Sri Lankan Government Plans to Implement Estate Duty as a Form of Property Taxation by 2025

Sri Lankan government plans to revamp the property tax system and introduce a wealth transfer tax by 2025. The aim of these measures is to make Sri Lanka’s tax system more progressive and gradually shift the focus of taxation from indirect to direct sources. These reforms are part of the government’s plan to enhance fiscal transparency and improve tax compliance in a country where the informal sector is relatively large.

According to the International Monetary Fund (IMF) Country Report No. 23/116, the government’s objective is to reach a primary fiscal surplus of 2.3% of GDP by 2025. To achieve this goal, the government is planning to introduce a nationwide real property tax and adjust the system of transfers between the central and provincial governments. The government also plans to introduce a gift and inheritance tax with a tax-free allowance and minimal exemptions.

Preparatory work for these tax reforms will commence by mid-2023, supported by IMF technical assistance. The IMF’s Extended Fund Facility is designed to provide financial support to countries like Sri Lanka that face balance of payments difficulties resulting from structural problems. The IMF’s support will help Sri Lanka implement its fiscal consolidation plan and achieve sustainable economic growth.

The introduction of a real property tax is a significant reform that will have far-reaching consequences. Currently, Sri Lanka’s property tax system is outdated and does not reflect the true value of properties. The government’s plan to introduce a nationwide real property tax will keep the system current and ensure that property owners pay their fair share of taxes. This will generate revenue for the government and reduce the burden on indirect taxes, such as Value Added Tax (VAT) and customs duties.

The introduction of a gift and inheritance tax is also a significant reform. Which is intended to reduce wealth inequality and ensure that wealth is distributed more evenly across society. The tax-free allowance and minimal exemptions ensure that the tax does not unduly burden middle-class Sri Lankans.

The government’s plan to document all tax expenditures provided under the Strategic Development Projects Act and the Board of Investment Act is an important step toward fiscal transparency. These acts provide tax incentives to businesses that invest in certain strategic sectors of the economy. By documenting all tax expenditures, the government will be able to monitor the effectiveness of these tax incentives and ensure that they are not abused.

The government’s plan to embark on revenue administration reforms is also a significant step toward improving tax compliance. Sri Lanka’s informal sector is relatively large, and many businesses operate outside the formal tax system. The government’s plan to strengthen tax compliance will ensure that these businesses pay their fair share of taxes and contribute to the country’s economic growth.