By: Staff Writer
August 20, Colombo (LNW): Sri Lanka’s plan to offer relief to personal income tax payers could result in a loss of Rs2.66 billion at constant price or (0.08% of the country’s GDP), according to Treasury Secretary Mahinda Siriwardana.
This shortfall in revenue would be offset by additional tax measures. President Ranil Wickremesinghe recently mentioned that discussions are ongoing with the International Monetary Fund (IMF) to provide income tax relief by expanding the tax brackets.
The government’s tax relief roposal involves increasing the threshold for personal income tax from 500,000 rupees to 720,000 rupees.
Currently, the maximum personal income tax rate has been raised to 36 percent from 24 percent, and the taxable monthly income threshold has been lowered to Rs. 100,000. From Rs. 250,000
The IMF, after reviewing the proposal, recommended providing more relief to lower tax brackets, maintaining similar relief for mid-level taxpayers, and slightly reducing relief for higher earners while keeping the essence of the proposal intact.
The Treasury’s proposal suggests maintaining a tax-free threshold of Rs. 1.2 million expanding the tax band to Rs. 720,000 from Rs 500,000, and keeping the top tax rate at 36 percent.
In contrast, the IMF’s counterproposal retains the Rs. 1.2 million tax-free threshold but extends the first tax band from Rs. 500,000 to Rs. 1 million with subsequent bands shifting up by Rs 500,000, while maintaining the top tax rate at 36percent, finance ministry sources said.
Siriwardana revealed that negotiations with the IMF on this amendment began as early as September 2023. Implementing such a proposal wasn’t feasible earlier due to revenue not meeting the targets.
However, with an improvement in revenue collection this year, it is now possible to negotiate adjustments to the Personal Income Tax (PIT) structure.
These adjustments aim to provide relief to taxpayers in the middle-income brackets while ensuring that the highest earners do not receive disproportionate benefits.
The estimated cost of these adjustments is about 0.08% of GDP, and compensatory revenue measures have been discussed with the IMF to ensure that revenue targets remain on track.
Despite radical economic reforms post-1978, Sri Lanka’s currency suffered rapid depreciation due to attempts to target money supply without a floating exchange rate after abandoning an external anchor.
However, post-war, the return of peacetime monetary instability and inflationary policies led to crises following rate cuts, which reduced growth and tax revenues, resulting in ad hoc tax hikes.
Aggressive targeting of the call money rate led to dual stabilization crises within the same program, stifling growth while accelerating monetary debasement and debt accumulation. During the current stabilization crisis, income tax was increased, prompting several private companies to raise salaries to increase disposable income and prevent brain drain, thereby also boosting income tax collections. The central bank and some state-owned enterprises have also significantly increased salaries.
