Govt. hikes tax rates to put fiscal house in order

• To collect additional income of Rs.125bn this year and Rs.292mn next year
• Tax increases will be implemented in 3 stages to ensure fiscal stability
• VAT rate increased immediately to 12% from 8%; Teleco levy to 15% from 11.25%
• To increase Corporate Income Tax rate to 30% from current 24%
• To introduce significant changes to personal income tax regime
• To increase annual levy of betting and gaming operations; tax to remain at 40%

The Cabinet nod was granted this week to increase taxes to 2019 levels in three stages to collect an estimated Rs.125 billion additional income during this year and over Rs.292 billion additional income starting from next year.
Prime Minister Ranil Wickremesinghe in his capacity as Minister of Finance, Economic Stabilisation, and National Policies on Monday sought the approval of the Cabinet of Ministers to instruct the Legal Draftsmen to prepare the necessary Bills to amend the Inland Revenue Act, Value Added Tax Act, Betting and Gaming Levy Act, Telecommunication Levy Act and Fiscal Management (Responsibility) Act with a view to increase the government revenue.

Accordingly, the Prime Minister’s Media Division yesterday announced the schedule of proposed tax increases, which is to be implemented in three stages, with the aim of restoring macroeconomic and fiscal stability in the country. 

With immediate effect, Value Added Tax (VAT) will be increased to 12 percent from the current 8 percent while Telecommunication Levy will be increased to 15 percent from 11.25 percent. 

With effect from October 1,2022, the relief granted on Personal Income Tax (PIT) will be reduced to Rs. 1.8 million from Rs.3 million per annum and tax slabs on taxable income will be reduced to Rs.1.2 million from the current Rs.3 million, while imposing 4-32 percent tax rate for each slab. 

Further, it was proposed to make Withholding Tax (WHT) on employment mandatory by considering WHT on interest and dividends as final payments and reintroduce a relief on interest income of senior citizens up to Rs.1.5 million. 

Further, it was proposed to impose WHT on service payments exceeding Rs.100,000 per month made to professionals.

Meanwhile, it was proposed to increase Corporate Income Tax rate to 30 percent from the current 24 percent and to increase the concessionary tax rate provided for selected sectors to 15 percent from the current 14 percent.
The threshold for VAT registration was proposed to decrease to Rs.120 million from the current Rs.300 million per annum. Further, it was decided to end the VAT exemption granted on the sale of condominium units.

In addition, it was proposed to increase the annual levy imposed on gaming businesses to Rs.500 million from current Rs.200 million. The annual levy on the betting industry will also be increased in the range of Rs.25, 000 to Rs. 1 million. Overall, both gaming and betting industries would see the rate of annual levy on gross collection point increasing to 15 percent from the current 10 percent.

However, the tax rate on liquor, tobacco, betting and gaming will remain at 40 percent.
Meanwhile, with effect from April 1, 2023, dividend payments made by a resident company to a non-resident person will be liable to income tax. Further, it was proposed to end tax holidays granted to certain industries.
Moreover, the government is planning to make further changes to VAT exemptions after reviewing the economic benefits of such exemptions.

The Prime Minister’s Media Division stressed that the proposed tax increases are critical to restore macroeconomic and fiscal stability in the country, as the 2019 tax cuts led to a significant erosion in the State revenue.

“At present, the situation has aggravated to a very critical level where the General Treasury has to increasingly obtain Central Bank financing to make the government expenditures, including a substantial part of interest, salaries and wages, pensions and Samurdhi payments etc. 

This is clearly unsustainable and hence the implementation of a strong fiscal consolidation plan is imperative through revenue enhancement as well as expenditure rationalisation measures in 2022 and beyond to ensure macroeconomic stability to support the medium to long-term economic growth objectives of the country,” it elaborated.

According to Prime Minister’s Media Division, the sweeping tax cuts granted in 2019 combined with the effects of the pandemic has caused an annual loss of around Rs.600 billion – 800 billion in tax revenue to State coffers, ultimately resulting in the lowest revenue to GDP ratio in the region. 

As a result, the revenue to GDP ratio has plummeted to 8.7 percent in 2021 from 9.1 percent in 2020 and 12.7 percent in 2019, which is significantly lower than the  average revenue ratio of around 25 percent of GDP in emerging market and developing economies.  

“Sri Lanka’s 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 as loss of business and investor confidence due to credit rating downgrades,” the Prime Minister Media Division pointed out.