Sri Lanka’s direct tax revenue to record a significant hike in 2021

Sri Lanka’s direct taxation is expected to witness a significant increase among other budget 2021 revenue proposals.

The country faces several issues such as low level tax ratio with declining trend, slow structural change of tax composition, dismal outcome even after changing the tax system and low level of efficiency and productivity of Value Added Tax (VAT).

Tax revenue and other proposals in budget 2021 will be aimed at providing immediate benefits to the people and priority will be given to projects which provide immediate public relief such as empowerment of low income families and upliftment of the rural economy.

The government will take several measures including broadening the tax base, simplifying the tax rates, reducing the number of taxes, facilitating voluntary compliance, avoiding politically-motivated tax amnesties and tax concessions, and avoiding political interference and influence on tax administration to enhance tax revenue.

Several existing tax holidays, partial tax holidays, and other concessions, are to be removed while introducing a simplified three tier corporate tax structure, taxation of capital gains, and expanding the coverage of withholding taxes.

The government had set a target in its medium-term economic plan to increase income tax contribution to total tax revenue to at least 40 per cent from 20 per cent in the budget revenue proposals.

The estimated tax revenue will be Rs.1225. 5 billion and non-tax revenue Rs. 204.6 billion in 2021, provisional data showed.

Tax revenue declined significantly by 25.9 per cent to Rs. 408.5 billion in the first four months of 2020, compared to Rs. 551.5 billion in the same period of 2019 while non-tax revenue increased significantly by 46.5 per cent to Rs. 68.2 billion from Rs. 46.6 billion, Finance Ministry data revealed.

In Sri Lanka, the sales tax rate is expected to reach 8 per cent in 2021, according to analysts’ expectations.

A tax charge will be enforced onto consumers based on the purchase price of certain goods and services.

The benchmark used for the sales tax rate refers to the highest rate. Revenues from the sales tax rate are an important source of income for the government.

Corporate tax rate will be revised and the Finance Ministry is likely to re-introduce wealth tax while maintaining social security rate 20 per cent for companies and 8 per cent for employees, official sources said.

The excise tax on cigarettes and hard liquor manufactured locally will be further increased (Excise duty on Special Arrack remains without change) and Excise duty malt liquor will also be revised.

The government will hike taxes on fuel luxury item and cosmetic imports.