Bring back a better designed 'wealth tax' for Sri Lanka - World Bank

COLOMBO (News 1st); The World Bank country report for Sri Lanka reported that despite initial signs of stabilization in the first half of 2023, the macroeconomic outlook remains uncertain, contingent on successful debt restructuring and structural reforms.

The World Bank country report says that Sri Lanka’s tax performance is far below its potential when compared with other countries at a similar level of development and trade.

It also noted that Sri Lanka’s tax collection in 2020 was the lowest among peers.

It went on to note that, Tax revenue decline was driven by a fall in VAT and excise collections, adding that VAT collections have not kept up with the growth in final consumption in the economy.

The report recommends that to achieve macro-fiscal and debt sustainability, and reach its tax potential, Sri Lanka needs to increase its share of tax to GDP substantially

The World Bank report added that Capital taxation could be strengthened by introducing non-distortive taxes like wealth, gift, and inheritance taxes. 

The introduction of a wealth tax could be a useful means of raising revenue in a non-distortive and equitable manner if the full implementation of taxation of capital income is not feasible.

It noted that Sri Lanka used to have a wealth tax, but this was abolished in 1992, and this tax may need to be reinstated, albeit with a better design.

The report added that upgrading IT infrastructure is critical to enhance tax administration efficiency and effectiveness.

It noted that Sri Lanka’s tax system is going through a period of significant reform, which is needed to stem the decline in revenue performance over the last three decades, and especially since 2019.

The report said that overall revenueadjustment needs to  be guided by a strategic reform plan that includes an appropriate sequencing of reforms – in line with technical and capacity considerations.

It added that consistent implementation of this plan will drive improvements in revenues as the economy recovers, and it will help build a resilient tax system that can serve as a foundation for fiscal sustainability and better public service delivery.