Colombo, May 31: The Sri Lanka Prime Minister and Minister of Finance Ranil Wickremesinghe has announced hikes in taxes to get more revenue for tiding over the ongoing economic crisis.
VAT will go up from 8% to 12% and the telecom levy will go up from 11.5% to 15%.
A statement from the PM’s office said that the following will be done:
Decreasing VAT threshold from Rs. 300 million per annum to Rs. 120 million per annum effective from October 1, 2022. Reviewing VAT exemption schedule and removal of unproductive exemptions based on the economic benefits. Removal of the VAT exemption on Condominium Residential Apartments effective from October 1, 2022.
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Removal of zero percent VAT rate granted on the supply of services by a hotel, guest house, restaurant or other similar businesses providing similar services, registered with the Sri Lanka Tourism Development Authority, if sixty per centum of the total value of the inputs are sourced from local supplies/sources and imposition of 12 percent tax rate on the same effective from October 1, 2022.
Making any other consequential amendments due to the above proposals.
“The VAT rate was reduced from 15 percent to 8 percent with effect from December 1, 2019 and the threshold for registration of VAT was increased from Rs. 3 million per quarter or Rs. 12 million per annum to Rs. 75 million per quarter or Rs. 300 million per annum effective from January 1, 2020. Due to the above reforms coupled with the impact of COVID-19, VAT revenue declined by 47 percent to Rs. 233.8 billion in 2020 from Rs. 443.9 billion in 2019,” the statement said.
The telecommunication levy, meanwhile, was reduced from 15 percent to 11.25 percent effective from December 01, 2019, which led to a decrease in revenue by 28 percent to 13.1 billion rupees in 2020 from 18.3 billion rupees in 2019, the PM’s statement said, explaining the increase.
Income tax reforms have also been proposed, along with changes to betting and gaming levies.
Meanwhile, the following amendments have been proposed to the Fiscal Management (Responsibility) Act, No. 3 of 2003:-
Inclusion of a provision where exceeding the Treasury Guarantee limit is permitted in the case where there is an exceptional depreciation or other unforeseen circumstances.
Inclusion of an escape clause to ensure flexibility that the Government may deviate from the operational target(s) or fiscal rule(s) due to unforeseen circumstances. This would eliminate the need to continually amend the Act each time when a target is breached.
The cabinet of ministers have approved the proposed reforms, the statement said.
The PM’s statement noted that the low tax regime introduced in late 2019 following the election of President Gotabaya Rajapaksa caused an annual loss of around LKR 600 billion – 800 billion in tax revenue to state coffers.
“Therefore, these reforms are now being looked as policies that led to a significant loss of government revenue, partly due to the spread of COVID-19 pandemic in 2020/2021 and related developments, which affected the revenue generation process, ultimately resulting in the lowest revenue to GDP ratio in the region. The revenue to GDP ratio has declined to 9.1 percent in 2020 from 12.7 percent in 2019 and further deteriorated to 8.7 percent in 2021. This is significantly lower than the average revenue ratio of around 25 percent of GDP in emerging market and developing economies.
“The low tax regime, the impact of the COVID-19 pandemic on revenue mobilisation, together with the pandemic relief measures, widened the budget deficit significantly to 11.1 percent of GDP in 2020 and 12.2 percent of GDP in 2021 from 9.6 percent of GDP in 2019. This has led to an increase in the government debt to GDP ratio to 100.6 percent in 2020 and 104.6 percent in 2021 from 86.9 percent in 2019,” it said.
Sri Lanka introduced a low tax regime in late 2019. The reforms included the reduction of tax rates of Value Added Tax (VAT), Personal Income Tax (PIT) and Corporate Income Tax (CIT), and narrowing tax bases of VAT and PIT, while introducing a plethora of tax incentives, such as tax exemptions for agriculture and Information Technology (IT) and enabled services, tax deductions and tax holidays. This caused an annual loss of around LKR 600 billion – 800 billion in tax revenue to state coffers.
Therefore, these reforms are now being looked as policies that led to a significant loss of government revenue, partly due to the spread of COVID-19 pandemic in 2020/2021 and related developments, which affected the revenue generation process, ultimately resulting in the lowest revenue to GDP ratio in the region. The revenue to GDP ratio has declined to 9.1 percent in 2020 from 12.7 percent in 2019 and further deteriorated to 8.7 percent in 2021. This is significantly lower than the average revenue ratio of around 25 percent of GDP in emerging market and developing economies.
The low tax regime, the impact of the COVID-19 pandemic on revenue mobilization, together with the pandemic relief measures, widened the budget deficit significantly to 11.1 percent of GDP in 2020 and 12.2 percent of GDP in 2021 from 9.6 percent of GDP in 2019. This has led to an increase in the government debt to GDP ratio to 100.6 percent in 2020 and 104.6 percent in 2021 from 86.9 percent in 2019.
This fiscal imbalance has significant adverse spillover effects over the economy. Sri Lanka’s economic outlook remains vulnerable with the unprecedented inflationary pressures, persistently large fiscal and balance of payment financing needs, large debt overhang and critically low level of reserves and pressures on the exchange rate. Economic growth will be adversely affected by the foreign currency shortage and ensuing economic conditions prevailing in the country as well as loss of business and investor confidence due to credit rating downgrades.
The loss of access to international markets and the relatively low amount of other foreign exchange inflows to the government have created substantial issues in financing the government budget deficit. In 2020 and 2021, the entire budget deficit was financed through domestic sources as there were net repayments to the foreign sources. Of the domestic sources to finance the budget deficit, the majority was obtained from the banking sources, particularly from the Central Bank of Sri Lanka, given the unavailability of sufficient amount of net financing in the domestic non-bank sources. Continuous significant amount of Central Bank monetary financing has adversely affected the economy, particularly with the significant pressure on the inflation and the exchange rate.
At present, the situation has aggravated to a very critical level where the General Treasury has to increasingly obtain Central Bank financing to make the government expenditures, including a substantial part of interest, salaries and wages, pensions and Samurdhi payments etc. This is clearly unsustainable and hence the implementation of a strong fiscal consolidation plan is imperative through revenue enhancement as well as expenditure rationalization measures in 2022 and beyond to ensure macroeconomic stability to support the medium to long-term economic growth objectives of the country.
In the above background, tax reforms are proposed to be implemented over the immediate and near term.
The Cabinet of Ministers has approved a proposal by Prime Minister and Finance Minister Ranil Wickremesinghe to amend five Act of Parliament to boost Government revenue The five are – Inland Revenue Act – VAT Act – Telecommunication Levy Act – Betting & Gaming Levy Act – Fiscal Management Act. The move is in line with the new interim government pronouncements that State revenue has to be considerably increased to meet essential expenditures amidst the economic crisis. The Government has announced a relief Budget as an interim measure. Cabinet on Monday also approved to present a Rs. 695 billion supplementary budget to Parliament, the PM’s office said.
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