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Friday July 12th, 2024

Sri Lanka to tax imaginary rents on houses under IMF deal

ECONOMYNEXT – Sri Lanka will charge taxes on owner occupied and vacant residential houses on imputed or ‘imaginary’ rents from April 2025, under an International Monetary Fund deal after aggressive macroeconomic policy pushed the country into sovereign default.

The imputed rents will be calculated based on a property price register. However there will be an exemption threshold, a report released by after

Non-existent Rents

A nationwide digital Sales Price and Rents Register (SPRR) is to be set up by March 2025, and accessible to the Department of Inland Revenue.

“This digital SPRR would be the key resource for assessing property values and the imputed rental income tax,” the IMF report said.

A provisional SPPR is suggested for August 2024.

A database on property valuations that includes information such as assessed values, latest assessment date, and property type in all municipal councils by August 2024.

Sri Lanka will amend the Notaries Act to improve data-sharing among government entities by April 2025 to ensure information on each notarized real property contract is automatically fed into the digital SPRR.

There will be an exemption threshold for small houses and increasingly higher rates to make the tax ‘progressive’.

“The introduction of an imputed rental income tax is critical to sustain revenue mobilization efforts,” the report claimed.

The imputed rents will add 0.15 percent to revenue to GDP.

Municipal councils will also get more revenue through doubling a tax on leases from 0.1 to 0.2 percent.

The tax on housing comes as there are existing constraints in building houses with high protectionists taxes on building materials. The IMF program however supports trade liberalization.

Sri Lanka has trade controls due to a deeply flawed operational framework of the central bank which triggers forex shortages as rates are mis-targeted or including through sterilization of interventions to avoid market pricing interest rates allowing ‘import substitution businesses’ to claim that they can ‘save foreign exchange’ if given protection.

Housing taxes like all wealth-style taxes have to be paid without cash flow unlike taxes charged on actual income.

Actual rents from second houses are already captured under income tax.

Areas with high property tax rates such as Baltimore in the US have led to falling populations and reluctance by owners to refurbish houses as higher values attract more taxes.

There are increasing calls in Baltimore to reduce property taxes to stop population falls, amid opposition from local authority workers who fear cost pruning.

READ MORE:

Soaring property assessments ignite calls for tax reform in Baltimore City

Sri Lanka has dodged a bullet on a wider property taxes as there was a constitutional block.

“The property tax was initially planned for 2025 but faced institutional impediments. These included data sharing and constitutional constraints on revenue sharing between local and central governments,” the report said.

“The tax is imposed on the income of individuals (rather than real property itself) and thus raises central government revenue in accordance with the constitution.”

Sri Lankans already pay ‘rates’ for local government services based on a small assessed value, many of which have not been revised to in line with currency collapses triggered by the central bank.

Local authorities

Feel the Pain

Unlike value added tax that people do not feel and conform to the South Asian taxation principle of Kautilya of not damaging the flower and taking honey like a bee, income style taxes make people ‘feel the pain’.

As they are charged before a productive transaction is initiated, they also lead to lost income taxes and lost economic activity, analysts have said.

But an advantage is that they make the public feel the ‘feel the pain of the large government’ and may lead to a push for a return to spending-based consolidation.

Sri Lanka had wealth taxes in the past before levies like value added tax and were abolished as the country stagnated.

There have been claims made that progressive income taxes led to a brain drain in Sri Lanka as people fled the country after the latest currency collapse.

Sri Lankans have been flocking by the millions to get jobs in single anchor currency-board-like regimes in the Middle East from the 1980s as the currency collapsed without a credible anchor.

Sri Lanka has introduced a series of taxes including hikes in value added and income tax to finance a bloated state after serial currency crises from flexible inflation targeting/potential output gap targeting reduced growth and led to a foreign borrowing spree.

Sri Lanka is trying to raise revenues to 15 percent of GDP under an IMF program, without cutting spending (revenue based fiscal consolidation) after macro-economists cut taxes to boost adding to the usual printing of money and drove the country into external default in 2022.

Sri Lanka started going to the IMF from the mid-1960s by printing money to suppress interest rates for refinance rural credit.

At the time revenues were in excess of 20 percent of GDP.

Reform Fatigue

Taxing non-existent incomes and savings could also lead to reform fatigue and turfing out of reformist administrations.

Analysts who warned of the consequences of aggressive monetary policy say that while raising taxes is necessary it is not a replacement for monetary stability as seen repeatedly in Latin America and Sri Lanka in the past.

