1Q tax income narrowly misses target amid spurt in economic activities

• IRD says 98% of target set for 1Q achieved 

Sri Lanka’s tax income during the first fiscal quarter has only narrowly missed the target set for the period, in a clear sign of robust economic recovery staged in the first three months of the year, which came with the return of normalcy.     

At the Public Finance Working Committee meeting held last week, it was revealed that the Inland Revenue Department (IRD) has recorded a 98 percent achievement of the first fiscal quarter target set for tax revenue.  
Sri Lanka has a total tax revenue target of Rs.1,724 billion for 2021, of which Rs.371 billion is set to come from corporate and personal income taxes, Rs.823 billion from the taxes on goods and services and another Rs.530 billion from taxes on the external trade. 

Sri Lanka’s tax revenue slumped to Rs.1,216.5 billion in 2020, from Rs.1,734.9 billion in 2019, predominantly due to the virus-related economic restrictions, which severely dampened the  tax income, generating consumption and 
business activities. 

Meanwhile, the tax cuts granted at the beginning of 2020 failed to deliver their desired outcomes, due to the virus, albeit they acted as necessary stimulus to power the business and economic revival after the first wave of the pandemic. 

The near achievement of the first fiscal quarter tax revenue target by the IRD reflects that a working economy can generate higher tax incomes for the government even at low tax rates, as low tax rates act as a clear stimulus for consumer to consume more out of his higher disposable incomes and businesses to reinvest more of their higher 
retained earnings.  

This is with the near absence of activities such as education, entertainment, travelling and leisure and tourism, as they are still scrambling to return to their pre-pandemic performance levels, as the virus is having a lingering effects on them, even before the fresh restrictions were imposed from 
mid-April.

Meanwhile, the country’s banking sector for the first time started taxing its profits at the proposed new tax rate of 24 percent, starting from the March fiscal quarter this year, with retroactive effects on earnings for the financial year ended in 2020, after the government gazetted the new tax rate in March 2021, effectively enforcing the amendment to the Inland Revenue Act of 2017. 

Despite the government proposed the new 24 percent corporate income tax rate effective from January 1, 2020, banks continued to tax their profits at 28 percent, as it wasn’t considered properly enacted by way of a gazette, amending the exiting legislation.