Home » Cash strapped Sri Lanka introduces tax hike to enhance revenue

Cash strapped Sri Lanka introduces tax hike to enhance revenue

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In light of the financial constraints placed on the government budget owing to 2019 tax relief granted to business stooges of the former President Gotabya Rajapksa regime under the guise of stimulating the economy ,Sri Lanka’s latest tax rate hike has been gazetted recently.

President Ranil Wickremesinghe as the Minister of Finance has increased personal income tax with an aim to double tax to GDP ratio by 2025 as the island nation is in the process to finds ways to come out of an unprecedented economic crisis.

– A person who earns more than 100,000 Sri Lankan rupees will have to pay taxes depending on the additional amount they earn. This means the annual threshold-free income is 1,200,000 rupees. This threshold level was 3,000,000 rupees earlier and now has been cut by 60 percent.

– The tax slabs of 3,000,000 after the threshold-free income is now reduced by over 83 percent to 500,000 rupees.

– For each 500,000 tax slab, there is an incremental 6 percent tax. If a person annually earns 3 million rupees, which was tax-free earlier, the first 500,000 rupees after the 1,200,000 rupee tax-free threshold, he will be changed 6 percent, next 500,000 at 12 percent, next 500,000 at 18 percent and the remaining 300,000 at 24 percent.

– A 1,200,000 rupee expenditure relief that was available for a resident individual under an earlier system is not available anymore. This relief was provided for children’s education, interest on housing and solar panel loans.

– Corporate tax rate is raised to 30 percent from earlier 24 percent.– A 10 percent Advance Income Tax is charged on an income made out of rent exceeding 100,000 rupees, while 5 percent is charged on an interest income or discount.

The gazette shows that a 15 percent AIT is applicable on dividend payments and 14 percent for any other payments.

– A 5 percent withholding tax rate is charged on the service fee of more than 100,000 rupees for teaching, lecturing, examining, invigilating or supervising an examination, service fee as a commission or brokerage to resident insurance, sales or canvassing agent.

The same 5 percent withholding tax is applicable for services provided by individuals in the capacity of independent service providers such as doctors, engineers, accountants, lawyers, software developers, researchers, academics or any individual service provider as may be prescribed by regulation.

Sri Lanka’s proposed tax hikes may lead to lower interest rates in the future as the expected increase in state revenue could reduce the dependency on treasury bills and bonds, dealers said.

The key changes include reducing the tax-free threshold for personal income tax to 1.2 million rupees from 3.0 million and raising the corporate tax to 30 percent from 24 percent.

Capital gains tax for companies has been proposed to be raised to 30 percent from 10 percent for investment assets.

Dealers said there was no significant reaction for the tax hike proposal yet, but however investors may seek on the best Return on Investment (ROI) opportunities such as real estate or the stock market, if the interest rates fall.

Sri Lanka’s risk free interest rates are hovering around 30 percent, but investors still see negative returns because the inflation has reached an unprecedented 70 percent.

The foreign borrowings have completely dried up in Sri Lanka after the island nation declared sovereign debt default in April this year. Since then the government has been heavily depending on local borrowing mainly through T-bills and T-bonds.

The yields in both government securities reached around 30 percent after the central bank raised its key monetary policy rates by an unprecedentedly higher amount to tame a skyrocketing inflation despite higher borrowing by the government.

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