Sri Lanka hikes tax rates to boost government revenues

The crisis-hit nation’s inflation rose to 39.1 p.c in Could, its statistics workplace mentioned on Tuesday.

The island nation of twenty-two million individuals has been battered by its worst financial disaster since independence from Britain in 1948, with a extreme scarcity of overseas forex stalling imports of necessities, together with meals, gasoline and medicines [FIle: Adnan Abidi /Reuters]

Sri Lanka’s cash-strapped authorities has introduced a taxation overhaul to spice up income amid the nation’s crippling financial disaster, climbing worth added taxes and company earnings tax, and slashing the aid given to particular person taxpayers.

Prime Minister Ranil Wickremesinghe, who took workplace this month and plans to current an interim price range inside weeks, mentioned on Tuesday the measures had been essential as the present state of presidency funds was unsustainable.

“The implementation of a robust fiscal consolidation plan is crucial via income enhancement in addition to expenditure rationalization measures in 2022,” Wickremesinghe’s workplace mentioned in a press release.

Sri Lanka’s inflation rose to 39.1 p.c in Could, its statistics workplace mentioned – a report degree, in contrast with the earlier excessive of 29.8 p.c recorded in April.

A rise in worth added tax (VAT) to 12 p.c from 8 p.c with quick impact is among the many key tax will increase introduced on Tuesday, which is predicted to spice up authorities revenues by 65 billion Sri Lankan rupees ($180.56m).

Different measures, together with rising company earnings tax to 30 p.c from 24 p.c from October, will earn a further 52 billion rupees ($143.46m) for the exchequer.

Withholding tax on employment earnings has been made obligatory and exemptions for particular person taxpayers have been decreased, the assertion mentioned.

The island nation of twenty-two million individuals has been battered by its worst financial disaster since independence from Britain in 1948, with a extreme scarcity of overseas forex stalling imports of necessities, together with meals, gasoline and medicines.

The roots of the disaster lie in tax cuts enacted by President Gotabaya Rajapaksa in late 2019, which got here months earlier than the COVID-19 pandemic that battered the nation’s profitable tourism trade and led to a drop in overseas employees’ remittances.

The tax cuts triggered annual public income losses of about 800 billion rupees ($2.2bn), the prime minister’s workplace mentioned in its assertion.

The brand new tax regime and COVID-19’s influence, along with the pandemic aid measures, widened the price range deficit considerably to 12.2 p.c of gross home product (GDP) in 2021 from 9.6 p.c of GDP two years earlier.

In an interview with the Reuters information company this month, Wickremesinghe – who additionally holds the finance ministry portfolio – mentioned he would reduce expenditures down “to the bone” within the upcoming interim price range and reroute funds right into a two-year aid programme.

The tax hikes are aimed toward placing public revenues again at pre-pandemic ranges and centered on fiscal consolidation because the nation seeks a mortgage package deal from the Worldwide Financial Fund (IMF), mentioned Lakshini Fernando, a macroeconomist at funding agency Asia Securities.

“The tax will increase are undoubtedly a really optimistic first step, particularly for IMF talks and debt restructuring,” Fernando mentioned.

“This was required to take ahead discussions and also will assist the federal government in talks with bilateral and multilateral companions to safe extra funding,” Fernando mentioned.