Amid Sri Lanka’s ongoing economic reforms under the guidance of the International Monetary Fund (IMF), attention has turned to the prospect of a property tax being introduced by 2027.
While the IMF’s fourth review report makes only a brief mention of this plan, it has reignited public debate over whether the long-discussed levy on property ownership – or its alternatives such as imputed rental income tax – might finally materialise.
Tax experts caution that while no final decision has been made, Sri Lankans should closely watch several critical areas as the Government and IMF move forward with building the infrastructure for property-related taxation.
One key concern is clarity around what form the eventual tax will take – whether it will be a direct property tax, an imputed rental income tax, or a broader wealth, gift, or inheritance tax.
They also warn of potential implications for homeowners, particularly those with multiple properties, high-value urban real estate, or properties left vacant. The thresholds for taxation, exemptions for primary residences, and treatment of inherited property are likely to become contentious issues.
Another area of concern is constitutional authority. Under Sri Lanka’s Constitution, land and property taxes traditionally fall under provincial council jurisdiction. Any national-level tax could trigger legal challenges unless carefully structured, as was the case with the previous imputed rental income tax proposal.
Existing property tax and reform project
Property taxation in Sri Lanka has historically played a modest but important role in the country’s fiscal framework, primarily at the Local Government (LG) level. At present, recurrent property taxes – levied annually on the value of property – are collected by local authorities such as municipal councils, urban councils, and pradeshiya sabhas.
These taxes are based on annual values determined by the Government Valuation Department, typically reassessed every five years. However, in practice, revaluations are irregular and often outdated, contributing to significant underperformance in property tax revenue collection.
Alongside recurrent property taxes, stamp duties on property transfers serve as a major source of LG revenue, accounting for about 30% of their own revenue in 2023, while recurrent property taxes contributed approximately 25%. Yet, both systems face challenges – from a lack of up-to-date valuations and incomplete property registers to difficulties in valuing properties in a market dominated by owner-occupiers, where rental data is scarce and often informal.
According to the IMF’s May 2024 Technical Assistance Report on property taxation in Sri Lanka, the comprehensive property tax reform project is expected to take about five years, although this timeline could shorten given the Valuation Department’s existing expertise and data.
The report outlines a clear implementation roadmap, emphasising the need to appoint a dedicated project team and establish a Central Management Unit (CMU) with transparent public updates to build trust. While stamp duty on property transfers remains a key local revenue source, recurrent property taxes have historically underperformed due to outdated valuations, irregular revaluation cycles, incomplete tax registers, and a lack of open market rental data.
To address this, the immediate priority is to establish a digital database of approximate current capital values for residential properties, which would support tax policy design, revenue projections, and taxpayer guidance.
This involves digitising existing annual value records from municipal councils, adjusting them to reflect market values using representative property samples, and maintaining annual valuations of these sample properties. This database will be critical for future property tax administration and audit selection, while reforms to improve LG revenue capacity continue over the medium term.
IMF report
In light of recent developments highlighted in the IMF’s fourth review report on Sri Lanka’s Extended Fund Facility (EFF) arrangement, KPMG Sri Lanka Tax and Regulatory Division Principal Suresh Perera weighed in on what the report truly signalled regarding the long-discussed property tax.
Perera explained: “What is stated in the IMF fourth review report is actually one paragraph – only one paragraph with a few sentences. That paragraph starts with the title, ‘We plan to continue building the data infrastructure for possible property tax.’ The first sentence under that title reads: ‘We are planning to introduce the property taxes by 2027 first quarter.’”
He stressed that the immediate priority, as outlined by the IMF, was building adequate information on property valuation. “The first step in the process requires a database on historical valuation records,” Perera noted. “To this end, Sri Lanka is working to digitise the valuation records held by the Valuation Department, starting with municipal councils. It plans to complete this process by the end of 2025.”
