• IMF endorses rental income tax for SL amid legal constraints
• PCs hold exclusive power to levy property taxes
• Fiscal Policy Dept. cites lack of land registry data for immediate implementation
• Uncertainty remains over rental income tax rollout despite initial April target

The existence of a constitutional bar restraining the Central Government from collecting property taxes has partly influenced the decision to introduce a rental income tax rather than a property tax as originally envisaged, the Department of Fiscal Policy reveals.

Speaking to The Sunday Morning Business, Department of Fiscal Policy Director General Dr. M.K.C. Senanayake revealed the existence of a constitutional restriction providing the power to collect property taxes to Provincial Councils (PCs) and not the Central Government.

He stated that the International Monetary Fund (IMF) missions had also recommended the introduction of rental income tax.

Dr. Senanayake further stated: “We are introducing the rental income tax not because it is a better tax [compared to property taxes]. It is a workable solution that can be introduced immediately because we don’t have a database with land registry data. 

“This is why we introduced this simple method, which we can work on later on.”     

The report titled ‘Sri Lanka: Technical Assistance Report – Property Taxation at the National and Subnational Level’ published by the IMF on 23 August states: “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 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”. 

“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 (IRIT) 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,” the report reads.  

Dr. Senanayake stated that although it had been previously announced that the rental income tax would come into effect from 1 April this year, the relevant laws had not been gazetted. He claimed that it was too early to comment on whether it would be implemented as announced previously.