Deputy Prime Minister and Minister for Finance, Professor Biman Prasad, has announced that reducing the Value Added Tax (VAT) from 15% to 9% will result in a $600 million loss in government revenue.
During his address in the 2024-2025 National Budget debate in Parliament, Prof Prasad explained that for every 1% reduction in VAT, the government stands to lose approximately $100 million in tax revenue.
“If Value Added Tax is reduced to 9%, the government would face two options: either increase the national debt by $600 million or reduce government expenditures by the same amount,” he said.
Prof Prasad posed critical questions regarding compensating for the revenue loss: “Are you going to increase the fiscal deficit to double digits and add an additional $600 million in debt? Technically, this would be challenging given the availability of financing. Or are you going to reduce expenditures by $600 million, which none of you have discussed—in fact, some have suggested increasing allocations.”
He assured that the Coalition Government thoroughly considered the decision on VAT. “When we increased the VAT rate from 9% to 15% in the last Budget, it was based on thorough analysis, exploration of different options, consultations with experts, discussions with multilateral lenders, and public discourse.”
Prof Prasad emphasized the difficulty of the decision: “We didn’t randomly select the 15% rate; it was based on a detailed analysis and our real revenue needs to ensure adequate government funding and steer our debt-to-GDP ratio downward. Had we not taken this step, we would be in major debt distress, with most lenders ceasing to provide loans to the government.”