Perera described the IMF’s plan as unfolding in two stages: “The first step is a database with regard to historical valuation. For the second stage, a database based on market value estimates is required.”
To support this, a provisional digital nationwide Sales Price and Rents Register (SPRR) has already been established. “Sri Lanka has resolved outstanding data-sharing constraints and we will establish the final SPRR by end-September,” he said.
He also highlighted a timeline adjustment: “It was a structural benchmark earlier for end-June; now they are saying it will be end-September.”
The final objective is to merge these datasets into a comprehensive, digitised property valuation system. “Finally, it says Sri Lanka will combine the historical digitised records with the SPRR to generate a final database of properties with estimated market values by June 2026,” Perera stated. “This database will be the key resource for assessment of property values and basis for several taxes, including property taxation and capital gains taxation.”
He added that this valuable data repository would be made accessible not only to the Inland Revenue Department (IRD) and the Valuation Department, but also to the Land Registry and the public by September 2026.
Will a property tax be introduced?
However, what grabbed attention was the IMF’s reference to “introducing property taxes by 2027 first quarter”. Perera urged caution, questioning whether this meant an actual property tax or a revival of earlier proposals like the imputed rental income tax, or even wealth, gift, or inheritance taxes.
“The first question that arises is whether the IMF is saying there will be a property tax in the first quarter of 2027,” he mused. “Are they referring to the imputed rental income tax, or are they talking about gift tax, wealth tax, inheritance tax, etc.?”
Perera pointed out that the concept of taxing property was first introduced in March 2023 in the IMF’s initial report. “According to that, the timeline to introduce this – gift taxes, wealth taxes, etc. – was by 1 January. It did not take place and there are many reasons for it not taking place according to that timeline,” he explained.
One of the major barriers was constitutional. “According to the Constitution, taxes pertaining to land in provinces can only be executed or legislated by the provincial councils,” Perera noted. “In other words, land taxes should be accruing to the provinces and not to the IRD.”
To navigate this legal hurdle, authorities proposed the imputed rental income tax, which Perera described as “not exactly a tax on the property, but a direct tax on the individual who gets that tax”.
He elaborated: “There’s a constitutional problem in Sri Lanka with regard to imposing taxes on property, because those taxes will go to the provinces and not to the IRD. Therefore, we are basically converting it into a direct tax – direct income tax – on the individual.”
This proposal, however, was met with significant public resistance. “That is what we used to call a tax on the imaginary income of the individuals – imputed rental income tax,” Perera said. “There was significant resistance from the public with regard to that. Therefore, the Government did not go ahead with the imputed rental income tax at that time.”
Now, with the IMF once again referencing ‘property taxes,’ Perera believes it signals that the matter remains under consideration. “What I gather from this is that the concept of taxing property – the collection of taxes from property – has not been abandoned,” he stated. “They are basically waiting for the right time and preparing for that.”
Explaining how the imputed rental income tax had worked previously, he said: “Homeowners should be prepared to pay income tax based on the potential rental income they can derive if they were to rent a property instead of occupying it themselves.
“If you are renting out a house, then it will not be subject to the imputed rental income tax. The tax will only apply if you are occupying the house as the homeowner or if you have closed down the house and it is not being rented out.”
Perera clarified: “The rent is only on the houses, not on commercial properties. If you have a house you are living in, and that is your only house, then you should be prepared to pay, provided it comes within the thresholds as well. That is also important.”
Even at that time, he recalled, there had been signs that authorities were considering moving towards a property tax regime eventually. “There was an indication that they are looking at going for the property tax,” he said.
As for whether a tax will actually be introduced in 2027, he said: “It is too early to comment on how it will be shaped in future, since these statements in reports are not law. It has to be accepted by the Cabinet, drafted into law, and subsequently passed by Parliament.”
Perera added: “The preparation of the database is continuing, because Sri Lanka is not in a position for Parliament to decide to immediately impose a property tax; we can’t do that because we lack the database.”