Sri Lanka’s new revenue law to help credit profile: Moody’s

July 03, 2017 (LBO) – Sri Lanka’s new Inland Revenue Act will contribute to increasing the country’s very low level of government revenues, a key constraint on the sovereign credit profile, Moody’s said.

Last month, the government made public a new income tax bill that will replace the existing law with a more efficient, modern and broad-based tax framework.

Moody’s investor service said in a statement that the gazetting of the proposed tax reforms paves the way for the IMF to approve a pending third loan tranche from Sri Lanka’s three-year, 1.5 billion US dollars extended fund facility program.

“The continuity of the IMF program will support the authorities’ ongoing fiscal and structural reform efforts while the disbursement of the 168 million dollars loan will boost Sri Lanka’s external liquidity position,” Moody’s said.

The bill will, among other things, simplify the sources of income, introduce a three-tier tax structure with reduced exemptions and reintroduce the capital gains tax.

The act also proposes: modernizing rules related to cross-border transactions to address base erosion and tax avoidance, broadening the tax base by removing excess tax incentives and expanding income tax sources.

The implementation of revenue reforms that foster long-term fiscal consolidation will be critical to shoring up Sri Lanka’s credit profile.

“The country’s large debt burden and weak debt affordability weigh significantly on its creditworthiness. The government’s debt burden of 79.3% of GDP in 2016 was higher than the median of 53% for B-rated sovereigns,”

“The debt burden has risen from a low of 68.7% of GDP in 2012. With nominal GDP growth forecast to be slower in coming years than over the past decade, persistent and sizeable fiscal deficits would further increase Sri Lanka’s debt stock.”

Full statement is reproduced below.

Government of Sri Lanka