Sri Lanka’s proposed Inland Revenue Act aims to widen income tax net

The new legislation was demanded by the International Monetary Fund as a condition for disbursing its third tranche of aid.

Sri Lanka’s new income tax Bill, which is the island nation’s first major tax reform since independence from the UK in 1948, is expected to come before Parliament in late August.

The Inland Revenue Act, demanded by the International Monetary Fund (IMF) as a condition for disbursing its third tranche of aid, aims to expand the net to ensure that all of the country’s citizens pay direct taxes over the next two to three years, while at the same time reducing indirect ones and stamping out tax evasion. The goal is to enact the legislation by the next tax year.

Finance minister Mangala Samaraweera said: “Personally I want everyone over the age of 18 to have a taxpayer number whether they pay tax or not.”

The IMF, which approved a loan of $1.5 billion last year, said the new measure would support fiscal consolidation, make Sri Lanka’s tax system more efficient and equitable and generate resources to support social and development programmes.

The organisation had put pressure on the country to increase tax revenues amid repeated balance of payment crises, which had seen the rupee depreciate by 29% since 2008 as external borrowing leapt in the final phase of its 26-year war. The previous government had also borrowed heavily to rebuild internal infrastructure after the struggle ended in 2009.

But over the last two years, tax revenues in the country have grown to 12.4% of gross domestic product, after having dropped as low as 10.1% in 2014.

State minister for finance Eran Wickramaratne said that Sri Lanka would need to install new software and provide training for Inland Revenue staff to meet the requirements of the new legislation.

“Tax payers will be allowed up to six months to file returns, and officials will have time till the second half of 2018 to become familiar with the law,” he added.