Revenue shortfall:

Govt seeks interim alternatives to VAT

Eran declines to reveal sources

By Lalin Fernandopulle and Sanjeevi Jayasuriya

Achieving the government’s revenue targets for this year will be an uphill task due to the delay of nearly five months in implementing the revised Value Added Tax (VAT) to bring in the much needed revenue to State coffers, economic analysts said.

However, State Enterprise Development Deputy Minister Eran Wickramaratne said the government will resort to other income measures to minimize the revenue slippage during the past few months.

‘We will have to collect other revenue to provide the level of services without interruption,” Wickramaratne said.

When asked about the sources through which the government hopes to enhance revenue, he declined to elaborate but insisted that revenue sources will be tapped to provide welfare services.

With regard to the lapse of nearly six months to implement the revised VAT, he said whatever has been collected as VAT will be regularized through the Bill that will be presented in Parliament next month.

“We are a unity government and all views will be taken into account prior to Cabinet approval of the Bill which will thereafter, be presented in Parliament for legislation,” the Deputy Minister said.

He acknowledged that there is potential loss of revenue since the verdict of the Court until parliamentary approval of the Bill is obtained.

When asked about the impact of the revision on the conditions laid down by the International Monetary Fund (IMF), Wickramaratne said fiscal consolidation is a vital aspect of the IMF program and added that a key concern is to ensure government revenue is increased. He said VAT is only one of the proposals of the IMF.

There are many areas that have to be looked into. “We are focused on improving them.

On monetary policy, inflation is maintained at a moderate level; Gross Domestic Product (GDP) growth rate is on track; a flexible exchange rate policy is being maintained; measures to improve tax administration, State enterprise reforms especially of SriLankan Airlines, the Ceylon Petroleum Corporation, Ceylon Electricity Board and a few others have been initiated and groundwork has already been launched to improve the governance framework of State-owned enterprises.”

“The IMF will take a holistic view of the reforms the government has undertaken,” the Deputy Minister said.

With regard to State borrowing, he said the previous regime increased debt by around 26 percent per annum from 2005 to 2014. On the contrary, debt rose little over three percent per annum from 2015 to the first quarter of this year. Foreign debt which increased by 25 percent per annum from 2005 to 2014 reduced by around one percent from 2015 to 2016 and the foreign debt component increased by around 100 percent per annum from 2005 to 2014.

“We are carefully managing the debt situation and there is no cause for alarm. We could access the markets whenever needed.”

The Supreme Court issued an interim order suspending the implementation of the VAT and Nation Building Tax (NBT) revisions. VAT was revised upward from 11 to 15 percent to be effective from May 2. However, the Prime Minister following the suspension said it would not affect revenue to the government as it would be presented to parliament with revisions and would be in force from May 2.

Central Bank Governor Dr. Indrajit Coomaraswamy at a media briefing last month said the delay in presenting the Bill in parliament will have an impact on reaching the government’s revenue targets.

Meanwhile, Media Minister Gayantha Karunathilaka last week said tax revenue had increased by Rs. 100 billion this year. Former Central Bank Deputy Governor W.A.Wijewardane said achieving the revenue target for this year would be a huge challenge due to the delay in implementing the revised VAT which has to come into force through Parliamentary approval.

“All tax measures should be approved by Parliament which is the supreme authority on public finance. In the past it was passed along with the Appropriation Bill. Had it taken place that way the VAT Bill would have been passed in December last year,” he said.

Wijewardane said this time it failed because the government did not present it with the Appropriation Bill. The Inland Revenue Department issued instructions in March this year without legislation. The circular had to be withdrawn and the government had to go before Parliament which made the opposition protest. Today the VAT has become a political issue. The VAT should have been effective from April 1. The government has lost almost five months of revenue. The government tax revenue target is around 13 percent of the GDP. “The government will have to resort to borrowing as an alternative measure. Government borrowing has already gone up by Rs. 300 billion from January to June this year. This will increase the budget deficit as a percentage of the GDP. The IMF requires that Sri Lanka keeps its fiscal deficit at a manageable level,” he said.