Deputy Prime Minister and Finance Minister, Professor Biman Prasad, has stated that reducing the Value Added Tax (VAT) from 15% to 9% would result in a $600 million revenue loss for the government.
In his response during the debate on the 2024-2025 National Budget in Parliament, Prof Prasad highlighted that a 1% reduction in VAT translates to a $100 million loss in tax revenue.
“If the VAT is reduced to 9%, the government would either need to increase national debt by $600 million or cut expenditures by the same amount,” he said. “The key questions are: how will this be compensated? Will the fiscal deficit be increased to double digits, adding an additional $600 million in debt? However, technically, borrowing this additional $600 million is not feasible given the financing constraints.”
“Alternatively, expenditures would need to be reduced by $600 million, which no one has discussed; instead, some have suggested increasing certain allocations.”
Prof Prasad mentioned that the Coalition Government conducted thorough research before making decisions regarding VAT. “When we increased the VAT rate from 9% to 15% in the last budget, we conducted a detailed analysis, explored various options, consulted experts, engaged with our multilateral lenders, and brought the matter to public discussion,” he said.
He stressed that this decision was not made lightly. “The 15% VAT rate was not arbitrarily chosen; it was based on comprehensive analysis and our real revenue needs to ensure adequate government funding and a downward trajectory for our debt-to-GDP ratio. Without this adjustment, we would be facing significant debt distress, and many lenders would have ceased lending to the government,” he added.