Sri Lanka Aims to Hike Taxes in Budget to Soften Crisis

The pulse | Economy | South Asia

Wickremesinghe’s government plans to more than double tax revenue so that it can cover expenses without having to print money.

Sri Lanka’s president on Monday proposed to more than double the country’s tax revenue as the island nation struggles to emerge from its worst economic crisis.

Unsustainable debt, a severe balance of payments crisis on top of the lingering scars of the COVID-19 pandemic have caused severe shortages of basic goods such as fuel, medicine and food, and skyrocketing prices have caused severe hardship for most the Sri Lankans.

Presenting the annual budget in Parliament, President Ranil Wickremesinghe attributed the country’s difficult situation to declining government revenue and stressed the need to increase it.

Wickremesinghe said the country’s income has dropped significantly to 8.3 percent of GDP in 2021, which he said is one of the lowest in the world. He said his administration has introduced revenue measures to correct the 2019 tax cuts three times this year.

“These tax reforms will help increase revenues in 2023 and beyond, allowing a shift away from costly monetary financing (money printing) to cover government spending in the future,” Wickremesinghe said.

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According to statistics presented in the budget speech, the government expects to increase tax revenue to 3.1 trillion Sri Lankan rupees ($8.5 billion) from 1.3 trillion rupees in 2021.

The document shows that the income tax would triple from 302 billion rupees ($824 million) to 912 billion rupees ($2.5 billion).

The economy deteriorated as the COVID-19 pandemic and the 2019 Easter Sunday attacks devastated tourism, which is a key source of foreign exchange. At the same time, in 2019, the previous government pushed through the biggest tax cuts in Sri Lankan history.

Sri Lanka’s foreign exchange reserves are down to around $1.5 billion and the country does not have enough dollars to import key essentials. Inflation has risen more than 90 percent in recent months.

Sri Lanka has suspended payment on nearly $7 billion in foreign debt due this year pending the outcome of talks with the International Monetary Fund on a rescue package. The country’s total external debt exceeds $51 billion, of which $28 billion must be paid by 2027.

The economic collapse triggered a political crisis and thousands of protesters stormed the president’s official residence in July, forcing Gotabaya Rajapaksa to flee the country and then resign.

Wickremesinghe said negotiations with the IMF were progressing while the government is in talks with India and China on debt restructuring.

“We are confident that these discussions will lead to a positive outcome,” he said.

The vote on the budget will take place on November 22.

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