Business
New Year, New VAT: Can Sri Lanka’s poor cope with the increase?
Lakshila Wanigasinghe is a Research Officer at the IPS with research interests in poverty, social welfare, development, education, and health. She holds an MSc in Economics with a concentration in Development Economics and a BA in Economics with concentrations in International, Financial and Law and Economics from Southern Illinois University Carbondale (SIUC), US. (lakshila@ips.lk)
By Lakshila Wanigasinghe
Ringing in the new year for Sri Lankans was an increase in the value-added tax (VAT) rate to 18% and a withdrawal of tax exemptions on several goods and services. The last day of 2023 witnessed long queues as people rushed to stock up on essentials such as fuel and gas. Although queues are a familiar sight following the onset of the economic crisis, this time around, it was to avoid being hit with the VAT hike.
In light of these developments, this blog aims to shed light on VAT, offering a brief overview and delving into the potential implications of the increase, particularly on the poor and vulnerable.
There are both pros and cons to VAT. While VAT offers a means for governments to generate revenue without overcharging the wealthy, its downside lies in imposing a substantial economic burden on lower-income groups, as consumers ultimately bear the tax burden.
Amendments to VAT
In an attempt to raise government revenue, the VAT rate on applicable goods and services increased from 15% to 18% starting 01st January 2024. This amendment brought 97 previously VAT-exempt goods and services including, fuel, gas, telecommunication services, as well as several food products manufactured using locally cultivated grains, locally manufactured coconut milk, and certain dairy products (locally produced), under the tax umbrella. Items that continue to be VAT-exempt include medicines, educational services, public passenger transport services, and food products such as infant milk powder, locally manufactured rice, bread, etc.
Along with the change in tax rates, the VAT threshold for businesses was also reduced to an annual turnover of LKR 60 million (from LKR 80 million) and LKR 15 million per taxable period (from LKR 20 million). These changes to VAT are expected to generate revenues of around LKR 1,400 billion in 2024.
Implications for the Poor and Vulnerable
The tax rate increase and the threshold reduction for businesses liable for VAT signals that more items are applicable for VAT at a higher percentage than before. Although this affects all households, it adds an excessive burden on the already struggling poor and vulnerable groups grappling with the concurrent crises from COVID-19 in 2020 to the ongoing economic crisis.
Impact on Household Expenditure and Coping Mechanisms
The fuel price hikes, a direct consequence of the new VAT rates, are expected to trigger a domino effect on the prices of various consumer goods and services, potentially leading to inflation. Although inflation has been low since mid-2023 compared to the beginning of the year, the latter part of 2023 (October to December) witnessed a relative increase in inflation. As per the Colombo Consumer Price Index, inflation between September to December 2023 was recorded as 1.3%, 1.5%, 3.4% and 4.0% respectively. The VAT reforms are likely to add to inflationary pressures in 2024. This, in turn, will further reduce the purchasing power of already constrained households.
A survey conducted by the Department of Census and Statistics (DCS) in 2023 on the impacts of the economic crisis revealed that over 60% of households in the country experienced a decrease in income since March 2022. The survey also finds that over 90% of households experienced an increase in their monthly household expenditure due to the economic crisis. The findings further reveal that 99% of households that experienced a rise in expenditure witnessed an increase in food expenditure. The combination of reduced income and rising expenses is poised to constrain consumer spending, particularly affecting goods and services subject to VAT. For example, the survey results reveal that 83% of households whose expenditure increased due to the economic crisis experienced a rise in transport costs. Following the imposition of VAT on petrol and diesel (previously VAT exempt), the price hike in these commodities will further escalate household expenditure on transport. This will compel some households to self-impose restrictions on the use of certain modes of transport or find alternate solutions due to unaffordability concerns.
Financial Constraints and Indebtedness
Purchasing power constraints force households to adopt various coping strategies to minimise the impacts of these adverse shocks. Around 74% of households that experienced a decline in income did not employ any coping strategies to mitigate the impact while around 7% resorted to a secondary job or additional source of income. Conversely, to cope with the impact of rising expenditure, households employed multiple mechanisms such as limiting/controlling expenses (75%), dietary changes (75%) and reducing/withdrawing savings (46.4%), etc. It is interesting to note that most households chose to adopt coping mechanisms only with respect to mitigating the impact on expenditure although a majority experienced income loss as well.
