• Treasury officials draft new proposals to replace previous tax plan
• Alternative measures to be presented during 3rd IMF review under EFF
• Govt. opposes taxing non-existent income, seeks viable revenue solutions
• Previous Govt.’s property tax plans were stalled by constitutional constraints

The Government under President Anura Kumara Dissanayake will not be going ahead with the proposal made by the previous Government to introduce an imputed rental income tax, the Ministry of Finance reveals.

Instead, the Government is currently formulating several alternative proposals that will be presented to the International Monetary Fund (IMF) at the next review of the IMF programme.

Speaking to The Sunday Morning, Treasury Deputy Secretary R.M.P. Rathnayake revealed that Treasury officials were currently drafting several alternative proposals to replace the previous Government’s proposal to introduce an imputed rental income tax.

He further revealed that these new proposals would be submitted to the IMF during the third review under the $ 2.9 billion Extended Fund Facility (EFF).

According to Rathnayake, the new Government has expressed reservations regarding the imputed rental income tax proposal. In response, the IMF had informed the Government to submit alternative proposals to meet the IMF targets.

“The IMF basically wanted the Government to come up with some new proposals. The officials are currently working on them,” he stated.

However, Rathnayake declined to provide any specifics with regard to these new alternative proposals. 

Furthermore, he revealed that no date had been fixed yet for the third review under the IMF EFF, noting that it would be fixed after the Parliamentary Elections.

However, he revealed that the Sri Lankan team was in New York at present, attending the 2024 Annual Meetings of the IMF and the World Bank Group (WBG), where they could work with the IMF in relation to these new proposals.  

Speaking to The Sunday Morning, Senior Consultant to the President on Economic Affairs and Finance Prof. Anil Jayantha Fernando revealed that the current Government was fundamentally opposed to the proposal by the previous Government to introduce an imputed rental income tax as it was essentially a tax on a non-existent income.

Elaborating further, he stated that the IMF did not intend to dictate to a country to implement specific taxes, adding that the only requirement by the IMF was for each country to come up with viable revenue generation schemes to meet the targets set by the fund.

“All it does is to give us a target. For example, on this current journey, we have to increase our Governmental income to a particular percentage of the Gross Domestic Product (GDP) in order to rationalise Government spending. It is upon the Government to propose methods to derive income in a manner that the general public will not find overbearing,” stated Prof. Fernando.

Accordingly, he also revealed that the Government was drafting several alternative proposals at present to replace the previous proposal to introduce a rental income tax.

Originally, the previous Government had considered the introduction of a national property tax, which was 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 imputed rental income tax 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 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 report by the IMF has recommended the introduction of a rental income tax because “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”.

The report further notes: “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.”