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Clarification on Imputed Rental Income Tax : Ministry of Finance

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Clarification on Imputed Rental Income Tax

The recent publication of the International Monetary Fund (IMF) supported Extended
Fund Facility (EFF) programme related documents make reference to a proposed
property tax to be implemented as an imputed rental income tax. The purpose of this
press release is to clarify certain speculations and misconceptions regarding the same.

One of the key reasons for Sri Lanka’s deep, complex and unprecedented economic
crisis is the sharp decline in government tax revenue that led to high budget deficits
and resultant escalation of public debt to unsustainable levels. Accordingly, the
remedial measures to recover from the crisis have entailed a focused effort to improve
the revenue of the government. Revenue based fiscal consolidation has been
implemented during the last two years in an attempt to bring Sri Lanka’s government
revenue from a record low 8.3% of GDP in 2022 to 15% of GDP by end 2025. In the year
2023, tax reforms focused on progressive corporate and personal income tax measures.
In 2024, revenue enhancement is supported by Value Added Tax (VAT) reforms,
including elimination of most exemptions and rate adjustments.

Thus far, the revenue targets for 2023 have been largely met and target for 2024 is on
track to reach the required level of 13.5% of GDP by end 2024. Therefore, there remains
1.5% of GDP revenue gains expected in 2025 in order to reach the 15% of GDP revenue
target. The main revenue measure expected to help achieve the 2025 target is a wealth
tax that is focused on property. From the outset of the IMF programme approval in
March 2023, the revenue measures expected in 2023, 2024, and 2025 have been clearly
presented in the public domain.

The envisaged property tax is in an advanced stage of design and therefore, it is
premature to outline specific details of rates and thresholds. However, the focus of this
tax is on high wealth individuals, and not on average income earners. This objective
will be achieved by a suitable tax-free threshold to ensure that the tax is targeted on
very high value property or multiple properties that are owned by wealthy members of
society. This specific targeting is evidenced by the fact that the tax is expected to yield
0.2% of GDP by 2025 and 0.4% of GDP in a full year in 2026.

The design of the tax will also ensure appropriate set off mechanisms to avoid double
taxation and any elements that distort economic incentives. Property taxes are
implemented in many countries (including developing countries like India) since they
are considered to be a highly efficient, progressive, and non-distortive means of
generating revenue to fund public services.

The tax is expected to go through the regular legal process of amendments to the
required legislation and is expected to come into force in April 2025. In addition to
completing the legislative process, there is significant administrative work required to
be done in terms of improving valuation mechanisms and databases in order to
implement this proposed tax measure that was first announced in March 2023 with the
publication of IMF programme documents. In fact, that is not a new tax measure. The
Inland Revenue Act No. 10 of 2006 included a similar imputed income calculation
termed “Net Annual Value”. Property in Sri Lanka is also subject to existing taxes such
as local authority Rates and Stamp Duty – therefore, there is significant precedence for
such a property tax.

The continued improvement of government revenue and associated reduction in
budget deficits has supported the government’s efforts to restore economic stability,
and has helped bring down interest rates and support appreciation of the currency,
which brings with it material improvements to all citizens. A failure to reach the
required level of government tax revenue that can fund public expenditure would lead
to a recurrence of the economic crisis that had devastating impacts on the entire

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