The International Monetary Fund (IMF) has urged the Sri Lankan government to reform its tax policies and control expenditure to address ongoing budget deficits and align spending with revenue. The IMF also emphasized the continuation of progressive tax reforms to stabilize the economy.
The new government introduced tax reforms aimed at providing relief to individuals and small businesses affected by inflation and high living costs. However, these measures have come under IMF scrutiny.
The IMF will assess these tax policies in a report to be submitted to its executive board, which must approve the release of a $333 million tranche under the Extended Fund Facility program.
Julie Kozack, Director of the IMF Communications Department, confirmed that the report will be published after the board’s meeting in the coming months.
Sri Lankan authorities are expected to comply with IMF-backed economic reforms. Any deviation could strain relations with the IMF and complicate future negotiations with international lenders.
A former treasury secretary noted that failing to adhere to IMF recommendations might hinder Sri Lanka’s access to foreign funding.
President Anura Kumara Dissanayake, who also serves as Finance Minister, announced an increase in the income tax-free threshold from Rs 100,000 to Rs 150,000.
While this change aims to ease the tax burden, it could result in revenue shortfalls if a significant portion of taxpayers is exempted. To offset this, the government plans to raise the Withholding Tax (WHT) from 5 percent to 10 percent.
Additionally, VAT exemptions for locally produced dairy products like yogurt could lead to revenue losses. The government also plans to remove tax exemptions on service exports and introduce a 15 percent concessionary rate, potentially making Sri Lanka less competitive compared to nations offering lower tax rates or exemptions for export industries.
To support pensioners and lower-income earners, the government will allow individuals earning below Rs 150,000 or paying less than 10 percent in income tax to apply for lower withholding tax rates through the Inland Revenue Department.
Furthermore, as part of the IMF-backed third review, the government has agreed to withdraw VAT on fresh milk and yogurt to promote child nutrition.
The IMF’s proposed tax reforms, effective January 1, 2025, aim to increase the tax-to-GDP ratio to 14 percent by 2026. Key changes include a new imputed rental income tax on residential properties, contributing 0.15 percent of GDP, and an increase in VAT on digital services to 18 percent, generating an additional 0.08 percent of GDP.
Corporate taxes will rise for tobacco and betting industries, while stamp duties on leases will double. The removal of the Simplified VAT (SVAT) system is expected to add administrative burdens on businesses.
Furthermore, import restrictions on vehicles and goods will be lifted, adding 0.8 percent of GDP but increasing competition for local industries.
While these measures aim to enhance revenue and economic equity, they may also result in higher costs for consumers, businesses, and property owners. Short-term inflationary pressures are likely, though improved tax compliance and reduced evasion could strengthen fiscal stability.Despite immediate challenges, the IMF insists these reforms are crucial for Sri Lanka’s long-term economic health and debt sustainability
