Sri Lanka’s cash-strapped government announced on Tuesday massive, all-encompassing tax hikes in order to boost revenue. The announcement came as Sri Lanka is facing its worst economic crisis and needs an IMF bailout.
The increases were a rollback of the generous cuts ordered by President Gotabaya Rajapaksa soon after he won the November 2019 elections.
Prime Minister Ranil Wickremesinghe, who is also the finance minister, said Rajapaksa’s tax cuts cost the state some 800 billion rupees ($2.22 billion) annually and widened the budget deficit sharply.
International rating agencies, as well as independent economists, have pointed to Rajapaksa’s fiscal policy as having fuelled the current financial crisis.
Wickremesinghe, an opposition legislator, was made prime minister this month.
Value-added Tax (VAT), which is applied to almost all goods, was increased to 8.0 percent from 12 percent immediately. Additionally, corporate taxes were raised to 24 to 30 percent.
Personal income tax exemption threshold has been lowered to 3.0 million rupees ($8,330/year) from 1.8 million rupees.
These increases are a rollback from the generous cuts President Gotabaya Rajapaksa ordered shortly after he won November 2019 elections.
Ranil Wickremesinghe (Prime Minister) and the Finance Minister said Rajapaksa tax cuts had cost the state 800 billion rupees ($2.22 trillion annually), which widened the deficit.
Both independent economists as well international rating agencies pointed to Rajapaksa’s fiscal policy for fueling the current financial crisis.
Wickremesinghe was named prime minister by the opposition legislature.
Mahinda Mahinda was Mahinda’s brother and predecessor. The protests against the government turned into a deadly flurry of violence that lasted for months.
His predecessor and the president’s elder brother Mahinda stepped down after months of anti-government protests turned deadly.
The South Asian nation is in talks with the International Monetary Fund for a bailout after running out of dollars to pay even for the most essential imports such as oil, food and medicines.
Sri Lanka has also defaulted on its $51 billion foreign debt.
Wickremesinghe said he was also removing several tax breaks granted to companies in recent years.
The government did not say how much it will raise from the new tax measures.
However, the prime minister had said they had run out of rupees to pay the salaries of 1.5 million civil servants and would have to “print money”. That would in turn fuel inflation, which is already at a record 33.8 percent.
