Deputy Prime Minister and Minister for Finance, Professor Biman Prasad, has stated that reducing the Value Added Tax (VAT) from 15% to 9% would result in the government losing $600 million in revenue.
During his right of reply in the 2024-2025 National Budget debate, Prof Prasad mentioned that for every 1% reduction in VAT, the government would lose approximately $100 million in tax revenues.
“If the VAT is reduced to 9%, then the two options would be to either increase our national debt by $600 million or to cut government expenditures by the same amount,” he said.
“The questions are, how will this compensation be made? Will the fiscal deficit be increased to double digits, adding an additional $600 million in debt? Technically, borrowing this additional $600 million is not feasible given the availability of financing.
“Or will expenditures be reduced by $600 million, which none of you have discussed (some have even talked about increasing certain allocations).”
Prof Prasad stressed that the Coalition Government conducted thorough research before making the decision on VAT.
“I would like to reiterate that when we increased the VAT rate from 9% to 15% in the last Budget, we undertook a thorough analysis, explored different options, consulted with various experts, discussed with our multilateral lenders, and even brought it up for public discussion.”
He emphasized that it was not an easy decision, and they had to ensure they got it right.
“We did not choose the 15% VAT rate arbitrarily; it was based on a thorough analysis and our real revenue needs to ensure the government is adequately funded and to put our debt-to-GDP ratio on a downward path.
“If we had not done this, we would have found ourselves in major debt distress by now, and most of our lenders would have stopped lending to the government.”