1 June 2022 09:32 am Views - 161
By Yohan Perera
The Government yesterday decided to revise taxes given the current economic crisis and thereby decided to increase Value Added Tax from eight percent to 12 percent, Telecommunication tax from 11.25 percent to 15 percent. “In addition the levy of gross collection from gaming was increased from 10 percent to 15 percent, corporate income tax was increased from 24 percent to 30 percent, The ten year tax holidays from constructions using recycled materials, boat manufacturing and bonded warehouses were also revised.
Sri Lanka introduced a low tax regime in late 2019. The reforms included the reduction of tax rates of Value Added Tax (VAT), Personal Income Tax (PIT) and Corporate Income Tax (CIT), and narrowing tax bases of VAT and PIT, while introducing a plethora of tax incentives such as tax exemptions for agriculture and Information Technology (IT) and enabled services, tax deductions and tax holidays. This caused an annual loss of around Rs 600 billion – 800 billion in tax revenue to state coffers.
Therefore, these reforms are now being looked as policies that led to a significant loss of government revenue, partly due to the spread of COVID-19 pandemic in 2020/2021 and related developments, which affected the revenue generation process, ultimately resulting in the lowest revenue to GDP ratio in the region.
The revenue to GDP ratio declined to 9.1 percent in 2020 from 12.7 percent in 2019 and further to 8.7 percent in 2021. This is significantly lower than the average revenue ratio of around 25 percent of GDP in emerging market and developing economies.
The low tax regime, the impact of the COVID-19 pandemic on revenue mobilization, together with the pandemic relief measures, widened the budget deficit significantly to 11.1 percent of GDP in 2020 and 12.2 percent of GDP in 2021 from 9.6 percent of GDP in 2019. This has led to an increase in the government debt to GDP ratio to 100.6 percent in 2020 and 104.6 percent in 2021 from 86.9 percent in 2019. “The economic outlook remains vulnerable with the unprecedented inflationary pressures, persistently large fiscal and balance of payment financing needs, large debt overhang and critically low level of reserves and pressures on the exchange rate. Economic growth will be adversely affected by the foreign currency shortage and ensuing economic conditions prevailing in the country as well rated to this fiscal imbalance has significant adverse spillover effects over the economy. Sri Lanka’s loss of business and investor confidence due to credit rating downgrades,” the Prime Minister’s office said.