Sri Lanka raises taxes to boost state revenue

Main opposition Samagi Jana Balawegaya's (SJB) economic spokesman Harsha de Silva criticised the tax hike.
A Sri Lankan government. (Photo | AP)
A Sri Lankan government. (Photo | AP)

COLOMBO: Sri Lanka has raised taxes with retrospective effect by issuing a special gazette, which the analysts said was a move to boost state revenue in the midst of the anticipated deal with the IMF to help the bankrupt island nation tide over its worst economic crisis.

According to the gazette issued on Tuesday, effective from April 1, 2022, a person with a monthly income above 100,000 Sri Lankan rupees will have to pay taxes.

The annual threshold-free income is 1,200,000 rupees down from the previous level of 3,000,000 rupees.

If a person annually earns 3 million rupees, which was tax-free earlier, the first 500,000 rupees after the 1,200,000 rupee tax-free threshold, will be charged 6 percent, next 500,000 at 12 percent, next 500,000 at 18 percent and the remaining 300,000 at 24 per cent.

The corporate tax has been increased to 30 per cent from 24 per cent.

The gazette was issued after President Ranil Wickremesinghe, who is also the Finance minister, informed Parliament this week on the need to raise taxes to boost state revenue.

"The tax structure of the country should be completely reviewed and changed. At present around 80 per cent of the total amounts of taxes are indirect. Every citizen of this country pays taxes without knowing it. They pay taxes for activities that have nothing to do with them. Even the last poor citizen of the country has been caught-up in this tax net. Changing this situation is the need of the era," he said.

"According to the tax policy we adopted in 2019, around 14 per cent of the gross domestic product was earned from taxes. However, due to the change in the tax policy, the tax revenue decreased to 8.5 per cent. Now we have discussed with the International Monetary Fund and agreed to raise that amount again to 14 per cent," he said.

Sri Lanka has made progress in striking a staff-level agreement with the IMF for a USD 2.9 billion facility extending over four years.

The move to raise taxes is being seen as reforms agreed with the IMF.

Main opposition Samagi Jana Balawegaya's (SJB) economic spokesman Harsha de Silva criticised the tax hike.

"We agree that reforms are needed. But it must be done in a manner that people are able to face them. The food inflation is over 90 per cent, people's incomes have dropped by 50 per cent," de Silva told reporters.

Sri Lanka, a country of 22 million people, is going through its worst economic crisis since its independence in 1948 which was triggered by a severe paucity of foreign exchange reserves.

In mid-April, Sri Lanka declared its international debt default due to the forex crisis.

The country owes USD 51 billion in foreign debt, of which USD 28 billion must be paid by 2027.

There have been street protests in Sri Lanka against the government since early April due to its mishandling of the economic crisis.

A crippling shortage of foreign reserves has led to long queues for fuel, cooking gas, and other essentials while power cuts and soaring food prices have heaped misery on the people

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