Changes to tax structure in 2019 led overall tax base to shrink, says PublicFinance.lk

• Employees registered to pay monthly tax on their incomes declined by 97% from 2019-2022
• The number of companies registered for VAT fell by 69% from 2019-2022

Significant changes made to the country’s tax system in the year 2019 resulted in the tax base shrinking considerably, and have contributed to the current grim state of the national economy, according to PublicFinance.lk run by Colombo-based think tank Verité Research.
 A narrow tax base increases tax administration costs and reduces revenue collection.
The number of employees registered to pay monthly tax on their incomes reduced by 97 percent from 2019-2022.

This was mainly due to the replacement of the mandatory Pay-As-You-Earn (PAYE) tax system with an optional Advanced Personal Income Tax (APIT) system and the increase in the tax-free threshold by 6 times.
There was also a change in the system to pay taxes on interest income. It was initially done via withholding tax, which was replaced with Advanced Income Tax for 2020. This led to a reduction in agents registered to pay taxes on interest income by 63 percent for the same time period.

Further, by increasing the Value Added Tax (VAT) registration threshold from Rs.12 million per annum to Rs. 300 million per annum, the number of companies registered for VAT fell by 69 percent from 2019-2022. 
According to PublicFinance.lk, reinstating the mandatory PAYE tax and the Withholding Tax at 10 percent as a prepayment on interest, fees and other incomes, would help Sri Lanka regain its lost tax base and gain an additional revenue of Rs. 184 billion in 2023. 

Sri Lanka announced major tax policy changes in January 2020, which led to a sharp reduction in the tax revenue from 11.6 percent of GDP in 2019 to 8.1 percent of GDP in 2020.  The reduction in revenue subsequently led to a fiscal position that made debt servicing unsustainable, and to a credit rating downgrade. In turn, it also locked Sri Lanka out of global financial markets.

PublicFinance.lk is a platform for public finance related information in Sri Lanka. This platform intends to bridge the gap in information and understanding of public finance by providing insights and analysis on Sri Lanka’s public finance.