Sri Lanka's IMF Bailout: Tax Proposal Negotiations

Colombo, Aug 14 (PTI) Sri Lankan President Ranil Wickremesinghe has said that his government is evaluating a proposal by the IMF that suggests widening the tax bands and reducing the top tax rate as against the Treasury's plan to provide relief to mid-level taxpayers hit by recent tax reforms.

Sri Lanka is currently in negotiations with the International Monetary Fund (IMF), which has made external debt restructuring conditional to the USD 2.9 billion bailout package for the cash-strapped nation.

The third tranche of the bailout package was released in mid-June as the Washington-headquartered global lender said on August 2 that Sri Lanka's economic reform programme has yielded good results, two years after the island nation declared sovereign default in mid-April of 2022, its first since gaining independence from Britain in 1948.

“Following the strong performance in tax revenue this year, the Government proposes to @IMFNews an adjustment in Personal Income Tax slabs from Rs 5,00,000 to Rs 7,20,000, aiming to provide relief to mid-level taxpayers affected by recent tax reforms,” the President's Media Division posted on X on Wednesday.

“The #IMF suggests changes, offering more relief to lower bands, similar relief for mid-level and slightly less for higher earners, keeping the proposal's core intact,” it added in the second post.

The two posts referred to Wickremesinghe's keynote address at the University Lecturers' Conference held here on Tuesday when the president revealed plans to provide relief for personal income tax.

“We are evaluating these proposals and working towards one that provides relief. I am considering the IMF proposal. Our decision will be guided by what is best for the country and the people,” a statement from the President's Media Division said quoting Wickremesinghe.

The President spoke about the two proposals, the first being the Treasury's proposal which maintains a tax-free threshold of Rs 1.2 million, widens the tax band from Rs 5,00,000 to Rs 7,20,000, and keeps the top tax rate at 36 per cent, the statement said.

“And the counter proposal by the IMF proposes that the tax-free threshold remains at Rs 1.2 million, but the first tax band is widened from Rs 5,00,000 to Rs 1 million, shifting all tax bands up by Rs 5,00,000, with subsequent bands remaining at Rs 5,00,000 and the top tax rate at 30 per cent,” it added.

Wickremesinghe, who is also the finance minister, admitted that the past two years were “very difficult,” and the country survived the first year only because of the skill of “our ministers.”

“Now we have signed agreements with the Official Credit Committee (OCC), IMF, and others. There are many proposals in these agreements, but I believe the benchmarks are key. You should be aware of them because we have to operate within these benchmarks,” he said.

He spoke about the multiple benchmarks vis-a-vis public debt to GDP ratio, which must be reduced to 95 per cent by 2032, down from 111 per cent today; the gross financing needs to GDP ratio, which must be 13 per cent by 2032 from the current 27.8 per cent.

He also said the forex debt service to GDP must be 1.3 per cent compared to the current 9.2 per cent, and the tax revenue to GDP ratio must reach 14 per cent by 2025 from the current 9.5 per cent.

"Our international reserves must be USD 15 billion by 2028 from the current USD 5.6 billion, inflation must not exceed 5 per cent, and treasury guarantees should be less than 75 per cent, he said, “We have achieved these two targets for now," Wickremesinghe said.

The macroeconomic benchmarks, agreed upon between Sri Lanka, 17 OCC countries, credit countries, China (represented by the Exim Bank), the IMF, the Asian Development Bank (ADB), and the World Bank totalling 21 entities took over a year of negotiations.

“These benchmarks cannot be changed; how we achieve them is a different matter,” the statement quoted the President.