Crisis-hit Sri Lanka raises tax rates to maximize government revenue | Investment News

COLOMBO (Reuters) – Sri Lanka’s cash-strapped government on Tuesday announced a tax overhaul to boost revenue amid the country’s crippling economic crisis, raise value-added taxes and companies and drastically reduce the relief granted to individual taxpayers.

Prime Minister Ranil Wickremesinghe, who took office this month and plans to present an interim budget in weeks, said action was needed because the current state of public finances was unsustainable.

“Implementation of a strong fiscal consolidation plan is imperative through improved revenue as well as expenditure rationalization measures in 2022,” Wickremesinghe’s office said in a statement.

Inflation in Sri Lanka reached 39.1% in May, its statistics office said on Tuesday – a record high, compared to the previous high of 29.8% reached in April.

An increase in value added tax (VAT) to 12% from 8% with immediate effect is among the major tax increases announced on Tuesday, which are expected to boost government revenue by 65 billion Sri Lankan rupees (180.56 million of dollars).

Other measures, notably the increase in corporate tax to 30% from 24% from October, will bring in an additional 52 billion rupees to the Treasury.

Withholding tax on labor income has been made mandatory and exemptions for individual taxpayers have been reduced, the statement said.

The island nation of 22 million people has been hit by its worst economic crisis since its independence from Britain in 1948, with a severe shortage of foreign currency that has blocked imports of essentials including food, fuel and medications.

The roots of the crisis lie in the tax cuts enacted by President Gotabaya Rajapaksa in late 2019, which came months before the COVID-19 pandemic hit the country’s lucrative tourism industry and led to a drop in travel shipments. foreign worker fund.

The tax cuts have caused annual government revenue losses of around 800 billion rupees, the Prime Minister’s Office said in its statement.

The new tax regime and the impact of COVID-19, along with pandemic mitigation measures, have widened the fiscal deficit significantly to 12.2% of GDP in 2021, from 9.6% of GDP two years earlier.

In an interview with Reuters this month, Wickremesinghe – who also holds the finance ministry portfolio – said he would cut spending “to the bone” in the next interim budget and redirect funds to a two-year relief program.

The tax hikes aim to bring government revenue back to pre-pandemic levels and focus on fiscal consolidation as the country seeks a loan package from the International Monetary Fund (IMF), said Lakshini Fernando, a macroeconomist at investment company Asia Securities.

“The tax increases are definitely a very positive first step, especially for negotiations with the IMF and debt restructuring,” Fernando said.

“This was necessary to move discussions forward and will also help the government in talks with bilateral and multilateral partners to secure more funding,” Fernando said.

($1 = 360.0000 Sri Lankan rupees)

(Reporting by Uditha Jayasinghe; Writing by Devjyot Ghoshal, Editing by Ed Osmond and Mark Porter)

Copyright 2022 Thomson Reuters.

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