‘IMF putting pressure on Sri Lanka to increase tax revenue against its better judgment’

by Sanath Nanayakkare

Waruna Deepthi Rajapaksha, the organizer for Gampaha Division from the United National Party (UNP) said recently at ‘Rathu Ira’ programme on Swarnawahini TV that IMF was putting pressure on Sri Lanka to raise tax revenue despite knowing the fact that it couldn’t be done so swiftly though it is critical.

“The IMF mission team led by Peter Breuer and Katsiaryna Svirydzenka, who visited Colombo from September 14 to 27 gave a press conference last week and said their focus was on restoring macroeconomic stability and debt sustainability in Sri Lanka. Peter Breuer said Sri Lanka has made commendable progress in implementing difficult but much-needed reforms. He said that Inflation is down from a peak of 70 percent in September 2022 to below 2 percent in September 2023, gross international reserves increased by $1.5 billion during March-June this year and shortages of essentials have eased. However, he said, revenue mobilization gains – while improved relative to last year – are expected to fall short of initial projections by nearly 15 percent by year end, partly due to economic factors. He particularly said that it is important to strengthen tax administration, remove tax exemptions, and actively eliminate tax evasion.”

“All these are logical remarks that the government understands. However, these targets can’t be achieved overnight because Sri Lanka is a democracy and not an autocracy. Tax files can’t be opened as fast as we like because of the legal environment in this country.

There are only a few voluntary tax payers in Sri Lanka. All taxes don’t effectively work like the direct PAYE tax because some profit making businesses and good income-earning individuals can’t be forced to pay taxes. When a new business or an individual is asked to pay tax, they have legal provisions where they have four opportunities to seek redress. They can go to tax arbitrators, the courts and even the appeal court to fight it and defer tax payments or avoid paying tax.

There are about 10 million businesses in the country that are functioning as registered businesses. Let’s say 5 million of them are inactive and can’t pay tax. What about the other 5 million businesses? 86% of the total tax revenue is collected from 494 institutions. This means there are many businesses that evade taxes. Lack of consensus and collaboration in the political landscape also make it hard to close such loopholes. I think the IMF understands it. That’s why the IMF said that tax administration in Sri Lanka needs to be strengthened. On their part what they said was logical and reasonable. But on the government’s part it is a process that takes time, “he said.