The Sri Lankan government raised retail fuel prices by Rs 20 effective from Monday in its monthly revision, making it the first retail price hike of any commodity under the imposition of new Value-Added Tax rates.
The government revises fuel prices monthly based on the exchange rate of the US dollar and the global oil market prices. However, Monday's hike was purely a result of the new VAT rates.
Sri Lanka's VAT rate has been increased by three per cent from Monday for the band, which was previously taxed at 15 per cent, while most VAT-exempt items have been brought under 18 per cent in a highly unpopular move.
Last month, the International Monetary Fund (IMF) approved the release of the second tranche worth USD 337 million to the cash-strapped island nation, bringing the value of disbursements to USD 670 million in the four-year facility.
With its reforms, the IMF programme meant that the government set cost-based tariffs for utilities, while several rate hikes on electricity consumption placed hardships on the people.
Prices of petrol and diesel, which are used widely for transport purposes, were increased by over SLR 20 per litre, becoming the first retail price hike of any commodity under the imposition of new VAT rates, the Ministry of Energy said.
Fuel has been placed under VAT for the first time in the country.
The government said that considering the spiralling effect on the struggling economy, it lifted the 7.5 per cent import levy on fuel to keep its retail price at reasonable levels.
The increase of VAT from 15 to 18 per cent was necessary to raise state revenue to IMF desired levels, President Ranil Wickremesinghe, who is also the finance minister, said last month.
The VAT rate hike puts President Wickremesinghe’s government in an awkward position in the election year of 2024, analysts note.
The presidential election is due to take place before November this year.
Sri Lanka declared economic bankruptcy in April 2022 by announcing its first-ever sovereign default. The island nation was hit by its worst financial crisis in history, with its foreign exchange reserves falling to a critical low and the public coming out on the streets to protest the shortage of fuel, fertilisers and essential commodities.