VAT and its impact on industry and commerce, society: A CMA analysis

Sri Lanka welcomed the New Year with an increase in the VAT rate to 18 percent from 15 percent. This is in addition to the removal of VAT exemptions from 98 items out of 140. The reduction of VAT threshold to Rs. 60 million from 80 million needs approval of parliament. 
In an effort to educate the business community and the general public on how their daily activities will be impacted from the VAT changes, CMA hosted an informative webinar towards the latter part of December.
The webinar covered the impact on industry, commerce and society, where the resource persons highlighted the inclusion of fresh items such as meals and transport to workers, fuel, fertilizer, losses incurred on closing stocks with retail trade and supermarkets which will badly impact the SME sector as this amount is likely to be claimed from them by the retailers.   
The main presentation delivered by Asset Advisory Partners MD, Athula Ranaweera, highlighted that the increasing of the rate of tax and the charging of VAT on exempted articles will increase the cost of living and reduction of the buying power. The move will impact the SME sector, power sector, and the export sector. Further, because of making employee meals and transport liable to VAT it will affect to the continuity of employee’s welfare & health conditions.  

The provision of staff meals and transport which were exempt from VAT are now liable will create lot of complications since many of them are giving free or subsidized meals and transport and adding the market value to pay the increase VAT will increase the cost to the business sector especially the garment sector. 
“In the wholesale and retail trade where exempt items are concerned when you consider the closing stocks as at 31st December 2023 will be impacted as sales from 1st Jan 2024 will make them liable to pay the 18 percent VAT. 
“They will influence suppliers to give a special discount on items sold to supermarkets to set off the additional expenditure they have met. This will also have an adverse impact on SME suppliers, said Ranaweera.

The other important sector that will be severely impacted will be the renewable energy sector as the capital expenditure will be liable to 18 percent VAT. 
“This will impact the renewable energy projects such as solar, hydro, wind and will result in more expensive fuel to be used for power generation,” he added.
Also, the VAT on petrol and diesel will affect the cost of living as the transport, electricity will go up and the cost of living will go up more than 3 percent to 5 percent approximately. 
Meanwhile, Prof. Lakshman R Watawala President CMA and Gajma & Co. Senior Partner N. R. Gajendran stressed on the importance of the Institute of Certified Management Accountants to support the Government, Private Sector and SME by providing the proper methods of costing in order that costs can be controlled as well as for the pricing of products and services to be correct to reduce losses of manufacturers and to safeguard the consumer from paying high prices at a time the cost of living is sky rocketing.         
Matters on the VAT impact on the IT, Telecom, SMEs, Industries, Exports, Education were highlighted by the panelists which included N. R. Gajendran Senior Partner Gajma & Co., Suresh Perera Principal Tax & Regulatory KPMG, Jehan Perinpanayagam Chairman SLASSCOM, Dr. Kulatunga Rajapakse Emeritus Managing Director DSI Group of companies, Rohana Wijebandara Group Financial Controller Dialog Axiata, Prof. Anil Fernando Senior Lecturer University of Sri Jayawardenapura and moderator Ruchira Perera Council Member CMA.

Major impacts stemming from VAT changes

• The increase in cost of living by about 3% to 5% on average
• Reduction of the domestic buying power resulting in low demand which will badly affect the domestic production volumes 
• Curtailment of capital investments due to increase in capital costs 
• Making the renewable energy producing equipment liable to VAT will result in curtailing the investments in the power generation sector and ultimately the country has to depend more and more on imported petroleum products