Sri Lanka is setting an ambitious target to collect 40 percent of its taxes directly through income, wealth, and property taxes by 2025, up from the current 30 percent.
This strategy aims to expand the tax net and take legal action against tax evaders, according to State Finance Minister Ranjith Siyambalapitiya.
He pointed out that achieving a stable economy requires state revenue to be 15 percent of the GDP, noting that the country’s previous financial troubles were due to revenue falling to 8.3 percent of the GDP.
The state minister made this statmentment in the backdrop of government revenue excluding grantsincreased by 48.3 percent to Rs. 1,216.0 billion in the first four months of 2024 compared toRs. 820.1 billion in the same period of 2023.
Thiswas mainly due to the increase in tax revenueby 50.5 percent to Rs. 1,117.8 billion from Rs.742.6 billion.
The focus on direct taxes, which are typically paid by individuals with higher incomes and substantial asset ownership, comes in response to the severe economic crisis that led to a sovereign debt default. In response, both direct and indirect taxes have been increased.
The current administration, led by President Ranil Wickremesinghe, is also considering introducing new wealth, property, and inheritance taxes next year, as part of commitments made to the International Monetary Fund (IMF).
Siyambalapitiya stated that once the government achieves the target of 15 percent state revenue with 40 percent direct taxes, they plan to reduce indirect taxes and raise the threshold level for Pay As You Earn (PAYE) tax, which is currently at 100,000 rupees.
While acknowledging the challenges in increasing tax revenue from 8.3 percent to 13 percent of GDP, he expressed confidence in reaching the 15 percent target with public cooperation. He assured that the government is ready to cut taxes once the desired economic level is reached, though no specific date can be promised.
Siyambalapitiya noted that state revenue has increased to nearly 13 percent of the gross domestic product (GDP) from 8.3 percent in 2022.
When the recovery process began, the tax structure was heavily skewed with 80 percent of taxes being indirect and only 20 percent being direct. This meant that both rich and poor were equally burdened by taxes. The current ratio has improved to 70:30, with direct taxes now contributing 30 percent.
The government’s goal is to further improve this ratio to 40:60 by 2025, meaning 40 percent of tax revenue will come from those who can afford to pay taxes, and 60 percent will come from indirect taxes. This shift aims to create a fairer tax system.
