ECONOMYNEXT – Sri Lankas basic food prices are sharply down after multiple value added tax hikes over the past two years, but politicians, who stay mum on import duties, continue to claim that they will reduce VAT to bring down food prices.
After years of pushing the ideology that direct taxes are the best system tax, and indirect taxes were ‘regressive’ both politicians and ‘professionals’ received shock when income tax rates were raised to pay state worker salaries in 2022.
Politicians are usually against tax in a knee-jerk reaction from Western ideology
Now they want to reduce personal income tax. Personal income taxes have a major disadvantage because they undermine individual choice and take taxes away before an economic decision and transaction is made.
Value added tax is collected after an individual makes a choice, guiding the economy towards their needs and then the government collects a tax, analysts say.
In addition, taking small amount of taxes conforms to Kautilya’s rule of extracting taxes like bees take honey without harming the flower.
Spokesmen of at least two political parties have claimed that there is VAT on food.
Food prices have come down since monetary stability was reached
But a cursory examination of basic foods show that foods prices have came down over the past two years despite three hikes in value added tax.
While there were claims made in June 2022 in the media that food prices went up because VAT was raised to 12 percent from 08 percent, VAT was not actually imposed on basic foods.
There is no evidence to support claims that vegetables, or rice or Dhall went up due to VAT.
In May 2022, when VAT was at 8 percent basket of goods made up of 12 kilos of vegetables, red rice, local potato, imported onion, dhall, a kilo of cheap fish, 10 eggs and a coconut cost 5006.30 rupees based on central bank data cost 5006 rupees.
At the time monetary stability was not reached and the rupee had started to fall to 360 to the US dollar, three months earlier from printed money. After the VAT hike the same basked cost 5,591 rupees.
By September 09, 2022 after monetary stability was reached and the central bank’s deflationary policy was seen in the balance of payments, with the rupee still officially at 360 to the US dollar, the same basket cost 4,864 rupees, down 13 percent from the first VAT hike.
In October 2022, VAT was hiked to 15 percent and the Social Contribution Levy was slapped at 2.5 percent.
A year later on September 08, the basket that cost 5,591 rupees in June 2022 cost only 3,762 rupees, despite the 15 percent VAT and 2.5 percent SSCL.
In January 2024 VAT was further hiked to 18 percent.
Since singing the IMF staff level agreement, the cost of basic foods including rice, vegetables, potatoes and small fish is down 21 percent.
Why are food prices down?
There are two reasons for the price fall.
One is that unlike claims made in election platforms, most foods are exempt from VAT.
The second reason is that under Governor Nandalal Weerasinghe, the rupee had appreciated to 323 from 360 after a surrender rule was lifted earlier in the year.
The US Fed had also tightened policy reducing the price of internationally traded commodities of which some foods are close substitutes or are actually imported.
To try to eliminate seasonal effects liked to harvests, the same basket of foods which cost 5003 rupees in May 2022 cost 4,437 in May 2024.
The same basket of foods that cost 4,863 in the first week of September 2022 cost, 3799 rupees in the first week of 2024 which is down 21.8 percent over two years.
By September 2024 the rupee was around 299 rupees.
There is VAT on processed foods. However many processed foods are also sharply down from 2022 highs.
Sri Lanka’s food prices are higher than in free trading countries due to import duties and the special commodity level. Rice has a 46 rupee a kilo tax. Many fruits are taxed.
Maize is taxed, keeping cost of production of eggs, poultry, milk and dairy products. Dairy products themselves are taxed at extraordinary levels give profits to one or two dairy companies and to a nationalist goal of self-sufficiency.
Tinned fish is taxed to give profits to canning factory owners.
Oils and fats are taxed at unusual levels to give profits to coconut landowners, driving up prices across restaurants and bakeries.
Could politicking and IMF bashing fashion reasons for VAT on food claims?
It is not clear why opposition politicians insist that there is VAT on food.
There could be two reasons politicians and others claim that there VAT on food or that VAT keeps food prices up.
One is that it is fashionable to claim that IMF programs hurt the poor or that there is ‘austerity’.
To be sure, under the IMF, due to monetary policy modernization and targeting a single interest rate between a policy corridor with inflationary open market operations, currencies do collapse, pushing up food prices and triggering social unrest.
However, under Governor Weerasinghe, over the past two years, the rupee has been allowed to appreciate with deflationary policy.
Repeating claims that are not trues is a well-known political tactic. They usually work. A former Donald Trump press secretary said he had not ‘fidelity to the truth’.
“He used to tell me, it does not matter what you say Stephanie, say it enough and people will believe you. But it does matters. What you say matters.”
