Revamping tax policies: Govt’s strategic shift to boost fiscal revenue
The government will be introducing new taxes to comply with the current IMF programme. Under the IMF’s Extended Fund Facility (EFF), the government has agreed to reform the property tax system and introduce a wealth transfer tax to aid fiscal consolidation.
By 2025, it plans to implement an Imputed Rental Income Tax (IRIT) with specific thresholds and a distinct rate schedule in the Inland Revenue Act (IRA). Anti-avoidance measures will be put in place to prevent misuse of “residential” companies and discretionary trusts to evade IRIT, Finance Ministry sources revealed.
Changes to the central tax structure will include replacing the capital gains tax (CGT) exemption for primary residences with a threshold that aligns with the IRIT value threshold.
The exemption for capital gains taxation for listed companies on the stock exchange will also be removed. Following a review of lease amounts and affordability, an increase in stamp duties on land leases from 0.1 to 0.2 per cent is being considered, according to sources from the Fiscal Policy Department.
The government is also considering an electricity usage tax by sharing data between the Ceylon Electricity Board (CEB) and the Inland Revenue Department (IRD).
The Surveyor General, the Government Valuation Department (GVD), and local authorities will collaborate to improve data on properties and taxpayers.
The VAT treatment of residential property transactions will be aligned with international standards, exempting resale and rental contracts but taxing all first sales.
While an increase in these revenues could reduce the need for central government transfers, the potential reduction is minimal in the short term (less than 0.05 per cent of GDP).
Taxing imputed rental income from owner-occupied and vacant residential property, rather than directly taxing real property, could boost central government revenue.
Imputed rental income, the income homeowners could earn if they rented their homes, can be taxed as a fixed percentage of the property’s market value. While IRIT is legally distinct from a property tax, both are based on property market values and share similar challenges and benefits.
However, due to limited information on market values, the revenue from such a tax is difficult to estimate and may fall short of expectations.
Unlike local property taxes, IRIT usually doesn’t apply to commercial properties, which can improve efficiency but reduce revenue potential. Estimates suggest that IRIT could be progressive and yield 0.4 to 0.6 per cent of GDP, depending on its design.
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