Current tax structure

Proposed PAYE tax structure

Sri Lanka’s Pay-As-You-Earn (PAYE) Tax has been at the centre of the brain drain which the country has experienced over the last 18 months, as over 1.5 million Sri Lankans have left, with a quarter of them leaving for foreign employment.

PAYE Tax, which was almost abolished by the Gotabaya Rajapaksa Government in 2019, was brought back in 2023 as Sri Lanka entered the Extended Fund Facility (EFF) of the International Monetary Fund (IMF). It has received heavy opposition from the trade unions and professionals as higher tax rates forced most professionals to leave the country.

Despite promises for relief on PAYE Tax after the first review of the IMF, it appears that the Government will not be able to deliver, as Sri Lanka fell short of the IMF tax target which was a “concern” for the IMF, as per the report the fund issued.

With Budget 2024 drawing nearer, an alternative PAYE Tax structure has been proposed by Samagi Jana Balawegaya (SJB) MP and Committee on Public Finance (COPF) Chairman Dr. Harsha de Silva based on the alternative tax structures proposed by the Government Medical Officers’ Association (GMOA) and Professional Trade Union Alliance.

PAYE Tax collection surpasses annual target 

De Silva proposed the new tax structure to Parliament two weeks ago. He said that although taxes were the primary source of revenue for the Government, it was important to remember that taxes must be equitable and fair.

He said that the Government expected to raise Rs. 100 billion via PAYE Tax in 2023 while it aimed to collect Rs. 115 billion from Personal Income Tax (PIT), which is voluntarily declared.

However, he added that according to the data provided to the Committee on Public Finance, as at the end of August, PIT collection was at Rs. 25 billion and set to reach between Rs. 35-40 billion by the end of the year, which is way below the target.

He added that as of September, PAYE Tax collection stood at Rs. 107 billion, surpassing the Rs. 100 billion target. PAYE Tax collection is expected to reach Rs. 125 billion with the current 70% tax compliance.

De Silva said since 100% tax compliance could be expected from PAYE Tax as companies had to pass the taxes which had already been deducted from their employees to the Inland Revenue Department (IRD), PAYE Tax collection could reach a maximum of Rs. 178 billion with the existing 242,722 PAYE taxpayers.

“This means that there has been an original underestimation of roughly about Rs. 25 billion at 70% compliance or Rs. 80 billion at 100% compliance,” he said. “So now we know that the PAYE Tax structure going from 6% to 36% in slabs of Rs. 41,667 a month was actually an overburden on the working professionals.”

He noted that the Government could collect the expected Rs. 100 billion by reducing the marginal tax rates from 0-36% to 0-24%.

Alternate solution to PAYE problem 

According to the proposal by de Silva, the first Rs. 100,000 will not be subjected to tax and the tax slabs will increase by Rs. 50,000 as opposed to the current tax slab of Rs. 41,667.

Individuals earning above Rs. 100,000-150,000 per month will be subjected to a tax of 6%, Rs. 150,000-Rs. 200,000 – 10%, Rs 200,000-Rs. 250,000 – 14%, Rs. 250,000-Rs. 300,000 – 16%, Rs. 300,000-Rs. 350,000 – 18%, Rs. 350,000-Rs. 400,000 – 20%, Rs. 400,000-Rs. 450,000 – 22%, and above Rs. 450,000 – 24%.

De Silva said that with 100% compliance from the existing 242,722 PAYE taxpayers, tax revenue could go up to Rs. 91 billion, including a temporary surcharge of an additional 15% on the tax.

According to him, a 10% surcharge is taken from individuals earning Rs. 750,000 to Rs. 1 million per month, a 15% surcharge from Rs. 1 million to Rs. 1.25 million, and a 20% surcharge above Rs. 1.25 million.

“If we have the data of actual taxpayers of Rs. 500,000 per month and above, these estimates can be further improved and the surcharge will be more than just Rs. 8 billion,” he said. 

According to the data given by the IRD to COPF, there are 18,992 PAYE taxpayers earning more than Rs. 500,000 per month.

Speaking to The Sunday Morning, de Silva said that there was no breakdown of the taxpayers with a monthly income of over Rs. 500,000.

“We have made some assumptions and if we get access to the above Rs. 500,000 income earners, the numbers will be even better,” he said.

The MP said that the proposed PAYE Tax structure could adjust the burden on professionals, where the average could come down by 29% of the current tax burden yet result in the same tax revenue.

He said that he had not received any response from the Government on his proposal. 

‘Harsha’s proposal viable’

Speaking to The Sunday Morning, Gajma & Company Tax Consultancy Founder and Senior Partner N.R. Gajendran said that based on the data available on the proposed PAYE Tax structure, the proposal was a viable option to the current PAYE structure.

He said that the expectation of overachieving the PAYE Tax revenue target clearly showed ad hoc and unscientific budgeting of revenue. “The pain of taxpayers in paying unbearable tax is not justified and should be corrected immediately,” he added.

Gajendran, who is also a member of the Taxation Committee of the Ceylon Chamber of Commerce, said that the surpassing of the PAYE Tax revenue target showed that there was room for the reduction of rates and a further increase of the tax-free threshold.

However, he noted that in the proposal by de Silva, there was no need for an increase in the threshold as the rates had been reduced.

Finance Ministry unaware of proposal 

Speaking to The Sunday Morning, State Minister of Finance Ranjith Siyambalapitiya said the Finance Ministry was yet to receive a proposal from the Opposition on PAYE Tax.

However, he added that they would consider all proposals including that by de Silva as the Finance Ministry was currently having discussions on all proposals presented targeting the upcoming Budget.

“We will consider the proposal since de Silva is the COPF Chairman,” Siyambalapitiya said.