IMF rejects union claims on taxes
The International Monetary Fund (IMF) last week rejected claims that the proposed new Inland Revenue Act has provision for handing over the tax collection to private parties. Trade unions and other groups have been opposing the proposed Act on the grounds that it was counterproductive and also that it contained provision to take away the Inland Revenue Department (IRD)’s mandate of tax collection. In an interview with the Business Times in Washington on the sidelines of the annual World Bank/IMF meetings, IMF’s Sri Lanka Mission Chief Jaewoo Lee said the allegations were unfounded and urged the authorities to create more awareness on and be more transparent in the contents of the new Act. He said the legislative process for the new Inland Revenue Act would be an important step in rebalancing the tax system toward a more predictable, efficient and equitable structure and in generating the needed resources in support of the country’s ambitious social and development objectives.
Mr. Lee is Deputy Division Chief of the Regional Studies Division in the IMF’s Asia and Pacific Department. He has also worked in the IMF’s Research Department including on the IMF’s exchange rate assessment. Opposition has been growing over plans to re-organise the IRD under new legislation and claims that tax collection would be handed over to private parties as the IRD’s mechanism is weak. The government has also denied such claims. Ongoing work on re-drafting the proposed Act is critical towards implementing a more transparent, fair and even-handed taxation framework, which will better mobilise resources from people who are most able to pay, Mr. Lee noted. He also said that the fund’s second tranche of US$170 million out of a $1.5 billion three-year Extended Fund Facility (EFF) is expected to be disbursed in coming weeks after the conclusion of the first review at the IMF Board.
The second instalment, which the fund earlier said could be delayed if the government didn’t get its tax structure right and VAT in place, comes as Sri Lanka struggles to keep its economy afloat in the midst of a massive Rs. 9.5 trillion debt burden left behind by the previous regime. The change of heart was as a result of a positive outcome from discussions between the Sri Lankan and IMF officials in Washington during IMF annual meetings. Breaking from the past, tax authorities now aim to implement a well-designed fiscal consolidation path based on increasing revenues, which will enable the government to devote more resources to health, education, infrastructure and social spending. Such expenditures will help ensure growth, a steady reduction in poverty, and continuous improvement in Sri Lanka’s social development indicators, Mr. Lee said. EFF also supports Government’s reform efforts in shifting the source of taxation from indirect to direct taxes.
The Value Added Tax (VAT) Amendments are also essential to support revenue targets for 2016 and 2017 in addition to a ‘well-crafted’ 2017 budget with a high-quality tax policy strategy to raise Sri Lanka’s low tax revenue-to-GDP ratio, he pointed out. In many cases, IMF arrangements play a catalytic role in bringing in financing from other sources. In the case of Sri Lanka, it is expected to catalyze an additional $650 million in other multilateral and bilateral loans. It also helps to restore investor confidence in market access and sovereign borrowing, he revealed. The authorities’ ambitious reforms intend to put public finances on a sustainable footing by improving revenue potential to create space for its social and development spending programmes, which are essential for lifting Sri Lanka’s growth and making it more inclusive, he added.