Sri Lanka is on the cusp of entering 2025 with a new Government in place and with higher revenue targets in hand under the International Monetary Fund (IMF) programme. Achieving a primary surplus in 2025 is also one of the main targets for achieving debt sustainability.
The new NPP Government has mooted the tax relief it will provide to the people through the Pay-As-You-Earn (PAYE) Tax and the removal of Value-Added Tax (VAT) on certain essential items as mentioned in its economic policy statement. However, it has remained largely silent on the countermeasures to recover the loss of revenue from such relief measures, as the country is expected to have a revenue of 15.1% of Gross Domestic Product (GDP) in 2025.
The Sunday Morning recently reported that a Treasury statement which clarified revenue and expenditure measures, the forthcoming budget anticipates revenue at 15.1% of GDP – approximately Rs. 3.9 trillion – while expenditures are projected at nearly 20% of GDP – around Rs. 5.2 trillion – striking a balance between recurrent and capital investments. However, Sri Lanka, which does not have abundant natural resources for export such as petrochemicals or minerals, tax revenue is the key contributor to government revenue. Historically, tax revenue contributes around 80% of Sri Lanka’s government revenue.
According to reports, the Treasury has explained that there was a misconception that exports, tourism, and other external inflows accrued to the government revenue, noting that this was not the case. Instead, those revenues are collected by private enterprises while the Government only receives the corporate tax component of the profit of these enterprises. Dividends and levies from State enterprises contribute to Government non-tax revenue; however, historically this has been a net drain on Sri Lanka’s fiscal balances due to losses incurred by State enterprises. Fines, fees, and rents contribute only a very small component of Sri Lanka’s government revenue; taxes comprise the largest contribution.
Therefore, the IMF recommends prioritising revenue increases over expenditure cuts, although both strategies could help address the primary deficit. The focus will also be on improving the efficiency of capital investments to yield better returns from public spending. Revenue enhancements are expected through broadening the tax base and improving compliance, while expenditure will prioritise effective capital investments that provide high returns.
Another area where state revenue raising has long been flagged for being weak is on compliance checking and collection. However, gradually the tide seems to be turning and the State is taking tangible action to ensure compliance, even for sector which have got off the hook, often scot free like the local distilleries community, who have long been facing allegations of using backroom deals, funding political campaigns and or politicians to evade the ‘short hand of the law’ when it comes to paying their dues. These large-scale enterprises, who make mega profits but conveniently fail to pay taxes on time, like everyone else, and get off easy due to links to the political elite. The State has also long given them leeway in paying their dues, as the liquor sales amount to a significant part of the revenue pie. This needs to end.
It is indeed a welcoming sight with reports indicating the liquor manufacturing licence issued to distiller will be suspended from today (5) due to their failure to pay Rs. 5.7 billion in excise taxes and surcharges, the Excise Department announced. Accordingly, in line with the provisions of the Excise Ordinance Act, the Commissioner General of Excise has ordered to suspend the liquor manufacturing licence issued to leading domestic distiller effective from tomorrow, it is reported. The department had stated that measures have been taken to suspend the liquor manufacturing process from today and not to renew the other licences issued to the company from 31 December onwards if the company continues non-payment of tax arrears and surcharges. The department also raided a prominent casino in Kollupitiya for illegally operating multiple liquor counters yesterday. It is reported that the operation uncovered 100 bottles of illegally imported foreign liquor worth over Rs. 2.5 million. Although the casino’s liquor licence permits only one counter, it was found operating across 5 floors, causing significant tax losses.
Such action towards enforcing existing laws fairly to all and to ensure that the State is not denied tax rupees which they are rightfully owed should be commended. However, the Government has a long road ahead to get the revenue raising right.