, reducing revenue loss.

¶ 04 We earlier outlined point-of-sale (POS) requirements to capture sales data digitally. About 60% of potential indirect tax is currently lost along the chain. The Opposition should suggest improvements to such systems; instead, past fraud, waste, and high expenditures forced VAT up.

¶ 05 SMEs have suffered in the past three years; NPLs rose; parate enforcement resumed after 31 March. The Government suspended parate from December to 31 March and, with the Central Bank and banks, created relief packages: SMEs under LKR 25 million have until year-end, and larger ones until September, to restructure debts. Uptake has been limited due to bank-side and borrower-side constraints. A focused exercise identified around 12,000 critical cases for intervention. Chartered firms will support restructuring; NPL borrowers can access the LKR 5 billion concessional facility without prejudicing their accounts. Additionally, an LKR 15 billion concessional credit line and an unsecured credit guarantee scheme are in place. We urge banks to shift from “recovery” to “revival.” Weekly and monthly oversight is ongoing, and a National Committee has been appointed to craft SME policy and address the debt issue.

¶ 06 On trade policy, past governments missed opportunities to diversify markets and products through suitable agreements, leaving our export basket and destinations dangerously concentrated. The current Government is addressing what predecessors failed to do.

¶ 07 Regarding governance, ministries have reduced day-to-day costs; wasteful spending is being curbed; resources are redirected to essentials. The public gave us a mandate to correct the economy, politics, and rule of law. The law passed yesterday will empower the Inland Revenue Department to act.

¶ 08 Finally, when we examine assets—especially of politically connected families—the new law will allow examination against tax files. We expect many issues to be resolved in the coming months.

¶ 09 Thank you.