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Sri Lanka drafts norms to simplify taxes
August 26, 2016
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COLOMBO: Sri Lanka’s new government is drafting norms aimed at simplifying taxes, widening the tax base and increasing compliance, Finance Minister Ravi Karunanayake said.

The International Monetary Fund (IMF), which disbursed the first tranche of a $1.5 billion, three-year loan in June, has repeatedly asked the South Asian country for reforms to raise tax revenues.

The island nation’s tax revenue has steadily declined to 10.2 per cent of gross domestic product (GDP) in 2014 from around 20 per cent in the early 1990s as successive governments aimed at populist measures amid a 26-year war.

Karunanayake, speaking to Reuters at the island nation’s parliament, said the new tax reforms will be implemented in the near future, without elaborating on the time frame.

“The reforms are aimed at more simplified taxes, bigger tax base and higher compliance,” he said in an interview.

Similar tax reforms were held back by the last government headed by former President Mahinda Rajapaksa even after the end of the war as the measures were extremely unpopular.

Karunanayake, the finance minister since President Maithripala Sirisena took office in January 2015, said he still believes this year’s revenue target could be reached despite two Supreme Court rulings that have prevented the implementation of a 4 per cent hike in value-added tax (VAT).

“The other revenues have gone up sufficiently in order to condensate the fall. So there is no slippage and we will ensure that we basically achieve (the targets),” he said.

The IMF in June said a return to fiscal consolidation, targeting a reduction in the overall fiscal deficit to 3.5 per cent of GDP by 2020, is the linchpin of the reform programme it agreed for the $1.5 billion loan.


The global lender has urged Sri Lanka to give priority to enhance revenues through the implementation of new tax legislation, eliminate exemptions, build capacity in revenue administration and tighten expenditure management.

It has also urged the country to eliminate tax exemptions, and to introduce a new Inland Revenue Act in March 2017.

Sri Lanka’s tax revenue in the first seven months jumped 23 per cent to 769.8 billion rupees ($5.29 billion) compared with last year, the latest finance ministry data showed.

Economists and analysts, however, have varied on the government meeting this year’s budget deficit target of 5.4 per cent of the GDP as agreed with the IMF. Karunanayake said the country will achieve a 6.5 per cent growth this year, up from the last year’s 4.8 per cent despite three monetary policy tightening measures since December.

Meanwhile, the Government of Sri Lanka is increasing its three-year borrowing to $700 million from a targeted size of up to $500 million, in what would be the sovereign’s largest syndicated loan, sources said.

The deal has attracted commitments of around $450 million combined from 13 banks in general syndication, which was launched at the end of June with a base size of $300 million and a greenshoe option of up to $200 million.


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