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Sri Lanka Tax: Tax cuts to help improve govt revenue

by Devan Daniel -- While importers welcomed the tax cuts, the government's decision to slash taxes and remove surcharges on imports would help the government improve its revenue as volumes make up for the reduction in taxes and it is in line with proposals made by the Presidential taxation committee an official said.

The govrnment has slashed an import excise duty on vehicles by 50 percent, lifted 15 percent surcharge on all imports, revised several import duty bands down to 0 percent, 5 percent, 15 percent and 30 percent from 0 percent, 6 percent, 16 percent and 28 percent. Taxes on items such as watches and cameras have been brought down to 10 percent.

"These changes are basically in line with what the presidential taxation committee proposed," an official who wished to remain anonymous told the Island Financial Review.

He said: "Import duties on vehicles were too high and domestic sales have been falling since 2008. Of course when we had problems with foreign currency reserves, it made sense to increase import duties and introduce various surcharges so as to discourage the outflow of foreign exchange.

"High taxes resulted in falling sales volumes and that created another problem where the government could not meet its revenue targets. Now that the country's reserve position has improved, it makes sense to remove the surcharges and reduce taxes.

The increase in volumes as demand for these items, especially vehicles, improve would more than make up for the reduction in tax rates, and the government's revenue be simplified and made business friendly while increasing the government revenue by broadening the tax base."

When the IMF Review Mission visited Sri Lanka last February, it said the government had overshot its budget deficit target and the third tranche under the US$ 2.6 billion standby facility programme would be withheld as a result. It noted that the government could not meet its revenue targets for 2009 because of subdued economic activity and high taxes, especially for vehicle imports.


Tax revenue for 2009 was estimated at Rs. 619.5 billion, a drop of 5.5 percent from the budgeted target of Rs. 655.7 billion. Non tax revenues had increased by 18 percent to Rs. 82.5 billion from the budgeted target of Rs. 69.9 billion.

The Treasury said revenues from taxes fell due to a slump in external trade due to the global financial crisis.

Falling revenues and increased spending resulted in the budget deficit reaching 9.8 percent of GDP for 2009, instead of the targeted 7 percent.

Total expenditure in 2009 had increased to Rs. 1,197 billion, from the budgeted targeted of Rs. 1,091 billion, an increase of 9.7 percent.

Recurrent expenditure had increased by 6.6 percent to Rs. 884.6 billion from the budgeted target of Rs. 829.6 billion. Expenditure on public sector salaries and wages increased by 2.6 percent to Rs. 268.2 billion; interest payments increased by 14.2 percent to Rs. 308.2 billion; subsidies and transfers increased by 3.7 percent to Rs. 194.2 billion while expenditure on other goods and services increased by 2.2 percent to Rs. 113.8 billion.

Capital expenditure (such as long term investments in infrastructure projects) reached Rs. 312.5 billion, a 19.3 percent increase from the budgeted target of Rs. 261.9 billion. Analysts have argued that it was a healthy practice, where in the past, vital capital expenditure was cut by governments to accommodate more recurrent expenditure.


So far this year, fiscal numbers show that tax revenues have increased for the first two months of this year.

Tax revenue increased by 20 percent and Sri Lanka's budget deficit for the first two months of 2010 expanded slightly, by almost Rs. 2 billion, from the previous year with revenue growing faster than expenditure, data from the Central Bank showed.

The budget deficit, revenues and grants deducted by recurrent and capital expenditure, amounted to Rs. 109 billion, or 2 percent of GDP, for the first two months of this year, as against a deficit of 107.1 percent, or 2.21 percent of GDP, for January-February 2009.

Total revenue, including grants, grew by 17.02 percent to Rs. 108.6 billion from Rs. 92.8 billion the previous year. Tax revenues increased by 20.21 percent to Rs. 102.3 billion from Rs. 85.1 billion.

Total government expenditure increased by 8.85 percent to Rs. 217.6 billion from Rs. 199.9 billion last year. Recurrent expenditure increased by 7.15 percent to Rs.181.3 billion from Rs. 169.2 billion. Capital expenditure grew by 17.91 percent to Rs. 36.2 billion during the first two months of this year from Rs.30.7 billion the previous year.
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