10/17/2022, 17.59
SRI LANKA
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Sri Lanka risks a brain drain with tax hikes

by Arundathie Abeysinghe

President and Finance Minister Ranil Wickremesinghe has proposed taxing incomes starting at 100,000 rupees (US$ 270) a month. With inflation running at 70 per cent, this risks impoverishing the middle class. Discouraged by the economic situation, many Sri Lankan professionals plan to go abroad.

 

Colombo (AsiaNews) – The Sri Lankan government is proposing to amend existing tax legislation. If approved, anyone earning more than 100,000 rupees a month (US$ 270) will have to pay taxes. The corporate tax would rise from 24 per cent to 30 per cent. However, such a tax hike could drive professionals out of the country.

In December 2019, former President Gotabaya Rajapaksa eliminated many taxes. The current president and finance minister, Ranil Wickremesinghe, wants instead to double tax to GDP ratio from the current 12.7 per cent to overcome the country’s current economic crisis.

For some analysts, higher tax revenues are key after Sri Lanka defaulted on its sovereign debt in April and is seeking support and funds from the International Monetary Fund for its reforms.

Others disagree, viewing the president’s tax proposals more of an impulsive measure to increase government revenues in the short run.

Under the proposal, a person earning at least 100,000 rupees a month will have to pay taxes depending on the additional amount earned. This means lowering the bottom tax threshold by 60 per cent, from three million rupees (US$ 8,175) to 1.2 million rupees (US$ 3,270).

“The sharp increase in personal income tax rates would drastically affect middle-class families, discourage employment, negatively affect their lives in an environment of high inflation. This could increase the brain drain,” said Asanka Tennakoon, CEO of a leading IT company.

“The 2019 tax system is not going to be the same now,” noted a financial analyst on condition of anonymity. “Those higher tax rates were affordable at that time as the cost of living was lower and the inflation was 6-7 per cent.”

At present, “many professionals are leaving the country due to the unprecedented economic crisis and the prolonged political crisis as many uneducated lawmakers have been dictating in a less participatory decision-making process what educated professionals must do,” said other analysts.

Shenuka Amarasinghe, chief technology officer at a Colombo-based tech company with headquarters in the United States, said that she and her husband, both employed by IT firms, are “seriously thinking of emigrating as we are already piled up with a house loan, vehicle loan, in addition to the high cost of living”.

“Although taxes in developed countries are higher than in Sri Lanka, people get benefits with taxes; instead, here we are paying taxes to operate loss-making public sector institutions,” she added.

What is more, a “30 per cent tax rate could be a deterrent for investment,” this according to Sahan Munasinghe, an economic analyst. “Even if it could be argued that creating a level playing field would be a positive move, sectors which enjoyed preferential tax treatment would be disproportionately affected with the introduction of the tax proposals.”

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