Bhathiya Barukanda
As part of on-going efforts to support economic recovery and ease the burden on mid-level income earners, the government has announced proposed adjustments to the Personal Income Tax (PIT) structure. These changes are aimed at maintaining fiscal responsibility while providing relief to those most affected by recent tax reforms introduced in early 2023.
The Cabinet Memorandum outlines a proposed amendment to the PIT structure, following discussions with the International Monetary Fund (IMF). The original tax reforms, introduced in mid-2022, were part of a broader strategy to enhance government revenue in response to the country’s economic crisis. Under the Extended Fund Facility (EFF) programme with the IMF, Sri Lanka has committed to achieving a primary budget surplus of 2.3% of GDP by the end of 2025. This goal requires significant tax revenue increases, targeting 14% of GDP by 2025.
The initial reforms included a tax-free threshold set at Rs. 1.2 million per annum, with tax bands of Rs. 500,000 each, and a marginal tax rate of 6%, up to a maximum 36%. However, public demand for relief, particularly for middle-income earners, led the government to re-engage in negotiations with the IMF in mid-2024, when the country began meeting its fiscal targets.
The government now proposes increasing the tax bands from Rs. 500,000 to Rs. 720,000 while keeping the tax-free threshold at Rs. 1.2 million and maintaining the marginal tax rates at each band, including the top rate of 36%. This adjustment is expected to take effect in April 2025, following amendments to the Inland Revenue Act, No. 24 of 2017.
This adjustment focuses on providing relief to those in the middle tax bands, where the burden is most pronounced. For instance, a person earning Rs. 150,000 per month will see a 14% reduction in their tax burden, while higher income earners will experience more limited relief (Attachment –Page 02). The overall revenue impact of this adjustment is estimated at 0.07% of GDP, a figure that has already been factored into discussions with the IMF through compensatory measures, including revenue from vehicle import liberalization in 2025.
President Ranil Wickremesinghe, in his capacity as the Minister of Finance, emphasized that the proposed amendments balance the need for fiscal discipline with the public’s demand for relief, particularly for mid-level earners. The Cabinet is expected to approve the drafting of amendments to the Inland Revenue Act, with the changes set to take effect from April 2025.
