VAT Increase or Corporate Tax Hike Likely to Address Salary Demand in Public Sector

COLOMBO (News 1st); Increasing public sector salaries by Rs. 20,000 monthly, at an annual cost of Rs. 275 billion (1% of GDP), presents a significant fiscal challenge, warned Sri Lanka's State Finance Minister Shehan Semasinghe.

He said to offset this expenditure, implementing other fiscal adjustments is crucial. 

The State Minister noted that one potential approach is to increase VAT by 4 %, raising it to nearly 22 %, or elevating the corporate tax rate to 42%.

However, the State Minister warned that such an increase could strain the economy further, potentially increasing the primary budget deficit, jeopardizing debt restructuring efforts, and derailing the IMF programme. 

Shehan Semasinghe noted that this situation could lead to a return to the severe economic and social conditions experienced in 2022. 

He added that the the path to economic recovery and growth requires cooperation of every individual, community, and institution, and said with continued public support, Sri Lanka can navigate these challenges and work towards a more robust economy.

At the same time, Treasury Secretary Mahinda Siriwardana stated during a meeting at the President's Office under the patronage of President Wickremesinghe today (08) that if the striking public servants' demand for a salary increase is met, the current 18% VAT will need to be raised to 20-21%. 

The President's Media Division noted that the government is not prepared to fulfill this demand as it would burden the public.

At the meeting it was emphasized that a salary increase this year is not possible. However, the 2025 budget will consider revising public service salaries based on the expert committee's recommendations on salary disparities.