Tax burden likely to remain longer than expected

Peter Breuer
PIC BY PRADEEP PATHIRANA 

• IMF Senior Mission Chief says tax is needed to fund essential services that government is providing
• Asserts if everybody wants to continue enjoying common goods, then all have to make commensurate contributions
• Points out current hardships are due to government running out of money and not having a strong income source

Sri Lanka, coming out of the economic crisis, has significantly taxed businesses and individuals alike and according to the International Monetary Fund (IMF), this burden is here to stay, at least for now.

While several attempts and concerns have been raised in this regard by a diverse section of the economy, the lender implied that it is imperative for Sri Lanka to continue to impose taxes at its current levels, so that the country does not collapse once again.

IMF Senior Mission Chief for Sri Lanka Peter Breuer noted that the tax burden, which is not entirely new to Sri Lanka, is needed, in order to fund the essential services that the government is providing.

“It is providing common goods for everybody.  And if everybody wants to continue enjoying these common goods, then everybody has to make commensurate contributions and that would address one of the root causes of the crisis,” said Breuer, responding to a question at a press briefing held in Colombo last week, to announce the outcome of the second review under the Extended Fund Facility.

Breuer acknowledged that Sri Lanka is in a significant crisis and that real incomes have declined substantially.  In dollar terms, Sri Lanka lost about one-sixth of its economic activity, while gross domestic product (GDP) went down 15 percent in dollar terms in 2023, relative to 2022.  

“So, certainly, the people of Sri Lanka feel that hardship every day. Now, a key reason for why this happened is because the government ran out of money and could not access any financing because it didn’t really have a strong income source of its own and so, this is how the crisis started to happen,” Breuer pointed out. 

Sri Lanka’s general revenue in 2022 was in the order of 8 percent and used to have a revenue of up to 20 percent of GDP in the 1980s.  

Breuer went on to elaborate that Sri Lanka is a country that used to actually collect a lot more revenue, almost three times as much as it did in 2022. By international comparison, in the three years between 2019 and 2022, Sri Lanka’s general revenue averaged something like 9 percent, maybe 9.5 percent of GDP, compared to other emerging market countries, in the order of 26 percent.  

While providing an update on the second review, the IMF said it welcomes Sri Lanka’s commitment to fiscal reforms. 

The delegation asserted that continued progress towards the introduction of the property tax is critical, together with the revenue measures to meet the revenue mobilisation goals in 2025 and beyond. While revenue administration and anti-corruption efforts to boost tax collections are also key, maintaining cost recovery in fuel and electricity pricing will help minimise the fiscal risks arising from the state-owned enterprises.