Government unveils tax reforms amid IMF scrutiny for public relief
The new government has announced some tax reforms as an immediate relief to the people and the micro, small, and medium-scale businesses hit by high inflation and cost of living during the previous regime. These have come into the scrutiny of the International Monetary Fund (IMF).
The IMF staff will include a comprehensive report on those tax measures that will be presented to the executive board for their approval to release the next tranche of US$ 333 million under Extended Fund Facility program to Sri Lanka, Julie Kozack, Director, Communications Department, IMF said.
She answered questions raised by a journalist at a media conference held in Washington last week, where she noted that the staff will include a full assessment of these measures in the staff report that will be published following approval by the Executive Board at its meeting expected to take place in the coming weeks.
It has to be followed by the government authorities in the implementation of the IMF supported economic reform programme for the prior actions, she added.
But moving away from the recommendations of the IMF could strain the relationship of Sri Lanka with the international financial institution, said a former treasury secretary with in-depth knowledge in the negotiations of the IMF.
He further added that this may create problems in the future with the IMF and other international lenders regarding negotiations and may hamper the access to further foreign funding for the country.
President, Anura Kumara Dissanayake who is also the Finance Minister, declared an increase in the Income Tax-free threshold to Rs.150,000 from Rs.100,000.
This may lead to a shortfall in the revenue if too large a proportion of the base is exempted from the tax and the correct figures would depend upon income distribution.
This, however, could be compensated for by the President’s proposition to enhance the rate of Withholding Tax, (WHT), to 10 per cent from 5 per cent.
Tax exemption on the export of services will be removed and a concessionary rate of 15 percent is proposed to be charged. This may render Sri Lanka less competitive compared to countries maintaining tax exemptions or lower rates for export-oriented industries.
The IMF has proposed tax reforms for Sri Lanka, to be effective from January 1, 2025, in a bid to stabilise the economy and increase the tax-to-GDP ratio to 14 per cent by 2026.
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