The New Year will dawn today with fresh, anticipated challenges for the Government and people alike on the economic front due to the increase of the Value Added Tax (VAT).

The VAT is increased from 15 percent to 18 percent effective from today.

The VAT threshold will also be reduced to Rs. 60 million. The government also removed VAT exemptions from 97 items out of 138 goods.

    

The government expects to collect revenue amounting to Rs.378 billion from the VAT hike in pursuit of targets stipulated by the International Monetary Fund (IMF) under its four - year programme with Sri Lanka.

The whole process is bound to create an inflationary effect of 2-3 percent on people already burdened by the high cost of living.

People, already reeling under the impact of soaring prices of goods and services, are concerned over the expected additional burden triggered by the VAT hike.

For the government facing an election year in 2024, it will entail a political cost.

Aware of this scenario, the Finance Ministry and the Inland Revenue Department are actively working to provide relief by removing other taxes on goods and services subject to VAT.

This is an effort to mitigate the inflationary effect amid forecasts by some organizations that the monthly income of a family will increase by Rs. 40, 000 due to the VAT hike, a claim vehemently disputed by government officials.

Deputy Director of the Economic Research Department of the Central Bank of Sri Lanka Janaka Edirisinghe disputed it and said the anticipated pressure would be less.

Whatever is said, the taxes applicable on telecommunications services have been increased effective from today.

The total tax on local calls/SMS, VAS and PayTV services and IDD called is 23.50 percent.

The VAT is a consumer tax and will impact family income on food. Therefore the poor will get affected as they have to spend large portions of their incomes on food items slapped with increased VAT.

It will also lead to reduction of consumption eventually leading to contraction of economy as analyzed by some economists.

However, the cost of living will not be decided by VAT only.

There are other economic developments such as global and local supply levels that decide on it . If things develop in that way, the VAT impact can be mitigated.