CA Sri Lanka Facilitates a Deep Dive into IMF Tax Reforms and Their Implications

The International Monetary Fund (IMF) issued a comprehensive report following its second review of Sri Lanka’s Extended Fund Facility on 12 June 2024, which sparked lively debates among economists, policymakers and the general public, especially with regard to the revenue proposals.

To facilitate a deeper understanding and gather diverse perspectives, a discussion forum was held on July 25, 2024, at CA Sri Lanka. Ms. Dinusha Rajapaksha presented the key revenue and administrative proposals recommended by the IMF, following which a panel discussion was held. The session, moderated by Mr. Saman Srilal, featured insights from key resource persons in the field of taxation.

Resource persons included Ms. Dinusha Rajapaksha (Partner – Tax Services, BDO Partners), Mr. N.R. Gajendran (Partner, GAJMA & Co), Ms. Thanuja Perera (Tax Advisor, Ministry of Finance), Raj Prabu Rajakulendran (Lead Economist, Verité Research) and Mr. GJ Sumanasena (Former General Secretary, Institute of Valuers of Sri Lanka & Vice President, OPA).

In his opening remark, Mr. Gajendran highlighted the projected increase in the tax-to-GDP ratio from 9.7% in 2023 to 12.5% in 2024.He pointed out that these figures might be overly optimistic. He observed that Sri Lanka’s tax-to-GDP ratio in the early ’90s was around 20% and the reduction to the present levels over the last two decades should be investigated. He pointed out the concept of imputed taxes, arguing it is based on hypothetical income rather than actual earnings, complicating their accurate measurement and potentially burdening taxpayers unfairly.

Ms. Perera, meanwhile, emphasized the positive impact of recent tax policy changes on revenue and development. She noted that the imputed tax is not a novel concept, having been implemented in Sri Lanka from 1932 to 2018 in the form of Net Annual Value. The current proposal aims to tax individuals who own multiple houses on either their rental income or imputed rent income in case of unoccupied houses. This approach, she argued, would not only generate revenue but also ensure a more transparent and equitable tax system. She also mentioned ongoing efforts to streamline VAT refunds through risk profiling and post-audit mechanisms.

Highlighting issues within the property market, Mr. Sumanasena focused particularly on the valuation process conducted by Provincial Councils without qualified valuers. He called for civil society to challenge these practices, advocating for fair market valuations and greater transparency. He stressed the need for proper valuation mechanisms to support equitable tax policies.

Mr. Rajakulendran emphasized the necessity of restructuring tax holidays and exemptions, which currently account for 1.7% of GDP. He argued that Sri Lanka’s tax rate is comparable to regional standards, but the inefficiency in tax administration and lack of transparency in granting tax holidays undermine revenue collection. Mr. Rajakulendran suggested that the government needs to engage with the public, provide clear justifications for new taxes, and build confidence that these measures are the best solutions for sustainable economic growth while emphasizing on the need to bring in measures to ensure the reforms process stays on course