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IMF staff-level deal comes with Wealth Tax

02 Sep 2022

 
  • IMF Mission Chief for Sri Lanka says move is to protect poor from fiscal adjustment impact
  • Says tax collection ‘very low’, progressive tax reforms needed
  • Notes tax reforms needed to ensure greater contribution from high-income earners
  By Imesh Ranasinghe    Implementing the Wealth Tax to protect the vulnerable and the poor from the impact of the fiscal adjustment to reduce the fiscal deficit is a part of the International Monetary Fund’s (IMF) Staff-Level Agreement (SLA) with Sri Lanka, stated IMF Mission Chief for Sri Lanka Masahiro Nozaki. Speaking yesterday (1) at the press briefing held in Colombo on the SLA with Sri Lanka, he said that since Sri Lanka’s tax collection has been very low, progressive tax reforms should be designed to raise tax revenue to support fiscal adjustment in reducing the fiscal deficit. He added that these tax reforms should be designed to ensure greater contribution from high-income earners, and to minimise the impact of fiscal adjustment on the vulnerable and the poor. “In this context, one of the ways to ensure progressivity of tax measures is to use a personal income tax, including a higher tax rate for high-income earners,” he said, adding that a Wealth Tax should be implemented to address this, and that such a Wealth Tax is part of the SLA with Sri Lanka. However, Nozaki said, the preparation of the Wealth Tax will take time, and how it is designed is going to be discussed with the Sri Lankan authorities over an appropriate time frame. The Sri Lankan authorities and the IMF team reached an SLA yesterday to support Sri Lanka’s economic adjustment and reform policies through a new 48-month Extended Fund Facility (EFF), with requested access to about $ 2.9 billion. One of the key elements of the programme on which both parties have agreed is raising fiscal revenue to support fiscal consolidation, which will involve implementing major tax reforms. The statement by the IMF said that these reforms include making the personal income tax more progressive and broadening the tax base for corporate income tax and Value-Added Tax (VAT). The programme aims to achieve a primary surplus of 2.3% of GDP by 2024. Sri Lanka abolished the Wealth Tax in 1992, as the tax was yielding low revenue at the time. According to the independent think tank Advocata, countries such as Germany, France, Sweden, India, and Pakistan have abolished the Wealth Tax in the last 25-year period due to the higher cost of administration involved, low revenue, and significant contribution to the outflow of capital from the respective countries.


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