Analysis: Impact of VAT Increase on Diesel Price
How much will diesel prices raise due to the VAT hike in Sri Lanka? Sri Lanka's decision to remove VAT exemptions on diesel and petrol will significantly raise fuel prices and trigger inflation across the economy.
Sri Lanka's parliament passed a bill this month to change the VAT rate from 15% to 18%, effective from January 1, 2024. This bill also removes most items from the VAT-exempt list, including diesel and petrol, which are crucial in daily life. Removing VAT exemptions on these commodities may lead to significant price hikes in other goods due to increased transport and other costs.
The possibility of a VAT increase has been discussed since September, with several parliamentarians expressing their views on its impact on diesel prices. Here are statements made by MP Patali Champika Ranawaka and MP Vijitha Herath.
MP Patali Champika Ranawaka stated, "There was a PAL of 7.5% before. Now, an 18% VAT will be applied to these products. Soon, there will be an additional cost of about 11% when new fuel stocks are imported next year. Then, fuel prices will surely rise."
NPP MP Vijitha Herath commented, "The price of a liter of diesel will increase by Rs.63 after the 18% VAT is imposed. Currently, a liter of diesel is sold at Rs.346 and it will increase by Rs.63 from January."
Currently, the government imposes the following taxes on diesel:
PAL = 7.5%
General Duty = Rs.25 per liter
Excise (SPD) = Rs.56 per liter
Let's break down the calculations. Assuming the profit margin and other costs are Rs.0 and the landing CIF value remains the same, we can derive the current CIF value as Rs.231, with current taxes (excluding VAT) amounting to Rs.98.
The current diesel price is Rs.329, calculated as follows:
CIF + [(CIF x 7.5%) + 81] = 329
Therefore, CIF = 248 / 107.5%
Resulting in CIF = Rs.231
The current taxes amount to Rs.329 – Rs.231 = Rs.98.
Considering the new diesel price after the 18% VAT imposition, the calculation is:
New Diesel Price = CIF + (CIF x 1.1 + current taxes) x 18% + current taxes
= 231 + (254 + 98) x 18% + 98
= Rs. 392
Thus, the new diesel price would be Rs. 392, an increase of Rs.63.
It seems MP Ranawaka did not consider that the existing 7.5% tax on diesel would remain as it is after the VAT increase. Although MP Herath's final diesel price aligns with our analysis, the Rs. 63 increase may have resulted from applying an 18% VAT on the incorrectly cited diesel price of Rs. 346 (Rs. 346 * 18% ≈ Rs. 63).
However, there is good news for consumers. Global fuel prices have decreased significantly in recent weeks. Therefore, the January fuel price change may not see such a significant upward increase from the VAT increase, and if the government wishes, they can always reduce other existing taxes on diesel. The next fuel price update is due on January 1, 2024.
Update:
Sri Lanka’s President Ranil Wickremesinghe has Minister of Finance has removed a border tax called the Ports and Airport Levy from imported diesel, petrol, liquefied petroleum gas and chemical fertilizer, according to a gazette notice issued on 01st of January 2024.