IMF urges Sri Lanka to have predictable tax system

ECONOMYNEXT – Sri Lanka should complete the implementing value added tax and start work on a new income tax law to make the tax system predictable and efficient, the International Monetary Fund has said.

Under a three year program, the IMF will disburse 1.5 billion US dollars (1.1 billion special drawing rights) to Sri Lanka’s central bank. The first tranche of 119 million SDRs was given in June with the start of the program.

Another 119 million SDR tranche was due on November 20.

The second tranche however may be held back pending legislation to increase value added tax.  IMF officials said they were unable to ‘complete the review’ effectively suspending payments, until the requirement is met.

Activists wen to supreme court and thwarted an attempt to collect taxes by minister’s prerogative, an anti-democratic practice resorted to by Sri Lanka’s post-independent rulers despite the existence of a parliament.

Sri Lanka has met deficit targets for June, the IMF said, but tax reforms are needed to bring down the deficit in 2017 and beyond.

"..[I]t is important that the government expedites the legislative process of implementing the value added tax (VAT) amendments that are needed to support revenue targets for 2016 and 2017," the IMF said following a review mission.

"The 2017 budget should also be underpinned by a well-crafted and high-quality tax policy strategy to raise Sri Lanka’s low tax revenue-to-GDP ratio.

"Commencing the legislative process for the new Inland Revenue Act would be an important step in rebalancing the tax system toward a more predictable, efficient and equitable structure…"

Lack of predictability, combined with arbitrary prerogative taxes, are a key too through which freedom of the individual has been undermined and has made it difficult to plan and do business or even for people to carry out their lives, critics have said.

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Sri Lanka has a large number of tax holidays which undermine revenue. Vehicles are also given tax free or tax slashed to the elected ruling class and state workers, while private citizens pay high taxes contributing to the upkeep of roads.

Under the IMF program the budget has to be presented to parliament in November in like with program targets.

By the December Sri Lanka also has to implement an automatic fuel pricing formula for fuel and also for electricity.

The ministry of finance and subject ministries also have to publish ‘statements of corporate intent’ for the six largest state enterprises. (Colombo/Sept16/2016)

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