IMF calls for second generation tax reforms

With the first generation of tax reforms failing to generate intended revenues, International Monetary Fund (IMF) has urged authorities to bring about second generation of tax reforms focused on broadening the tax base through improved administration.

“Revenue growth has not responded as envisaged to a first round of tax reforms, undermining capital investment plans; despite recent appropriate price adjustments, state-owned enterprises remain prone to large losses; and the current account deficit remains elevated and financed mainly through debt-creating flows,” IMF staff report noted.

Comprehensive tax reforms were introduced in 2010 and 2011 to simplify the tax structure and broad base the tax system, under which corporate income tax was brought down from 35 percent to 28 percent; the VAT rate was unified at 12 percent; and certain other taxes were abolished.

“However, the pace and quality of fiscal adjustment fell short of ambitious plans, and tax rate reductions generally took precedence over base broadening, while costrecovery pricing at state-owned energy companies has yet to emerge,” IMF staff report remarked.

The total government revenue as a percentage of GDP declined significantly to 13.0 percent in 2012 compared to 14.3 percent in 2011 entirely due to the decline in tax revenue as a percentage of GDP. Revenue is projected to increase to 15.3 percent of GDP by 2016.

Sri Lanka’s Tax revenues as a percentage of GDP continued to decline to 11.1 percent in 2012 from 12.4 percent in 2011, lowest amongst the regional peers according to IMF.

Shortly after the conclusion of the war in 2009, President Rajapaksa appointed a 10-member committee to study the country’s tax system and make recommendations to increase revenues. Three years on since the submission of the recommendations; it appears the Tax Commission Report has been put on the back burner by the authorities.

Further, it was only the first week of this month Senior Minister, Dew Gunasekara had pointed out the visiting IMF delegation that the country was in a dire financial crisis due to unprecedented decline in state income over the years.

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