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Committee on Public Finance Grills Ministry on VAT Bill Recommendations and Revenue Recovery

The Committee on Public Finance, previously responsible for reviewing the Value Added Tax (Amendment) Bill that eliminated all VAT exemptions in November 2023, questioned the Ministry of Finance about the non-adoption of its recommendations. The Committee had proposed reconsidering VAT exemptions for medical equipment, ambulances, high-protein agro foods for children, and agricultural items, which were not incorporated by the Ministry.

The discussion unfolded on February 20 at the Committee on Public Finance, chaired by Hon. (Dr.) Harsha de Silva.

The Value Added Tax (Amendment) Bill also raised the VAT from 15% to 18% and reduced the threshold for VAT registration from Rs. 80 million to Rs. 60 million per annum, effective from January 1, 2024. The move aims to align tax rates and registration requirements with the government’s target of increasing revenue to 14% of GDP in Sri Lanka. The Committee also scrutinized the delay in implementing VAT on foreign digital and software providers, creating an imbalance compared to domestic providers. Despite officials stating the need for a new law by April 2025, the Committee urged a mechanism for equal taxation until the new VAT bill is drafted.

Additionally, the Committee deliberated on the Social Security Contribution Levy (Amendment) Bill, approving the reduction of the turnover threshold for levy registration from Rs. 120 million to Rs. 60 million per annum, effective from January 1, 2024.

Concerns were raised by the Chairman regarding the maintenance of two separate tax structures. He proposed consolidating taxes under the Value Added Tax (VAT), resulting in an average effective rate of 22% when combined with the Social Security Contribution Levy. The Ministry of Finance clarified their objective of meeting revenue targets and transitioning to a streamlined tax system eventually.

The Committee also queried officials about recovering lost revenue from the initial ‘sugar scam.’ Despite officials arguing it as tax foregone, not loss, the Committee pressed for data on companies disproportionately benefiting from the tax adjustment. The recovery of 30% through corporate tax left 70% uncollectable within the current framework, prompting the Committee to urge officials to explore avenues for collecting all foregone tax revenue or propose legislation to prevent future recurrences.

While the Committee approved both the VAT (Amendment) Bill and the Social Security Contribution Levy, the Chairman dissented due to the expressed concerns.

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