The highly controversial capital gains tax, which was put on the back burner for little over a year, is now making a comeback as part of the new Inland Revenue Bill, as the cash-strapped coalition regime, burdened with massive debts, attempts to shore up its revenues.
Moody’s Investors Service, one of the ‘big three’ credit rating agencies, said the revenue reforms in the new bill will bolster the government revenue, supporting its fiscal consolidation, debt sustainability and thereby strengthening Sri Lanka’s credit profile.
“The bill will, among other things, simplify the sources of income, introduce a three-tier tax structure with reduced exemptions and reintroduce the capital gains tax,” Moody’s said in a special note on the new Inland Revenue Bill, which is likely to become law in the next couple of months.
Since coming into power, the coalition government made several attempts to reintroduce the capital gains tax. However, these attempts were either thwarted by the people or withdrawn by the government itself as such a tax could kill investments.
It now appears that the much-disliked capital gains tax has been casually incorporated into the new Inland Revenue Bill, which is said to have been developed with close consultation of the International Monetary Fund (IMF).
The capital market stakeholders would be the most worried lot as the revival of the tax could kill the stock market, which performed poorly until recently. The industry stakeholders last year made representations to the government requesting the capital market to be excluded from the capital gains tax.
Meanwhile, the IMF is also holding back the release of the third tranche of the US $ 1.5 billion Extended Fund Facility until the new revenue bill is tabled in parliament.
“We expect the bill to face limited opposition in parliament,” Moody’s said.
It has been reported that some important officials of the Inland Revenue Department had been left out from the drafting process of the new revenue bill.
Some tax specialists say the new bill is a carbon copy of the tax law the IMF introduced in Ghana, sometime back.
Moody’s expects the new tax laws in the proposed bill will improve the general government revenues up to 14.7 percent of gross domestic product (GDP) in 2017 and 15 percent in 2018.
The IMF projects revenues to rise further up to 16 percent of GDP by 2021.