Three steps...

Three step reform agenda to broad-base taxes

A 3-step tax reform agenda will allow taxes to be reduced and broad-based by 2017, Schneider said.

“This year it’s the Inland Revenue Act, next year it will the VAT, and then the Customs Code,” he said.

He noted that the increase of the VAT rate to 15 percent will give time and fiscal space for the reforms to take place, and added that 15 percent VAT is not that high compared to regional economies.

“Redoing the Inland Revenue Act, for example to widen the tax base, get rid of tax holidays, get rid of exemptions, do away with special rates, to be perfectly frank, will take 9 months to a year,” he said.

Schneider said that legal teams from Sri Lanka and the IMF are engaged in discussions on how to bring about the reforms, and that a technical assistance team will visit the country soon.

He added that the 2017 budget could include the reduction of taxes due to the VAT hike, without which the country would have faced a deepening fiscal deficit and a slump in investor confidence.

“The new Inland Revenue Act should be an integral part of the 2017 budget. With a wider tax base, and with collections coming up, there may actually be room over the medium term to reduce tax rates,” Schneider said.

Finance Minister Ravi Karunanayake made a similar statement a fortnight ago, promising to reduce taxes after several months.

Schneider noted that increases in direct taxation would allow for indirect taxes like VAT to be eventually phased out, while also allowing the government to remove para tariffs, which have created a protectionist environment, which in turn has reduced Sri Lanka’s competitiveness.

“In addition to the increasing costs of imports, exports become more expensive with increased input costs,” he said.