In a move with potential ramifications for inflation, the Sri Lankan Parliament greenlit a bill yesterday, raising the Value Added Tax (VAT) from 15% to 18%. Additionally, the tax base was expanded to include 97 out of the 138 goods that were previously exempt from VAT, signaling a significant shift in the country's fiscal landscape.

State Minister of Finance Ranjith Siyabalapitiya acknowledged the anticipated inflationary impact, estimating a moderate uptick of 1.5-2% due to the heightened VAT rate. However, industry analysts are placing greater emphasis on the potential inflation surge arising from the reintroduction of VAT on previously exempt goods, particularly diesel.

The decision to impose an 18% VAT on diesel, previously untouched by VAT, is poised to be a major contributor to inflation. Experts suggest that this move alone has the potential to drive year-on-year inflation up by a significant 2%. When combined with the broader changes in VAT rates, the overall inflationary impact could surpass the official estimate of 1.5-2%.

The move to broaden the tax base is viewed as a strategic measure to bolster government revenue; however, it raises concerns among consumers and businesses regarding its potential effects on the cost of living and overall economic activity.