• Govt. submits alternative revenue plan to IMF; details remain undisclosed
• New administration opposes IRIT, deferring implementation this year 
• No final decision on whether a replacement tax will be introduced: Deputy Minister
• IMF originally proposed rental tax as constitutional workaround to national property taxation

Sri Lanka has proposed an alternative revenue-generating mechanism to the International Monetary Fund (IMF) to replace the controversial Imputed Rental Income Tax (IRIT) which the Government has opposed, the Department of Fiscal Policy reveals. 

Speaking to The Sunday Morning Business, Department of Fiscal Policy Director General M.K.C. Senanayake shared that they had developed an alternative revenue-generating mechanism to replace the controversial IRIT and that it had been submitted to the IMF for its approval.

However, he refused to provide any specific details regarding this alternative revenue-generating mechanism, claiming: “President Anura Kumara Dissanayake has presented these proposals to Parliament.”

The Sunday Morning Business, despite its best endeavours, was unable to identify the exact speech of the President referred to by Senanayake.

However, speaking to The Sunday Morning Business, Minister of Labour and Deputy Minister of Economic Development Prof. Anil Jayantha Fernando stated that although they had decided that they would not be implementing the rental income tax this year, they had not made a decision on whether an alternative revenue-generating mechanism would be introduced in its place.

“We have decided we are not going to do it this year. However, we have not made a final decision on what we are going to do going forward,” he stated.   

Originally, the previous Government considered the introduction of a national property tax, which was however abandoned due to severe data constraints, capacity limitations to administer new taxes, and a constitutional bar on collection of property taxes by the Central Government. 

Thereafter, based on the recommendations made by an IMF study, it was agreed that Sri Lanka would introduce an IRIT from the second quarter of 2025.

The report titled ‘Sri Lanka: Technical Assistance Report – Property Taxation at the National and Subnational Level’ published by the IMF on 23 August 2024 provides: “The 13th Amendment of Sri Lanka’s Constitution clarifies that property-related tax revenues accrue to subnational governments. All taxes collected at the central level are thus transferred to Provincial Councils. 

“Notably, the Constitution allows for amendments of laws that are under the authority of subnational governments (specified in the Ninth Schedule of the Constitution – the Provincial Council List) under the condition that all nine Provincial Councils agree to such amendment. In principle, the revenue allocation of property-related revenue could thus be changed.”

Considering this constitutional bar, the IMF report recommended the introduction of a rental income tax. 

It noted: “Such tax is levied on the implicit income (or benefit) that is derived from owner-occupied property and would be imposed under the Inland Revenue Act, with revenue naturally accruing to the Central Government.

“Since Sri Lanka’s private sector is already plagued by a distortive turnover-based tax (the Social Security Levy), it is advisable that the imputed rental income tax be levied only on owner-occupied residential property and not on commercial property. 

“Commercial property is typically more valuable than residential property. The restricted application of the tax implies that revenue expectations need to be lowered relative to what would be raised by a full-fledged national property tax.”