Sri Lanka Raises VAT to 18%, Eliminates Exemptions

Sri Lanka's parliament has recently approved legislation to raise the Value Added Tax (VAT) from 15% to 18%. Accompanying this tax hike is the significant narrowing of VAT exemptions, by removing 95 previously excepted goods from the VAT-exempted goods list. This revision is poised to affect both consumers and businesses substantially.

The State Minister of Finance, Ranjith Siyabalapitiya, has acknowledged the possibility of a modest inflation increase, estimated between 1.5% and 2%, as a direct consequence of the tax adjustment. Nonetheless, the more profound inflationary pressure is anticipated to stem from reinstating VAT on goods that were previously exempted. Particularly, imposing VAT on diesel is expected to exert a pronounced impact since diesel plays a critical role in the transportation, agriculture, and manufacturing sectors. The incremental cost of diesel is likely to precipitate a domino effect across the entire economy.

In essence, the amalgamation of the VAT increase and the curtailment of VAT exemptions is expected to lead to escalated prices across a broad spectrum of goods and services. This inflationary trend could squeeze household budgets and potentially hamper economic growth.

Below is the complete list of goods and services that have been removed from the previous VAT exemption list.

New VAT liable List (List of Items removed from exemptions list) with effect from January 01, 2024

1. Food products made out of grains cultivated in Sri Lanka, as identified by the Commissioner General as high protein and high energy agro foods provided that procurements of such grains with backward integration from out growers is undertaken
2. Locally manufactured coconut milk
3. Liquid petroleum gas, petrol and diesel
4. Any motor vehicle identified under the Harmonized Commodity Description and Coding Numbers for custom purposes and liable to the Excise (Special Provisions) duty under the Excise (Special Provisions) Act, No. 13 of 1989 on the importation of such vehicle or any motor vehicle liable to the same duty on the manufacture of any such vehicle
5. Lorries, trucks, buses, sports equipment, machinery used for the production of rubber or plastic products, moulding (steel, glass, rubber, mineral material or plastic), photo-sensitive semiconductor devices; raw materials for the manufacture of spectacles and spectacle frames; items and spares for the poultry industry; bowsers, bulldozers, graders, levelers, excavators, firefighting vehicles, gully bowsers, semi-trailers for road tractors, machinery, equipment used for garbage disposal activities or garbage trucks; (item no to be corrected) energy-saving bulbs, and raw materials for the manufacture of energy-saving bulbs; ties and bows or designer pens; (item no to be corrected) classified under the Harmonized Commodity Description and Coding System Numbers for Custom purposes
6. Cellular mobile phones
7. Ethyl alcohol imported or manufactured and supplied as a by-product which is liable to customs duty and CESS on importation or excise duty under the Excise Duty Ordinance on manufacturing of such products
8. Electrical goods identified under the Harmonized Commodity Description and Coding System Numbers for Custom Purposes
9. High tech medical equipment or any machinery used for the manufacture of ticket issuing machinery identified under the specified Harmonized Commodity Description Numbers for custom purposes