Sri Lanka’s direct taxation is expected to witness a significant increase among other budget 2021 revenue proposals.

The country faces several issues such as low level tax ratio with declining trends, slow structural change of tax composition, dismal outcome even after changing the tax system and low level of efficiency and productivity of the Value Added Tax (VAT).

Tax revenue and other proposals in budget 2021 will be aimed at providing immediate benefits to the people and priority will be given to projects which provide immediate public relief such as empowerment of low income families and upliftment of the rural economy.

The government will take several measures including broadening the tax base, simplifying the tax rates, reducing the number of taxes, facilitating voluntary compliance, avoiding politically-motivated tax amnesties and tax concessions, and avoiding political interference and influence on tax administration to enhance tax revenue.

Several existing tax holidays, partial tax holidays, and other concessions are to be removed while introducing a simplified three tier corporate tax structure, taxation of capital gains while expanding the coverage of withholding taxes.

The government had set a target in its medium-term economic plan to increase income tax contribution to total tax revenue to at least 40% from 20% in the budget revenue proposals.

The estimated tax revenue will be Rs.1225.5 billion and non-tax revenue will be around Rs. 204.6 billion in 2021, provisional data showed.

Tax revenue declined significantly by nearly 30% to Rs. 408.5 billion in the first four months of 2020, compared to Rs. 551.5 billion in the same period of 2019 while non-tax revenue increased significantly by 46.5% to Rs. 68.2 billion from Rs. 46.6 billion, Finance Ministry data revealed.

In Sri Lanka, the sales tax rate is expected to reach 8% in 2021, according to analysts’ expectations.

A tax charge will be enforced onto consumers based on the purchase price of certain goods and services.

The benchmark use for the sales tax rate refers to the highest rate. Revenues from the sales tax rate are an important source of income for the government.

Corporate tax rate will be revised and the Finance Ministry is likely to re-introduce the wealth tax while maintaining a social security rate of 20% for companies and 8% for employees, official sources said.

The excise tax on cigarettes and hard liquor manufactured locally will be further increased (excise duty on special arrack remains without change) and excise duties imposed on malt liquor will also be revised.

Furthermore,The government is likely to hike taxes on fuel imports, luxury items and cosmetic imports.