Sri Lanka’s Council of Ministers has given the green light to increase the VAT rate from 15% to 18%, effective January 1, 2024. This move comes as the country struggles to meet its tax collection targets agreed with the International Monetary Fund (IMF). In addition to raising the VAT rate, the government has also decided to apply the same tax to select goods and services that were previously exempt from VAT.
The decision to raise the VAT rate to 18% is part of a broader effort to bolster tax collection and achieve fiscal consolidation, with a focus on revenue-based stability. Since June 2022, several tax policy reforms aimed at expanding the tax base and making taxation more progressive have been implemented. As a result, during the first nine months of 2023, government tax revenue has surged by an impressive 51%.
Despite this substantial increase in tax revenue, the targets set by the International Monetary Fund have remained elusive. In light of this, the Council of Ministers has taken the step of amending tax laws to implement various new tax proposals, effective from January 1, 2024. These changes include not only the increase in the VAT rate but also the extension of VAT to certain goods and services that were previously exempt.