In the absence of savings – particularly among the poor and vulnerable due to the consecutive adverse shocks –households are likely to borrow to cover their essential expenses. As per survey findings, 55% of households in the country are currently indebted with 22% of such households in debt to meet daily food requirements. Interestingly, 22% of households have accumulated outstanding debt due to the economic crisis while the majority (78%) have not. However, it is concerning that over half of Sri Lankan households are presently indebted, and a considerable share face financial constraints to satisfy essential needs. The VAT reforms are likely to impact these households further through amplified indebtedness due to increased borrowings from both official and unofficial channels. This limits the possibility of timely recovery from shocks as concerns such as repayment challenges will arise in the future. Hence, in addition to struggling at present, the poor and vulnerable are also at risk of facing more prolonged periods of struggle even as the country’s economic crisis subsides.
Coping with the Tax Burden
It is important to support the poor to cope with the VAT hike at least through targeted initiatives that cater to the most vulnerable groups. Using existing social protection programmes to identify the most vulnerable households and providing them with some form of concessions such as reduced prices on certain VAT-liable goods and services that are frequently used by these groups is one such option.
Targeted transfers are another option. While cash transfers are already provided to eligible poor and vulnerable groups in the country it is important to assess if the amounts received by these groups are sufficient to cope with the ongoing crisis and the burden of indirect taxes. Another option worth considering is to provide needy households with dry rations/nutritious food commodities since low-income households spend a large portion of their total expenditure on food and this share may increase further due to the VAT reforms. Further, although it was mentioned that essential items such as fruits and vegetables will not be taxed, these items too are likely to go up in prices due to the indirect nature of the tax.
Although it is too early to assess the true impacts of the VAT amendments on the poor and vulnerable’s ability to survive, they are certainly at elevated risk of facing unaffordability which in turn triggers countless other obstacles. While the degree of the abovementioned risks can vary by household, they can only be measured upon the availability of sufficient consumption data over the upcoming months. Proactive measures, such as timely support in the form of targeted initiatives and concessions, can not only alleviate the immediate challenges but also contribute to the resilience and recovery of the most vulnerable segments of the population.
Link to original blog: https://www.ips.lk/talkingeconomics/2024/01/10/new-year-new-vat-can-sri-lankas-poor-cope-with-the-increase/
The Colombo Stock Exchange (CSE), in collaboration with the Securities and Exchange Commission of Sri Lanka (SEC) and the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), has embarked on a significant initiative to introduce the eXtensible Business Reporting Language (XBRL) for listed entities in Sri Lanka. This move is expected to transform the way financial data is submitted, analyzed, and disseminated within the capital market.
XBRL is a global standard for digital reporting, specifically for financial business data. XBRL is the universal language for business data reporting and standardizes communication of financial reporting. It enhances data accuracy, simplifies reporting, and allows for more effective analysis and faster comparison of financial information by businesses, regulators, researchers, investors, and other stakeholders.
The primary objective of this initiative is to streamline the submission of financial and non-financial information of listed companies set out in the Interim Financial Statements and Annual Reports by listed companies in compliance with the XBRL taxonomy, ensuring a more efficient and effective dissemination of financial data to the market. The XBRL taxonomy would be developed jointly with CA Sri Lanka and SEC.
The CSE formally marked the beginning of this journey by signing a contract agreement with Microvista Technologies (Pvt) Ltd, India on 9th April 2025, to develop the XBRL system. Microvista Technologies (Pvt) Ltd is a leading compliance platform provider in India possessing extensive experience in XBRL based financial reporting implementations. A demonstration of the proposed system was held at the CSE premises for 30 selected listed companies, representing the banking, insurance, and other sectors. This session provided companies with a first look at the system’s interface and functionality, followed by a Q&A forum to gather initial feedback. The CSE will conduct awareness sessions for Listed Entities through a structured engagement framework.
CSE intends to adopt a phased approach for the implementation of XBRL based financial reporting. In phase one, CSE plans to convert Interim Financial Statements into XBRL based digital financial reporting in early 2026. Upon successful adaptation of phase one by the listed companies, the CSE envisions expanding the scope of XBRL based financial reporting to Annual Reports by 2027 and the submission of Sustainability Reports by 2028.
The adoption of XBRL brings a multitude of benefits to listed entities and market stakeholders. Built-in validation tools help identify inconsistencies or omissions, while the automated system facilitates faster and streamlined financial reporting. Tagged data can be reused across multiple platforms and reports, reducing duplication in data entry and significantly lowering compliance costs.
The implementation of XBRL supports transparency and increases capital market efficiency by helping users of business and financial information locate relevant details. For example, companies reporting under a common taxonomy provide specific details that are immediately comparable by investors and analysts in investment decision-making. XBRL enables listed companies to switch resources away from costly manual processes, typically involving time-consuming comparison, assembly and re-entry of data. Instead, they are able to redirect more effort on analysis, supported by software, which can validate and manipulate XBRL information.
