VAT could be reduced to 15% if VAT registered persons and businesses expand: Minister

Minister Bandula Gunawardena

Value Added Tax (VAT) can be reduced to 15% to equalize with its previous level if all businesses in Sri Lanka register for VAT, Bandula Gunawardena, the Minister of Transport, Highways, and Mass Media said on Saturday.

He said so while visiting a food factory in Kolonnawa where fruit dices and floats are produced for the wider cake industry.

“Young people in this country have opportunities to stand on their feet without engaging in hateful rhetoric about the society if they reimagine and rekindle the entrepreneurial spirit within them and start their own businesses. We have the opportunity to produce goods and deliver services to countries such as India, China, Japan and South Korea. They are huge economies and we can access those markets with tax-free benefits. When such a manufacturing and business culture is embedded in our society, there would be enough liquidity to ease the burden on the vulnerable sections of the society.

If all businesses register for VAT and thereby help expand the tax base, the tax burden on the innocent people would be reduced. VAT is levied on added value. A fruit floats maker is not subject to VAT because it is a primary good and has no added value. Accordingly, there is no VAT on rice, vegetables or fruit. Some people try to charge VAT on goods which are not under the regime of VAT. As the people are unaware of the technical aspects of VAT, some politicians try to mislead the people saying that VAT is leading to high cost of living,” he said.

Background of VAT: It is a consumption tax. VAT rules impose the tax at each stage of the supply chain while allowing businesses for VAT deduction on their purchases, except for the final consumer. This design ensures that VAT is an economically neutral tax for businesses: it flows through them, regardless of the product’s nature or the distribution chain’s structure, effectively taxing supplies made to final consumers who ultimately bear the tax’s cost. Furthermore, since it is collected at each stage of production and distribution, it has another essential advantage: it creates a consistent and stable source of revenue for the governments throughout the supply chain’s entire lifecycle.

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