The new tax bill is an important milestone in Sri Lanka’s tax reform journey. It can be considered a key win. Many countries have developed modern income tax systems that are streamlined and uncomplicated. This new tax bill aims to do that. Now implementation in a transparent and predictable way will be the key, and that’s what the private sector is looking for, Ceylon Chamber of Commerce Senior Economist Anushka Wijesingha said.
The benefit of the new tax bill will primarily be in terms of raising revenue, but particularly in terms of collecting more direct tax. Sri Lanka collects far less direct tax than many of its peers, and relies too heavily on indirect tax, he said.
Last year the ratio was 83:17. It should be more towards 60:40 and we hear that the Ministry of Finance is aiming towards that. Direct taxation is progressive, while indirect taxation is regressive - poorer households get hit disproportionately harder by indirect tax. So this bill aims to raise more direct tax.
“For a middle income country like ours, domestic revenue mobilization is important, as we cannot rely on cheap donor money and shouldn’t be over reliant on commercial borrowing alone,” Wijesingha said.
Rationalization, removing of many exemptions and special schemes, introduction of capital gains tax, raising the tax free threshold for income and PAYE tax, are some of the main features of the new tax bill.
While it’s good that tax incentives are now being streamlined, existing tax holidays are being allowed to run its course. A key issue is that tax free status for corporate debt is in doubt as it appears that interest on already issued corporate paper will be liable to tax at the point of paying interest, he said.