Sri Lanka Government warns VAT hike needed to meet public servants’ salary demands

The Secretary to Sri Lanka’s Treasury, Mahinda Siriwardana, indicated that meeting the salary increase demands of striking public servants would require raising the current VAT from 18% to between 20% and 21%.

He stressed that such a move would impose a heavy burden on the public, which the government cannot afford to do.

Siriwardana made these remarks during a meeting on Monday (July 08) at the Presidential Secretariat chaired by President Ranil Wickremesinghe.

The discussion focused on the actions taken by various public service trade unions and explored potential solutions to address their demands.

It was acknowledged that while a salary hike is not feasible this year, there are plans to revise public service salaries in the 2025 budget based on recommendations from an expert committee investigating salary disparities.

Siriwardana highlighted that a Rs. 10,000 increase in government employees’ salaries would require an additional Rs. 140 billion annually, and a Rs. 20,000 increase would need Rs. 280 billion more.

He pointed out that even with careful management of current revenues, additional tax hikes would be necessary to generate the required income.

Specifically, he noted that increasing salaries by Rs. 10,000 would require a 2% increase in VAT, and meeting trade union demands would necessitate raising VAT by over 3%.

However, he emphasized that raising VAT beyond the current maximum of 18% is currently not feasible.

The Treasury Secretary also explained that the government’s efforts to stabilize the economy mean the Central Bank cannot print money as before, as it would endanger the IMF program.

Dr. R.H.S. Samaratunga, Senior Advisor to the President on Economic Affairs, acknowledged the challenges of increasing public servants’ salaries this year but stated that the President is committed to allocating funds for this in next year’s budget.

He mentioned the appointment of a separate expert committee to study and report on salary discrepancies.

The meeting was attended by President’s Secretary Saman Ekanayake and other senior government officials.