Removal of tax exemptions to boost revenue by 0.5%: IMF

• An IMF-backed new tax law was introduced to simplify taxes, increase revenues
• New Act will come into effect on April 1, this year 

By Chandeepa Wettasinghe

The removal of tax exemptions through the new Inland Revenue Act (IRA) Sri Lanka legislated last year will increase the country’s revenue by 0.5 percent of Gross Domestic Product (GDP), according to the International Monetary Fund (IMF). 

“When implemented, the new IRA is expected to boost revenues further by about 0.5 percent of GDP (annualized) largely through removal of tax exemptions,” the IMF said in the third review of the 3-year US$ 1.5 billion Extended Fund Facility programme, which is holding Sri Lanka committed to economic reforms such as the 
new IRA.

The new IRA was formulated with assistance from the IMF and will come into effect in April 2018.

The IMF’s sister organization, the World Bank had expressed that the full effect of the new IRA may not be felt for years to come, before all stakeholders in the country fully accept and transition to the new system. The new IRA was a part of the solution to increase Sri Lanka’s tax collection by removing complex tax exemptions. The IMF has termed Sri Lanka’s tax to GDP ratio as “one of the lowest in the world”. 

The tax to GDP Ratio fell to 10.1 percent in 2014 from 19 percent in 1990. Under this government however, the figure has increased to 12.4 percent by 2016.
Further increase of the tax to GDP figure requires broadening of the tax base and introducing tax compliance mechanisms, the IMF said.

In order to achieve the targets in the IMF programme, the Finance Ministry is required to increase the country’s tax to GDP ratio by 1 percent from 2017 to 2019.
The Finance Ministry has so far been over performing on its fiscal targets set under the IMF programme, the multilateral agency said. Sri Lanka last year set a primary surplus for the first time in 63 years.

Achieving primary and current account surpluses in the government budget are key to the success of the IMF programme, culminating with the achieving of a 3.5 percent budget deficit by 2020.

The budget deficit for 2017 is projected to be around 5.2 percent of GDP.