Compared to manual data entry and analysis, XBRL would increase the accuracy of information and enable more value-added analysis, review, and decision-making. It also enhances data analytics capabilities for both regulators and investors, while improving accessibility to a wider pool of international investors through cross-border comparability. XBRL filing provides a reduction in total costs over the long term. This can benefit the organization in various ways, such as improved investor relations, investor coverage, and access to capital markets. Since, XBRL is a widely accepted filing approach adopted by many jurisdictions, many foreign portfolio investors are already used to XBRL formats. As such, they would prefer financial statements published in XBRL for their analytical purposes.
This strategic initiative by the CSE reinforces their shared commitment to modernizing financial reporting infrastructure and aligning Sri Lanka’s capital market with international best practices in transparency, accuracy, and accessibility.
Investor sentiment at the CSE became more positive yesterday and the market moved to a very healthy position due to external market factors.Investors were more optimistic about the government’s efforts succeeding in negotiating with the US authorities to get a concessionary arrangement from US’ reciprocal tariff increase of 46 percent on US exports, market analysts said.
Amid those developments both indices moved upwards. The All Share Price Index moved up by 155 points, while the S and P SL20 rose by 38.9 points. Turnover stood at Rs 2.4 billion with seven crossings.
Those crossings were reported in JKH which crossed 8 million shares to the tune of Rs 160 million; its shares traded at Rs 20, Hemas Holdings 500,000 shares crossed to the tune of Rs 60.2 million and its shares sold at 120.50, Access Engineering 1.5 million shares crossed for Rs 60 million; its shares traded at Rs 40, Agarapathana Plantations 2.5 million shares crossed for Rs 41.2 million; its shares traded at Rs 16.50, Lanka IOC 300,000 shares crossed to the tune of Rs 39 million; its shares traded at Rs 130, Commercial Bank 212,000 shares crossed for Rs 29.1 million; its shares traded at Rs 137 and LB Finance 220,000 shares crossed for Rs 20.4 million; its shares sold at Rs 93.
In the retail market top six companies that mainly contributed to the turnover were; Sunshine Holdings Rs 177 million (7.6 million shares traded), JKH Rs 123 million (6.1 million shares traded), Swisstec Rs 116 million (2.3 million shares traded), Access Engineering Rs 100 million (2.1 million shares traded) Agarapathana Plantations Rs 100 million (6.1 million shares traded) and Hemas Holdings Rs 96 million (804,000 shares traded).During the day 125 million shares volumes changed hands in 17000 transactions.
It is said that manufacturing sector counters led the market, especially with JKH, while services sector and plantations sector counters performed well too.
Yesterday, the rupee opened stronger at Rs 299.60/80 to the US dollar in the spot market dealers said, while bond yields continued to fall.
The expectation of some sort of resolution to the US- China trade conflict was contributing to the positive momentum, dealers said.
Excess liquidity was also coming back to the market, after a festival drawdown.
A bond maturing on 15.12.2026 was quoted at 8.90/9.00 and closed at 8.85/98 percent down from 8.88/9.00 percent Wednesday.
By Hiran H Senewiratne
Business
Uber supported economic growth in Sri Lanka with LKR 160 billion of economic activity in 2024: Report
Uber has released findings from its 2024 Sri Lanka Economic Impact Report, compiled by global policy research firm Public First. The report highlights how Uber and Uber Eats together contributed LKR 160 billion in economic activity last year—underscoring their growing role in delivering flexible earning opportunities, expanding access to safer, affordable transportation, and helping local businesses reach more customers.
Uber has transformed the way people travel and order food, groceries and more, over the last few years. By making transportation and delivery services safer and accessible, the company has helped generate economic growth at a time when Sri Lanka has been emerging from financial uncertainty.
Uber’s operations are fueling far-reaching economic benefits across Sri Lanka. In 2024, the platform generated LKR 338 billion in consumer surplus and LKR 16 billion in added tourism value, while drivers and delivery partners reinvested LKR 660 million into local maintenance services. These figures reflect how Uber’s ecosystem is stimulating secondary markets and enabling value far beyond the digital space.
Complementing this economic uplift, Uber has empowered drivers with more stable incomes, and given 70% of them a crucial buffer during tough times. Uber Eats helped local merchants generate LKR 3.6 billion in new business, while affordable transport options allowed thousands of users to save time, budget, and enjoy safer journeys—even during emergencies.
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