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IMF claims Sri Lanka tax hike to help creditors regain confidence

The International Monetary Fund (IMF) has defended the income tax hike and other tax reforms as essential for fiscal stability critical for Sri Lanka while declaring that it recognizes the economic hardship of people.

According to statistics presented in the 2023 budget speech, the government expects to increase revenue from taxes to Rs.3.1 trillion (US$8.5 billion) from Rs 1.3 trillion 2021.

The document shows that income tax would go up three times from Rs.302 billion ($824 million) to Rs.912 billion rupees ($2.5 billion)

The value-added tax (VAT) applied on almost all goods and services was raised from 8.0 percent to 12 percent with immediate effect, while corporate taxes were also increased from 24 to 30 percent.

Sri Lanka’s recent tax rises are in line with international comparisons and needed to help creditors regain confidence, the International Monetary Fund said on Thursday, backing the crisis-hit country’s effort to lock down a $2.9 billion bailout.

An IMF statement said the hikes, which included an up to 36% rise in income taxes, were essential to tackle revenue collection that has been low by global standards.

External financing would not bridge the gap needed to fund essential expenditure, the statement added.

Efforts to increase tax revenues should be pursued in a growth-friendly manner while protecting the poor and most vulnerable,” the IMF said. “It is however also important that those who can most afford it make commensurate contributions to the financing of the necessary government expenditures.”

“We understand the hardship people of Sri Lanka are experiencing at this time. Increases in the cost of living, loss of employment and livelihood, and falling real incomes have hit large parts of the population, and particularly the poor and vulnerable who have no buffers to withstand these hardships,” said IMF’s Senior Mission Chief for Sri Lanka Peter Breuer and Sri Lanka Mission Chief Masahiro Nozaki.

Responding to recent media questions around income tax hikes, the IMF officials pointed out that the current economic crisis has a number of origins, including the Government’s inability to meet Government spending needs through its revenue collections.

“Sri Lanka is among the countries to collect the least amount of fiscal revenue in the world, with tax revenue to GDP ratio at only 7.3% in 2021. External creditors are not willing to provide financing to fill this gap,” IMF officials added.

In that context they emphasized that: “Tax reforms are needed to correct this imbalance and only with appropriate tax receipts will the Government be able to fund essential expenditures, and avoid further slashing of critically important outlays. These reforms will also help regain the confidence of creditors.”

IMF officials said efforts to increase tax revenues should be pursued in a growth friendly manner while protecting the poor and most vulnerable.

“It is however also important that those who can most afford it, make commensurate contributions to the financing of the necessary Government expenditures,” they added.

The tax package the authorities have introduced, including the new tax rate schedule for the personal income tax, IMF officials said “helps to meet these objectives. The tax rates proposed under the authorities’ program are also in line with international comparison.”

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