After the IMF’s Second Amendment to its Articles deprived the central bank of a credible anchor, currency depreciation inflation and civil conflicts ratcheted up in the 1980s as attempts were made to target money supply without a floating rate.

The current serial currency crises came from targeting high levels of inflation without a floating rate.

Sri Lanka’s government spending is also high due to high nominal interest rates, which is also an inevitable consequence of a monetary regime with dual anchor conflicts.

Before 1978 and the jettisoning of the external anchor Sri Lanka’s inflation and interest rates broadly in line with that of the US.

All calls for a consistent single anchor regime have so far been resisted by macroeconomists, while people flee the country.

Some Latin America nations, led by Argentina which has the archetypical sterilizing central bank, also defaults with boring regularity despite having revenues of close to 25 percent of GDP.

Some Latin American nations have dollarized after about 20 IMF programs putting people out of their misery.

Argentina’s new reformist President Milei is facing severe opposition and unrest to reforms after macro-economists including from abroad blocked his plans to dollarize the nation, make the peso monetary policy impotent and bring monetary stability to the nation.

Sri Lanka’s central bank however killed inflation in September 2022 turning the balance of payments into a surplus and has also allowed the currency to appreciate, bringing down traded goods prices despite value added tax.

But, analysts have warned that as soon as rates are cut and enforced with liquidity injections claiming historical inflation is low, monetary instability will resume.

There have been claims that about 58 percent of defaulting countries since 1978 (waves of external defaults started after IMF’s Second Amendment each time the Fed hiked rates) became repeat offenders. (Colombo/June14/2024)

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  1. Sriomal says:

    Isn’t this presently called Rates?

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  1. Sriomal says:

    Isn’t this presently called Rates?

Sri Lanka appoints new Attorney General

ECONOMYNEXT – Sri Lanka’s President Ranil Wickremesinghe has appointed K A Parinda Ranasinghe PC as Attorney General.

He was appointed in terms of Article 61E (b) of the Constitution of Sri Lanka, the president’s media division said.

The new AG received the appointment from President Wickremesinghe at the Presidential Secretariat on Friday.

He fills the post after the retirement of former Attorney General Sanjay Rajaratnam. (Colombo/Jul12/2024)

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Sri Lanka rupee closes stronger at 301.70/302.00 to US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed stronger at 301.70/302.00 to the US dollar on Friday, from 302.80/303.00 to the US dollar on Thursday, dealers said, while bond yields were up.

A bond maturing on 15.12.2026 closed at 10.90/11.00 percent, up from 10.85/95 percent.

A bond maturing on 15.12.2027 closed at 11.75/80 percent, up from 11.80/88 percent.

A bond maturing on 01.05.2028 closed at 11.90/12.00 percent.

A bond maturing on 15.09.2029 closed at 12.10/30 percent, up from 12.15/25 percent. (Colombo/Jul12/2024)

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Sri Lanka stocks close up, muted activity

ECONOMYNEXT – The Colombo Stock Exchange closed up on Friday, data on its site showed.

The broader All Share Index closed up 0.35 percent, or 41.71 points, at 11,843; while the more liquid S&P SL20 Index closed up 0.56 percent, or 19.20 points, at 3,454.

Turnover was low at 653 million.

“The market picked up a bit from yesterday but it’s still below the psychological 12,000 mark,” Softlogic Stockbrokers said.

“Local retail participation drove the market predominantly.”

John Keells Holdings Plc brought in Rs109mn to the turnover, and the share closed flat at 194.50.

Melstacorp Plc contributed in Rs104mn to the turnover, and the share closed flat at 85.00.

Sentiment around the banking counters was mostly negative. Sampath Bank Plc closed down at 77.00, closed flat at 101.25, and Hatton National Bank Plc closed flat at 195.25.

The top contributors to the ASPI were Commercial Bank of Ceylon Plc (up at 103.50), Bukit Darah Plc (up at 397.00), and Hayleys Plc (up at 101.00).

Foreign participation remained low as well. There was a higher net foreign outflow of 101 million.

“Foreign selling was seen on John Keells Holdings, and banking counters; Hatton National Bank Plc (down at 195.00), Pan Asia Banking Corporation Plc (down at 20.70), and Commercial Bank of Ceylon Plc.

There was selective foreing interest on the diversified financials sector, particularly in companies that had vehicle leasing portfolios. “We think this might be due to the news of the vehicle import ban possibly ending.”

LOLC Holdings Plc closed up at 440.50, People’s Leasing and Finance Plc closed up at 12.20.

Softlogic Holdings Plc which announced the date of its rights issue, closed up at 8.50. (Colombo/Jul12/2024)

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