Wednesday, February 21, 2024

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Tax reforms to alleviate financial strain on professionals /middle class

By: Staff Writer

Colombo (LNW): On the eve of unveiling Budget 2024 on November 13 the Professional Trade Union Alliance, consisting of 47 professional organizations voiced their grievances about the heavy tax burden placed upon them and urged for changes in the tax structure to alleviate their financial strain.

The Government will provide relief to the taxpayers and will spend more on welfare and development in order to raise the quality of the life of Sri Lankans once the required revenue figures are optimized through the widening of the tax base, State Finance Minister Ranjith Siyambalapitiya said.

In June, the Inland Revenue Department (IRD) issued a gazette notification requiring doctors, lawyers and vehicle owners to open an income tax account while anyone over 18 years is required to open a tax file from 2024 January 1 onward

Under this set up eminent economic expert MP Dr. Harsha de Silva , along with his team of analysts, embarked on an investigative journey scrutinizing the existing tax structures and their implications.

Their findings shed light on two critical aspects of taxation in Sri Lanka: the Pay-as-you-earn (PAYE) tax and the Personal Income Tax (PIT).

The PAYE tax, initially projected to yield Rs 68 billion in revenue for the government, was later revised to Rs 100 billion.

However, the latest figures as of the end of September indicate that the government has already collected Rs 107 billion through PAYE, achieving a 70% compliance rate.

Extrapolating from this data, it is conceivable that the government could potentially earn up to Rs 125 billion by year-end with the current compliance rate or a substantial Rs 178 billion with full compliance. These numbers challenge the initial underestimation of PAYE revenue.

In stark contrast, the Personal Income Tax (PIT) fell significantly short of expectations. The government had projected Rs 115 billion in revenue by the end of last month, but the actual collection stood at a mere Rs 25 billion.

Extrapolating this data for the entire year reveals an estimated Rs 37.5 billion in revenue, far below the initial estimate.

This discrepancy highlights a concerning issue: voluntary compliance with PIT is distressingly low, while PAYE is collected more forcibly.

MP Harsha has proposed an alternative scenario to reform the existing PAYE tax structure. Under this proposal, the PAYE tax structure would begin at 6% for incomes exceeding LKR 150,000, with a progressive increase of 4% for each additional salary slab of LKR 50,000 up to LKR 250,000.

Beyond that, there would be a 2% increment for each subsequent 50,000 slab, capping at a maximum tax rate of 24% for incomes of LKR 500,000 or more.

Additionally, to bridge the revenue gap created by these changes, a 15% surcharge tax would be applied to individuals earning over LKR 750,000. The surcharge is an additional 15% of the tax, not 15% additional tax.

MP Harsha de Silva’s proposed alternatives offer a path toward a fairer and more efficient tax system that can simultaneously support government revenue targets and ease the financial strain on professionals and the middle class. It is a step toward a brighter and more prosperous future for the nation.

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