Sri Lanka revises corporate tax, withholding tax to raise revenue

REUTERS: Budget proposals presented in Sri Lanka on Thursday included revisions to corporate and withholding taxes to boost revenue and cut the 2017 fiscal deficit to 4.6 percent of GDP from this year’s 5.4 percent.

The government aims to boost its 2017 tax revenue by 27 percent to Rs.1.82 trillion ($12.35 billion) year on year, to meet a commitment given to the International Monetary Fund in return for a $1.5 billion loan in May.

Finance Minister Ravi Karunanayake said corporate income tax will have three slabs of 14 percent, 28 percent and 40 percent, instead of the current single rate of 28 percent. It is expected to bring Rs.32 billion out of the total 140 billion rupees of new revenue the government is budgeting to raise.
The withholding tax increase from 2.5 percent to 5 percent is expected to raise an additional Rs.26 billion, the budget document showed.
“Tax efficiency in the country is low relative to its peer countries. Tax administration is negatively impacted by the complex tax structure and the large number of exemptions and tax holidays, leading to a narrow tax base,” Karunanayake told the parliament in his more than three-hour speech.
The coalition government of President Maithripala Sirisena’s centre-left party and Prime Minister Ranil Wickremesinghe’s centre-right party struggled to implement key 2016 budget proposals as they disagreed on raising the Value Added Tax (VAT) until early this month.
The government’s medium-term economic strategy foresees cutting the deficit to 3.5 percent of GDP by 2020 while increasing the direct taxes.
Karunanayake expects revenue to improve through a more streamlined and simplified automated tax collection system.
He also said a 10 percent capital gain tax will be introduced from April 1, 2017 without much elaborating. The move is expected to add Rs.5 billion into the government coffer.
The government has more than doubled personal tax files to 1.4 million this year from the last year’s 599,000 in a move to raise Sri Lanka’s low tax compliance rate.
The $82 billion economy’s tax-to-GDP ratio is forecast to rise to 13.5 percent in 2017, from this year’s 11.6 percent.

“This budget shows we are progressing more in the direction of more direct taxation,” Anushka Wijesinghe, chief economist of the Ceylon Chamber of Commerce told Reuters.
On the expenditure side, Karunanayake announced a raft of proposals to boost the education sector.
The government faced a debt and balance-of-payments crisis earlier this year before the IMF came to the rescue. The Central Bank expects the $82 billion economy to grow between 5-5.5 percent this year, higher than last year’s 4.8 percent.