Lanka approves capital gains tax after IMF loan

Sri Lanka’s cabinet approved yesterday the introduction of a capital gains tax for the first time in 14 years, as the island battles a revenue crisis that has forced an IMF bailout.
Prime Minister Ranil Wickremesinghe’s tax plans come after the International Monetary Fund (IMF) this month released the first tranche of a $1.5bn loan in support of the island’s reform agenda.
“This is a move to increase direct taxation and reduce the reliance on indirect taxes such as VAT,” government spokesman Rajitha Senaratne told reporters. “It is the superrich who make huge profits who will be asked to pay capital gains.”
Senaratne said the tax would be introduced soon, but did not give details of rates and the areas to which it would be applied.
A 25% rate had been slapped on property sales before the tax was abolished in 2002.
As part of the deal to secure the IMF money, the government promised to increase tax collection, cut state expenditure and reform loss-making state enterprises, according to documents released by the IMF.
The country last month increased value added tax (VAT) from 11 to 15%.
The government sought an IMF bailout immediately after taking power in January last year, but the fund turned down the request, saying the country’s reserves were at a comfortable level then.
However, the government faced a balance of payments crisis after it went on a huge spending spree to implement its election pledges of higher public sector salaries and lower prices.
Wickremesinghe said the government will seek to raise its tax-to-GDP ratio to 15% by 2020 from the current level of 11%.
Sri Lanka has also agreed to a “flexible exchange rate policy” while maintaining price stability.
Last week, Wickremesinghe announced plans to lift six-decade-old restrictions on foreign exchange flows by November to allow the free transfer of money in and out of the island.
In 2009, Sri Lanka received $2.6bn from the IMF to boost its financial reserves, which dropped below $1bn at the height of fighting between Tamil Tiger rebels and troops.