The Hon. (Dr.) Anil Jayantha - Minister of Labour and Deputy Minister of Economic Development

¶ 01 Hon. Presiding Member, the VAT (Amendment) Bill amends Act No. 14 of 2002, in force since August 2002. We bring this to advance revenue-based public financial management and improve tax collection efficiency and administration.

¶ 02 VAT is an ad valorem tax — imposed according to value, not income. Along a value chain, many actors add value, but the tax incidence ultimately rests on the final consumer. In an efficient VAT, no intermediary bears the burden; the final consumer does. Sri Lanka has not fully reached that stage; our effort is to bring technology and efficiency gradually so VAT functions properly, with consumers able to see the VAT component on invoices.

¶ 03 In some cases prices are marked inclusive of VAT (e.g., a biscuit packet marked Rs. 100). The VAT is imputed within that; the IRD receives the VAT portion and the business retains the net. The risk is when parts of the chain are unregistered; VAT might be charged to consumers but not remitted. To address ambiguities, we clarify definitions effective 1 January 2024.

¶ 04 We also fix misuse in agriculture where “unprocessed” definitions allowed evasion; now the scope is clarified to prevent abuse.

¶ 05 Aircraft engines and parts were supposed to be removed from exemption since 2018 but it did not occur; we now bring them back into the VAT net. This will not raise air ticket prices because international air transport remains VAT-exempt.

¶ 06 We also align VAT on naphtha used in power generation by removing anomalies so domestically produced naphtha is treated equitably.

¶ 07 Critically, consistent with our policy to reduce burdens on essential nutrition, we are fully removing VAT on domestically produced liquid milk and yoghurt.

¶ 08 Another key reform concerns non-resident suppliers via electronic platforms. VAT is based on the place of consumption. Where a non-resident provides digital services consumed in Sri Lanka, they were previously outside our VAT net. We now bring non-resident electronic service suppliers into VAT to ensure neutrality and fairness.

¶ 09 Separately, under the Inland Revenue Act amendments, we addressed service exports income tax: we capped the tax on service export income at 15% (previously up to 30% for companies and 36% for individuals). That is distinct from VAT on non-resident e-services — there has been confusion; I clarify they are different measures.

¶ 10 On Simplified VAT (SVAT): in principle, exporters should not bear VAT; they should get timely refunds. Due to inefficiencies in refunds, SVAT was introduced. Our direction is to fix refunds via technology and administration and then phase out SVAT. We are working towards 1 October as the date, contingent on making the refund system efficient. We have planned a simulation in July as a structural benchmark under the IMF program to validate readiness. If issues arise, we have time to rectify. Our objective is a disciplined tax regime, integrated public revenue management, and improved collection and administration.