The International Monetary Fund (IMF) has insisted that the Sri Lankan Government significantly increase tax revenue as percentage of its Gross Domestic Product (GDP), says Sri Lankan President Ranil Wickremesinghe, adding that failure to comply would lead to a return to the infamous era of queues seen during the first half of this year.
“The agreed goal is to achieve 14.5-15% of GDP as a percentage of tax revenue by 2026. If Sri Lanka withdraws from this undertaking, IMF assistance will not be received. Without IMF certification, the support of international financial institutions such as the World Bank, Asian Development Bank, and the countries that have supported us financially, will not be forthcoming. If that happens, the country will return to the era of queues,” he said, delivering a special statement on the government’s recent tax reforms.
He added that the IMF had advised on the need for a surplus in Sri Lanka’s primary budget, which the government agreed to since the country requires the IMF’s support, and that it had thus been decided to increase the country’s tax revenue from 8.5% of GDP to 14.5% by 2026.
“Initially, a decision had to be made on the manner in which the income is to be increased. Money was printed due to the decrease in income. During the past two years, Rs 2,300 billion (Rs 2.3 trillion) has been printed, resulting in inflation rising to 70-75%, and even higher in respect of food inflation. These increases need to be controlled, while securing income. Therefore, during the discussions with the IMF, a new tax system has been proposed.”
Explaining the increase in direct taxes, President Wickremesinghe said that the IMF wanted the personal tax structure changed, as direct taxes constituted only 20% of Sri Lanka’s tax revenue, and that efforts to convince the IMF to allow the tax relief threshold of Rs 200,000 were not successful.
“The majority of the country’s citizens, even those below the poverty line, had no choice but to pay indirect taxes. The direct tax revenue is 20% and 80% has been derived from indirect taxes. The IMF that particularly had reservations in this regard was of the view that the amount of tax obtained through direct taxes should exceed 20%. The IMF noted that this would not be successful otherwise, and ordinary citizens would need to pay taxes. Therefore, according to this framework, and also to achieve the goals for 2026, the Treasury and the IMF discussed the possibility of limiting taxation on those who have an income of Rs 200,000, which however, did not materialise. Eventually, this resulted in the decision to levy income tax on people earning over Rs 100,000. Today, this has become a vital concern amongst citizens,” he said.
With the export industry disgruntled about the increase in taxes applicable to the sector, the President explained that the IMF had pointed out that export industries in other economies were not exempt from taxes.
“The IMF informed that even the export industries would be required to pay taxes. The IMF pointed out that in countries with an export economy, the related industries were liable for tax. The IMF also upheld that Sri Lanka’s primary export economy is based on the plantation industry. During British rule, taxes were charged from every plantation sector, including tea, coconut, and rubber. Therefore, if the country has to move towards that goal, taxes will have to be paid. The export sector has now questioned this aspect, and the related concerns are to be submitted to the IMF.”
He blamed the Gotabaya Rajapaksa Government’s tax cuts in late 2019 for derailing the IMF Extended Fund Facility (EFF) programme that had been entered into during the Yahapalana Government’s tenure, when Sri Lanka’s revenue was between 14.5-15% of GDP.
“However, in November 2019, the country’s taxes were drastically reduced, with government revenue decreasing to 8.5%. In this context, the IMF set aside the agreements and declared that it was unable to provide the agreed assistance. That year the government lost approximately Rs 600-700 billion in revenue. Simultaneously, the country had to face the Covid-19 pandemic. These issues are the main factors that led to the collapse of Sri Lanka’s economy,” he said.
The President warned that tougher times ahead will have to be faced, and said that these decisions are not being taken wilfully but reluctantly, and that they will be reconsidered periodically.
“In the same manner of conducting the debt restructuring programme successfully, if a bountiful Maha season is achieved as expected, it will help in reducing economic pressure. Measures to increase the country’s foreign reserves have also been discussed, and once all these steps have been implemented, the country can move forward.”
(By arrangement with ‘The Morning’)