Blow after blow: After VAT new excise tax on fuel, other items By Damith Wickramsekara

The government is considering how to implement an International Monetary Fund stricture to adjust all excisable taxes to reflect the annual rate of inflation, as it will further push up the prices of a host of items, including petrol and diesel, on the back of the VAT revision that comes into effect tomorrow.

If the IMF recommendation is to be followed and excise duties are changed to reflect the annual rate of inflation, it would require an adjustment of about 15 percent, senior Treasury officials told the Sunday Times. Excisable products include fizzy drinks and alcohol, petrol, diesel and super diesel, newspapers, journals and periodicals, certain electronic items like fridges and washing machines, water vehicles and trishaws.

Such a move would be a further burden on the people who are bracing for the harsh impact of the VAT hike and the removal of most VAT exemptions, Treasury officials have argued. The government hopes to raise an additional Rs. 650 billion in revenue through the VAT hike.

Consequently, some officials have suggested adjusting excisable taxes based on the last available rate of inflation, which was around 4 percent in December 2023. A senior Treasury source said, however, that the government had “no real choice” but to follow IMF instructions to adjust it to the annual inflation rate.

Duties will then be added to a host of items that will already be more expensive from tomorrow owing to the VAT hike. For example, the price of a bottle of liquor, which will go up between Rs. 20 and Rs. 90 following the VAT increase, could rise by as much as Rs. 350, in some cases. Finance Ministry officials fear this will drive even more people towards illicit liquor, a trend already being observed.

The Government managed to raise Rs 2,900 billion in revenue after implementing the IMF programme. The revenue target for next year is Rs. 4,190 billion, the senior Treasury official said, adding that the excisable tax adjustment is needed to achieve this target. “If we can meet this target, we will be able to release funds to restart stalled road and construction projects, make more health sector-related procurement and provide more resources for education, among other things,” he explained.

Sri Lanka also plans to use a portion of the US$ million released as the second tranche of the IMF bailout to settle some of its multilateral loans, amounting to around Rs. 1,200 billion next year.

With input from institutions like the World Bank and the Asian Development Bank, the total funding from these agencies will be about US$ 780 million. This will keep the US dollar steady at around Rs. 320 next year, according to the Treasury source.

The Government is expecting gross official reserves, which currently stand at US$ 3.8 billion, to increase between US$ 4-5 billion next year, while also counting on the third IMF tranche being released in the middle of next year.

“Once bilateral loans have been restructured, we will again be able to obtain loans from bilateral creditors,” the official said. “But it will be according to targets set by the IMF. We will also be able to obtain a moratorium on our old loans. All these are steps we are taking to gradually come out of this crisis.”courtesy sunday times