Sri Lanka’s construction industry, grappling with ongoing challenges, faces an imminent threat of collapse following the government’s decision to raise the Value Added Tax (VAT) from 15% to 18%, effective January 1, 2024, according to industry experts.

A Timeline of Struggles for Sri Lanka’s construction industry

Since June 2021, the construction industry has experienced recurrent contractions, reaching a staggering 50% decline from June 2020 to the present, with a significant 13.2% reduction in 2020 alone, according to Nissanka N. Wijeratne, Secretary General/CEO of the Chamber of Construction Industry of Sri Lanka.

The expected outcome will impact projects currently undertaken and those that are expected to be completed, putting great strain on ri Lanka’s construction industry.

Plummeting Demand for Building Materials

Wijeratne emphasized the tangible impact on the industry, citing a more than 50% reduction in the demand for crucial building materials like cement, reinforcing steel, ceramic tiles, and roofing sheets.

Compounding Challenges: A Precarious Situation

The already precarious situation in the construction sector is exacerbated by additional challenges, including delayed payments for completed work, non-reimbursement of cost increases, project suspensions in February 2023, and banks executing parate to recover mortgaged assets.

“The remaining companies are on the brink of liquidation,” warned Wijeratne, underscoring the severity of the situation.

Advocating for Relief Measures

In response to the crisis, the Chamber advocates for the suspension of parate execution by banks, at least until the close of 2024. This aligns with the anticipated recovery of the construction industry by that time.

VAT Hike: A Dire Blow

However, the recent increase in VAT to 18%, coupled with its extension to previously exempted items, poses a critical challenge. Sri Lanka’s construction costs, already the second-highest in South Asia, are set to surge. Wijeratne particularly highlighted the compounding effect of a 10% rise in fuel prices.

Economic Ramifications: Diminished Prospects

“With heightened costs and reduced household incomes, the prospect of increased individual house constructions and private sector developments becomes increasingly bleak,” added Wijeratne, emphasizing the broader economic ramifications.

Budget 2024: Limited Allocations

Even in the upcoming Budget 2024, there is a dearth of capital allocations. This situation leaves little room for initiating new projects, with the primary focus being on resuming some of the previously suspended projects.

“”The”Sri Lanka’s construction industry may have one ray of hope lies in the commencement of donor-funded projects upon completing the debt restructuring process,” Wijeratne concluded, pointing to a potential lifeline for the beleaguered construction sector in Sri Lanka.

The recent surge in Value Added Tax (VAT) in Sri Lanka has cast a shadow over the construction industry, heralding a challenging period ahead. As the government implements this tax increase, the construction sector finds itself grappling with heightened financial pressures. This surge in VAT is expected to have a cascading effect, influencing various facets of the industry, from project costs to overall investment climate.

For Sri Lanka’s construction industry, one of the immediate consequences of the VAT hike is an escalation in project costs. Construction projects, inherently capital-intensive, will witness a surge in expenses, impacting both developers and contractors. This increased financial burden could potentially lead to a slowdown in project initiation and completion, hindering the growth and progress of the construction industry in Sri Lanka. The ripple effect of these elevated costs may also deter potential investors, exacerbating the industry’s challenges.

Beyond the financial implications for Sri Lanka’s construction industry, the VAT increase adds an additional layer of complexity to an already intricate regulatory environment. Construction businesses must now navigate through intricate tax structures, compliance procedures, and financial planning adjustments. This increased administrative burden not only poses challenges to existing projects but may also dissuade new entrants from engaging in the industry. The evolving landscape necessitates adaptability and strategic planning to mitigate the adverse effects of the VAT hike on Sri Lanka’s construction sector.

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