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Clarification on Proposed Property Tax in Sri Lanka

Sri Lanka’s Ministry of Finance, Economic Stabilization, and National Policies has clarified recent speculations about the proposed property tax referenced in documents related to the International Monetary Fund (IMF) supported Extended Fund Facility (EFF) programme. The proposed tax will be implemented as an imputed rental income tax.

In a statement, the Finance Ministry emphasized that one of the primary causes of Sri Lanka’s severe economic crisis was a significant drop in government tax revenue, leading to high budget deficits and unsustainable public debt levels. To address this, the government has been focused on increasing revenue through fiscal consolidation. Efforts over the past two years aim to raise government revenue from 8.3% of GDP in 2022 to 15% by the end of 2025.

The statement detailed that tax reforms in 2023 targeted progressive corporate and personal income tax measures. In 2024, revenue enhancement will be supported by Value Added Tax (VAT) reforms, including the elimination of most exemptions and rate adjustments. The revenue targets for 2023 have been largely met, and the 2024 target is on track to reach 13.5% of GDP. An additional 1.5% of GDP in revenue is expected in 2025 to meet the 15% target.

The key revenue measure for achieving the 2025 target is a wealth tax focused on property. The ministry noted that since the approval of the IMF programme in March 2023, the planned revenue measures for 2023, 2024, and 2025 have been publicly outlined. Although specific details of the property tax rates and thresholds are not yet available, the tax is aimed at high-wealth individuals, not average income earners. A tax-free threshold will ensure that the tax targets only high-value properties or multiple properties owned by wealthy individuals.

The ministry highlighted that the property tax is expected to generate 0.2% of GDP by 2025 and 0.4% of GDP by 2026. The tax will include mechanisms to avoid double taxation and economic distortions. Property taxes are common in many countries, including developing nations like India, as they are efficient, progressive, and non-distortive revenue sources for public services.

The proposed tax will undergo the usual legislative process and is expected to be implemented in April 2025. Significant administrative work, such as improving valuation mechanisms and databases, is necessary for its implementation. The concept of this tax is not new; the Inland Revenue Act No. 10 of 2006 included a similar imputed income calculation called “Net Annual Value.”

Additionally, property in Sri Lanka is already subject to local authority Rates and Stamp Duty, establishing a precedent for property taxation. The Finance Ministry stressed that improving government revenue and reducing budget deficits are crucial for economic stability, lowering interest rates, and supporting currency appreciation, which benefits all citizens. Failure to achieve the necessary government tax revenue could lead to a recurrence of the economic crisis that recently impacted the country.

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