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How will proposed Tax Reforms affect Sri Lankans in 2025

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God Father

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Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

How will proposed Tax Reforms affect Sri Lankans in 2025 Image_17

The proposed tax reforms by the IMF, aimed at improving revenue mobilization and fiscal sustainability in Sri Lanka, come with several potential negative impacts:

1. Increased Tax Burden on Middle and Lower-Income Households

The introduction of an imputed rental income tax on owner-occupied and vacant residential properties could disproportionately affect middle-income households who own property but may not have sufficient liquidity to cover additional tax liabilities. This could lead to financial strain and reduced disposable income for these households​​.

2. Economic Slowdown Due to Higher Taxes

Higher taxes on essential goods and services, including the introduction of VAT on previously exempt items and increased Corporate Income Tax rates on key industries like betting, gaming, tobacco, and liquor, could reduce consumer spending and business investment. This may slow down economic recovery and growth​​.

3. Potential for Increased Non-Compliance and Tax Evasion

The complexity of new tax measures, such as the imputed rental income tax and enhanced VAT compliance requirements, could lead to higher levels of non-compliance and tax evasion. Taxpayers may find ways to underreport or hide income, reducing the effectiveness of these measures and leading to administrative challenges​​.

4. Impact on Real Estate Market

The imputed rental income tax could lead to a downturn in the real estate market as property owners may seek to sell properties to avoid the new tax. This could result in a decrease in property values and reduced investment in real estate, impacting the overall economy​​.

5. Adverse Effects on Small and Medium Enterprises (SMEs)

Increased tax rates and compliance costs can disproportionately affect SMEs, which may lack the resources to manage higher tax burdens and complex compliance requirements. This could lead to business closures, reduced employment opportunities, and a contraction in the SME sector​​.

6. Social Unrest and Public Opposition

The implementation of stringent tax reforms and austerity measures can lead to public dissatisfaction and social unrest. The perceived unfairness of new taxes and the burden on lower and middle-income groups could lead to protests and opposition against the government and the IMF program​​.

7. Short-term Revenue Uncertainty

While the proposed reforms aim to increase revenue in the long term, there may be short-term revenue uncertainty and administrative challenges in implementing new tax systems. This could lead to temporary revenue shortfalls and fiscal instability​​.

Overall, while the IMF's proposed tax reforms are designed to enhance fiscal sustainability and revenue mobilization in Sri Lanka, they carry significant risks and potential negative impacts that need to be carefully managed to avoid exacerbating economic and social challenges.

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Sri Lanka to exempt one house from imputed rent wealth tax: President
Tuesday June 18, 2024 10:34 am
ECONOMYNEXT – Sri Lanka will exempt one house from a proposed wealth tax outlined in an International Monetary Fund program, President Ranil Wickremesinghe said.

About 90 percent of the people’s houses are likely to be exempt from the proposed tax, he said.

“[O]ne house will be exempt from this,” President Wickremesinghe told parliament Monday.

“It is going to have a very high threshold and I do not think the vast majority of the people in this country should even be worried about their house

“Don’t worry your house will be safe.”

The IMF program document however did not mention an exemption on one house, but did mention an exemption threshold.

Taxing houses and thrift in general could have detrimental effects on people’s well-being, housing stock and their willingness to remain in the country without migrating, critics say.

Related Sri Lanka to tax imaginary rents on houses under IMF deal

The mechanism of imputed rents was used because rates on houses were assigned to provincial councils and courts could strike it down.

Opposition legislator Harsha de Silva said the Samagi Jana Balwegaya welcomed President Wickremesinghe’s statement.

In social media there is active discussion about taxing houses and savings.

“When we paid income tax for the money we bought the land,” according to a post going viral.

Paid stamp duty for buying the land. Paid vat import duty etc for all building materials to build the house. Paid rates on a annual basis for the value of the property.

“Now we are asked to pay a tax for living in that house as the owner 🥲.

“Very soon we will have annual tax for having to be married and for creating kids as its supposed to be a burden for the state.”

In some countries, married couples filing together gets tax credits.

Sri Lanka has monetary stability due to so-called flexible inflation targeting (an operating framework of a floating regime foisted upon on a central bank with a reserve target), triggering exchange rate depreciation, outright currency crises, output shocks, spikes in deficits and debt, eventual external defaults and high tax rates. (Colombo/June18/2024)

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