The Government will increase income tax, withholding tax, pay-as-you-earn tax and value added tax to levels before the 2019 controversial tax cuts which reduced fiscal revenue to a paltry 8.6 percent of gross domestic product when it should be between 13 and 14 percent.
The first to be hiked will be income and PAYE taxes, Finance Minister Ali Sabry told the Sunday Times. “VAT is the last thing I want to raise because that will have a direct impact on consumer pricing,” he said. “All these taxes need to be revisited so we can take revenue collection back to 13-14 percent of GDP.”
Mr Sabry would not commit to a time frame and said it had to be decided whether the increase would be in stages or outright. The objective is to go to the levels of taxation existed before the 2019 reductions which economists have widely criticised as having contributed to the present crisis.
In November 2019, shortly after President Gotabaya Rajapaksa’s electoral victory, the Government announced a VAT cut from 15 to eight percent and the abolition of seven other taxes, including a two percent nation-building tax paid by businesses. It also exempted all religious institutions from taxes.
The IMF said in March that these reductions combined with the COVID-19′s impact on revenues and expenditure measures widened fiscal deficits to 12.8 percent of GDP in 2020 and 11.4 percent of GDP in 2021, raising public debt well above 100 percent of GDP.
In October 2019, Mangala Samaraweera, the late Finance Minister who had raised revenue collection, warned that the country would face bankruptcy like Greece or Venezuela if the tax cuts went ahead.
In an information note released on Thursday, the Finance Ministry warned that in the process of implementing responsible and disciplined fiscal management “the country and its citizens will have to go through a period of difficulty”.
“A strong social protection network is required for the vulnerable and needy segments as reforms will be painful,” it states. But it warns that failure to implement required policy reforms at this critical juncture “will be very costly”.
In 2021 alone, the Government’s total expenditure was 2.4 times of its revenue, the note states. And spending on the Government’s day-to-day operations was 1.9 times of revenue the same year. Around 72 percent of revenue went towards interest expenditure, one of the highest such ratios in the world, while salaries and wages took up 58 percent.
Among the measures to be introduced as part of the “painful” reform process is cost-based pricing for utilities and energy sectors “with social safety nets to support vulnerable segments of society”. Divestment of “underutilised and non-strategic State assets, including unproductive SOEs [State-owned enterprises]” will also be required.
“Failure to implement required policy reforms at this critical juncture will be extremely costly,” the Finance Ministry warns.