IMF targets on point in this year’s budget
The President presenting the budget.
The 2025 budget aligns with IMF targets, encouraging investment in the energy sector and encouraging foreign investors through competitive tariff rates.
The ‘Clean Sri Lanka’ initiative allocates Rs. 3 billion for solar infrastructure development, and renewable energy incentives include tax benefits for solar and wind projects. Green bonds finance sustainable energy projects, attracting local and foreign investments and promoting renewable energy sources. Total revenue and Primary Surplus remain consistent.
Suresh R.I. Perera, Principal, Head of Tax and Regulatory, KPMG Sri Lanka emphasised that like last year’s budget proposals, this year too there is no introduction of wealth, inheritance, gift or property taxes recommended by the IMF in their review report. Furthermore, the Imputed Rental Income Tax recommended by the IMF has specifically been discarded in the budget speech. “The Capital Gains Tax rate applicable on individuals and partnerships will be increased to 15 per cent from the present 10 per cent whilst all other entities will be charged at 30 per cent.”
Tax law amendments
The budget proposals contain amendments to several tax statutes including the Inland Revenue Act, VAT Act, Social Security Contribution Act, Stamp Duty and the Tax Appeals Commission Act. Mr. Perera also pointed out that the tax changes presented by the President in Parliament last December about individual and corporate income tax changes will be adopted.
“The budget has concessionary provisions for senior citizens. They have the option of filing their income tax returns manually though all the others must file electronically. Furthermore, senior citizens could avoid withholding taxes being deducted from their deposit interest, by providing a self-declaration to the financial institutions to the effect that their taxable income from all the sources is below Rs.1.8 million. Other individuals who are not reaching tax liable threshold of Rs.1.8 million must rely on the refund mechanism,” he told The Sunday Times Business on Thursday.
However, Mr. Perera suggested that a “Direction Mechanism” would be the more appropriate solution to resolve, withholding taxes being imposed on non-senior citizens instead of the budgetary proposal of extending the Tax Refund Scheme currently applicable to senior citizens to non-senior citizens. He also expressed dissatisfaction with the decision to abolish the SVAT scheme though a specific date is not mentioned in the budget speech. This could hurt stakeholders, including exporters who are earning foreign currency.
He welcomed the move to simplify the income tax instalment computation method by shifting to the preceding year basis used under the old Inland Revenue Act. Furthermore, he pointed out the decision to abolish the requirement to file the Statement of Estimated Tax form (SET Form), a requirement that was introduced in 2018 under the new Inland Revenue Act, as a major step to simplify tax compliance.
The amendment to the Tax Appeals Commission Act to increase the fees to lodge appeals to the Tax Appeals Commission and the Court Appeal are new measures, opined Mr. Perera. The term of the members of the Tax Appeals Commission and the legal advisers would be increased from three to five years.
Mr. Perera noted that the reform of the tax system should be carried out scientifically. The tinkering of tax statutes on a trial and error basis is not satisfactory, noting that the same processes that have been practised in many past years in reforming the taxes are reflected in this budget too.
The introduction of several new legal frameworks to manage state-owned enterprises (SOEs) and facilitate public-private partnerships (PPPs) was announced in the budget.
The State Business Enterprises Management Act will ensure the effective management of SOEs, making them free from political influence and allowing them to operate as commercially driven institutions. The Public-Private Partnership Investment Management Act will encourage foreign and domestic private investments in collaboration with the public sector. The government aims to create an attractive legal framework for investment and conduct such investments as partnerships, providing public and government support.
Rohan Masakorala, Founder of Shippers Academy International commenting on the budget, said that many of these plans have been there in the past but have not been taken forward mainly due to bad politics and governance. He said for trade facilitation the elephant in the room is the outdated Customs Act. He said he was happy that in the budget speech, it was mentioned that a new Customs Act would be brought in but when going into detail it was surprising to see in the annexure this is not included for 2025 among the other 11 acts proposed to be tabled in Parliament. This was disappointing, he observed.
Mr. Masakorala, on the sidelines of the Certified Management Accountants-organised budget seminar on Wednesday, said the government must look outwards to understand what is happening in competition and stop focusing only on the location slogan. “Shipping, logistics and investments won’t happen with protectionism. We need to liberalise the key investment sectors such as logistics and ports to make use of the location. On the other hand, the country is full of outdated laws, labour laws, commercial dispute settlement etc. These must be world-class for business and investor confidence.”
He also said export targets should be realistic as in the past numbers can be put out, but execution is very critical. Economic growth is linked to these reforms and walking the talk, not just ideas.
A committee under the Prime Minister’s Secretary has been appointed to review the functions and utility of various government agencies. The government will create a holding company under full government control to improve governance, financial discipline, and operational efficiency. The government will also encourage private and appropriate state entities to raise funds through listed equity and debt capital markets.
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