Sri Lanka passes reforms intended to simplify taxes, increase revenue

REUTERS: The Sri Lanka parliament passed tax reforms yesterday that should simplify the tax system, widen the tax base and increase government revenue, as agreed with the International Monetary Fund (IMF) in exchange for a US $ 1.5 billion, three-year loan.

The Inland Revenue Act, Sri Lanka’s biggest major tax reform since it gained independence from Britain in 1948, should increase government revenue by at least Rs.45 billion per year, Finance Minister Mangala Samaraweera said.

“Under the current complicated income tax framework, we have faced several risks. Sri Lanka has become one of the countries which gets lowest tax revenue in the world,” Samaraweera told parliament.

Few companies and people are registered to pay taxes, Samaraweera said, and they pay less tax than they should.

The reforms are expected to support fiscal consolidation, make the tax system more efficient and equitable and generate resources for social and development programs, the IMF, which approved its loan last year, said in August.

Some of the proposals will take effect October 1. More will be implemented at the start of the next fiscal year, on April 1, 2018, finance ministry officials have told Reuters. Samaraweera said the reforms would broaden the direct tax base and reduce the indirect tax burden on the people.
The bill follows pressure from the IMF to increase revenues after repeated balance-of-payment crises that have led to a 29 percent depreciation in the Sri Lankan rupee since 2008 and external borrowing surged in the final phase of a 26-year war against 
Tamil separatists.

Tax revenue has risen to 12.4 percent of gross domestic product (GDP) in the last two years, after falling to 10.1 percent in 2014. It increased 9.2 percent to Rs.1.66 trillion last year, as Sri Lanka hit its budget deficit target of 5.4 percent of GDP, down from 7.4 percent in 2015.