June 15, 2016 (LBO) – International Monetary Fund’s latest staff report has suggested that Sri Lanka should minimize the exemptions provided under the Value Added Tax system, while abolishing the Nation Building Tax.
The report has highlighted that the country needs an appropriate registration threshold and the degree of base erosion should be reviewed.
Sri Lanka, through recent measures, exempted excisable goods such as petroleum products, cars, tobacco, and alcohol and replaced them with increases in excise rates.
The IMF has also suggested that Sri Lanka should abolish the Nation Building Tax as levying excises on a few key items at appropriate rates can support revenue needs while addressing externalities.
Commenting about direct taxes the fund has suggested introducing a simple and broad-based corporate income tax regime that would preserve revenue collection while facilitating competitive statutory rates.
“Corporate tax incentives should be limited to those linked to strategic investment,” IMF staff report said.
“The personal income tax regime should treat individuals equally regardless of occupation, with a tax rate scale appropriately set to alleviate income inequality.”
The International Monetary Fund also said that Income from capital can be taxed at a low flat rate and collected at source.
In Sri Lanka, numerous tax expenditures have been granted against tax principles, including corporate tax holidays, low tax rates for professionals, and exemptions for debt securities issued by listed companies.
The fund says estimated revenue foregone due to corporate profit exemptions was in the range of 1 1/3 percent of GDP in 2012–13, roughly equal to corporate tax collections.
Strengthening property taxes, streamlining import tariffs and para-tariffs, and establishing simple and coherent regimes for taxing SMEs were among areas highlighted by the latest staff report.