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Sri Lanka revises taxes to raise revenue
November 13, 2016
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COLOMBO: Budget proposals presented in Sri Lanka included revisions to corporate and withholding taxes to boost revenue and cut the 2017 fiscal deficit to 4.6 per cent of GDP from this year’s 5.4 per cent.

The government aims to boost its 2017 tax revenue by 27 per cent to 1.82 trillion rupees ($12.35 billion) year on year, to meet a commitment given to the International Monetary Fund (IMF) in return for a $1.5 billion loan in May.

Finance Minister Ravi Karunanayake said corporate income tax will have three slabs of 14 per cent, 28 per cent and 40 per cent, instead of the current single rate of 28 per cent. It is expected to bring 32 billion rupees out of the total 140 billion rupees of new revenue the government is budgeting to raise.

The withholding tax increase from 2.5 per cent to 5 per cent is expected to raise an additional 26 billion rupees, the budget document showed.

“Tax efficiency in the country is low relative to its peer countries. Tax administration is negatively impacted by the complex tax structure and the large number of exemptions and tax holidays, leading to a narrow tax base,” Karunanayake told the parliament in his more than three-hour speech on Thursday.

The coalition government of President Maithripala Sirisena’s centre-left party and Prime Minister Ranil Wickremesinghe’s centre-right party struggled to implement key 2016 budget proposals as they disagreed on raising the value added tax (VAT) until early this month.

The government’s medium-term economic strategy foresees cutting the deficit to 3.5 per cent of GDP by 2020 while increasing the direct taxes. Karunanayake expects revenue to improve through a more streamlined and simplified automated tax collection system.

He also said a 10 per cent capital gain tax will be introduced from April 1, 2017 without much elaborating. The move is expected to add 5 billion rupees into the government coffer.

The government has more than doubled personal tax files to 1.4 million this year from the last year’s 599,000 in a move to raise Sri Lanka’s low tax compliance rate.

The $82 billion economy’s tax-to-GDP ratio is forecast to rise to 13.5 per cent in 2017, from this year’s 11.6 per cent.


Sri Lankan shares closed slightly weaker on Friday while volume slumped to a 32-month low after budget proposals on Thursday to revise corporate and withholding taxes to boost revenue.

The Sri Lankan rupee also ended weaker, in line with declines in emerging market currencies that fell on investor fears higher US interest rates under incoming President Donald Trump would spark capital outflows from those markets.

“There is nothing much to see in the budget. It has failed to give the expected boost to the market,” said Danushka Samarasinghe, research head at Softlogic Stockbrokers.

“Increases in various taxes, including the corporate tax, will now add to the continuing negative momentum and also increases in various fees and taxes will reduce disposable income of the people. This will challenge the consumption-led growth.”


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