By: Staff Writer
Colombo (LNW): Sri Lanka’s tax burden is shouldered by those who can most afford it and the tax structure focuses on a few core taxes (personal and corporate income tax, VAT, core excises) says Finance Ministry secretary Mahinda Siriwardena.
Addressing the Inaugural Convocation of Chartered Institute of Taxation of Sri Lanka Mr Siriwardena noted that tax exemptions are eliminated as far as possible to ensure that taxes are neutral between sectors and entities and distortions are limited.
The initial focus of the tax reforms was on optimising tax revenue from progressive direct taxes such as personal and corporate income taxes.
There has been strong public opinion regarding the personal income taxes in particular. Sri Lanka collects around 0.5% of GDP from personal income taxes (PIT) whereas regional peers collect around 2% of GDP from PIT, he claimed.
The PIT structure was designed on a scientific basis considering the official income and expenditure survey (with estimates adjusted for inflation up to the point of implementation).
Accordingly, only the top 20% of Sri Lankan income earners are liable for income tax at a tax-free threshold of Rs. 100,000 per month.
Illustrating further, he added that the median income earner of the 10th highest income decile, would pay 5.8% of his or her total monthly income as tax,.
The Government is fully cognisant of the difficulties that are faced by tax payers given the increase in PIT rates and narrow tax slabs.
However, this is a crucial and essential contribution of the relatively high income-earners of the country towards the resolution of the economic crisis.
Finance Ministry is also fully aware of the various proposals presented to reduce PIT rates and still collect Rs. 100 billion from personal income taxes.
However, any reduction in PIT rates or threshold adjustments will result in lower Government revenue, which creates a shortfall from the target of 15% by 2025.
This will mean some other tax will have to be increased to compensate for the lower PIT – and this wm he said.
However, once tax administration and compliance measures take full effect and revenue targets can be met, it will be possible to adjust tax rates, he pointed out.
Sri Lanka has an ambitious and challenging target of reaching a revenue to GDP ratio of 15% by 2025.
This is a crucial requirement in terms of meeting the primary balance target, which in turn is a critical element of the debt sustainability target for the country.
Meeting these targets is necessary to stay on course with the IMF supported program and debt restructuring, which are essential components of Sri Lanka’s economic recovery.
