Deputy Prime Minister and Minister for Finance, Professor Biman Prasad, has stated that reducing the Value Added Tax (VAT) from 15 to 9 percent would result in a $600 million revenue loss for the Government.
During the 2024-2025 National Budget debate in Parliament, Prof Prasad explained that a 1 percent reduction in VAT equates to a $100 million loss in tax revenue.
“If VAT is reduced to 9 percent, the Government would either have to increase the national debt by $600 million or reduce expenditures by the same amount,” he said.
He posed the questions, “How will you compensate for this? Are you going to increase the fiscal deficit to double digits and add $600 million in debt? Technically, you cannot borrow this additional $600 million given the availability of financing. Or will you reduce expenditures by $600 million, even though some have talked about increasing allocations?”
Prof Prasad noted that the Coalition Government thoroughly analyzed the VAT decision.
“When we increased the VAT rate from 9 to 15 percent in the last Budget, we conducted a thorough analysis, explored different options, consulted various experts, discussed it with our multilateral lenders, and brought it for public discussion.”
He emphasized that it was not an easy decision and that they had to ensure it was the right one.
“We didn’t just randomly choose the 15 percent rate; it was based on a detailed analysis and our real revenue needs. This will ensure the Government is adequately funded and put our debt-to-GDP ratio on a downward path,” he stated.
“If we had not made this decision, we would now face major debt distress, and most of our lenders would have ceased lending to the Government,” he added.