REUTERS: Sri Lanka’s Supreme Court has ordered Parliament to stop considering a bill to raise Value-Added Tax (VAT) because the drafting of the proposed legislation had not followed due process, the assembly speaker said yesterday.
The failure to raise the tax could put in jeopardy the government’s ambitious fiscal consolidation plan to reduce the budget deficit to 5.4 percent of Gross Domestic Product (GDP) from the last year’s 7.4 percent.
However, Finance Minister Ravi Karunanayake said the government would present the bill again in the near future and raise VAT as planned.
“There won’t be slippage in revenue. The first six month revenue has risen 24 percent to Rs.780 billion rupees compared to the last year and it is well above the target,” Karunanayake told Reuters.
Tax increases were one of the main requests from the International Monetary Fund (IMF), which in May approved a US $1.5 billion, three-year loan for Sri Lanka.
The government had hoped to raise revenues by 100 billion rupees (US $686.8 million) this year through tax increases, mainly by putting up VAT.
On May 2, an increase in VAT to 15 percent from 11 percent took effect. But on July 11, the Supreme Court temporarily suspended the increase because it had not been approved by parliament.
A draft VAT amendment bill has been progressing. But yesterday, the speaker of parliament, Karu Jayasuriya, read out a court ruling saying the bill’s failure to follow constitutional processes “render the subsequent proceedings nullity”.
The Finance Minister said the government had submitted a VAT amendment proposal to the cabinet on Tuesday.
An economist, however, said the delay in raising the tax could derail the government’s fiscal consolidation process.
“I think now we will have to focus on the 2017 budget as this year is likely to miss the revenue target,” Anushka Wijesinghe, Chief Economist of Sri Lanka’s main business chamber, told Reuters.
Sri Lanka’s state finances are in a shaky situation, partly due to heavy borrowing by the previous government during its nine-year tenure that ended in January 2015.