2023-10-21-世界银行-斯里兰卡发展动态_2023年10月_调动税收创造更光明的未来（英）-2023.10-40页_40页_2mb

Sri Lanka Development Update Summary

Core Content

This document, Sri Lanka Development Update (SLDU), provides a comprehensive analysis of Sri Lanka's macroeconomic developments and tax reforms in the context of a severe economic crisis. It outlines the current economic situation, challenges, and the path forward for fiscal and structural reforms.

Main Aims

• To report on key developments in Sri Lanka's economy over the past 12 months.
• To place these developments in longer-term and global contexts.
• To update the outlook for Sri Lanka's economy.
• To examine selected economic and policy issues in depth.

Key Economic Developments

1. Context

• Sri Lanka faced a severe and unprecedented macroeconomic crisis in 2022, driven by structural weaknesses and poor fiscal and monetary policies.
• The crisis led to a default on external debt in April 2022, prompting the government to enter an IMF program and implement reforms to restore macroeconomic stability.
• The crisis had significant impacts, including a 7.8% contraction in real GDP in 2022, a sharp rise in inflation (peaking at 69.8% in September 2022), and a 81% depreciation of the currency.
• The poverty rate doubled from 13.1% in 2021 to 25.0% in 2022, and the number of households marginally above the poverty line increased.

2. Recent Economic Developments

• The economy showed initial signs of stabilization in the first half of 2023, with inflation returning to single-digit levels in July 2023.
• Usable official reserves increased to about 5 to 6 weeks of imports (or US$2.4 billion by end-July 2023), up from US$500 million in December 2022.
• Real GDP contracted by 7.9% in the first half of 2023 compared to 1H2022, with a significant decline in industrial activity (18.3% y-o-y) and the services sector (3.2% y-o-y).
• Agricultural activity grew by 2.2% in 1H2023, supported by eased fertilizer shortages and a relatively benign climate.
• Tourism and remittances began to show signs of recovery, contributing to the stabilization of the economy.

3. Outlook, Risks, and Priorities

• The macroeconomic outlook remains uncertain, contingent on successful debt restructuring and structural reforms.
• Inflation is expected to stay in single digits due to weak demand, but further monetary loosening and exchange rate pressures could counter this trend.
• The primary deficit is projected to decline in 2023, but the overall fiscal deficit will remain high due to the large interest bill.
• Debt restructuring and revenue-based fiscal consolidation are expected to reduce the overall balance in the medium term.
• Key risks include a prolonged or insufficiently deep external debt restructuring, political backlash, inadequate domestic revenue mobilization, limited external financing support, and a prolonged global slowdown.

Tax Reforms for a Better Future

1. Introduction

• Tax reforms are critical for improving domestic revenue mobilization and restoring macroeconomic stability.
• The document emphasizes the need for a more efficient, sustainable, and equitable tax system.

2. Sri Lanka's Tax Performance

• Sri Lanka has one of the lowest tax-to-GDP ratios globally, at 7.3% in 2022.
• The tax system is characterized by low, multiple, and frequently changing tax rates, a narrow and shrinking base, and overreliance on indirect taxes.
• Compliance is low, and the system is excessively complex and unfair.

3. Causes of Tax Underperformance

• Poorly designed tax policy and chronic tax administration challenges.
• Ill-timed tax cuts in 2019 eroded fiscal buffers and led to a rapid increase in debt.
• Weak enforcement, low compliance, and inadequate taxpayer segmentation.

4. Tax Reforms in a Time of Crisis

• The government introduced a series of tax reforms in 2022-23 to improve revenue collection.
• Key reforms included:
  • Lowering the VAT registration threshold from LKR 300 million to 80 million.
  • Raising the standard VAT rate from 8% to 15%.
  • Raising the standard CIT rate from 24% to 30% for all sectors.
  • Removing concessionary rates and exemptions, including those for the IT sector and dividend payments to non-residents.
  • Lowering the PIT tax-free allowance from LKR 3 million to 1.2 million.
  • Increasing the maximum marginal PIT rate from 18% to 36%.
  • Introducing new taxes, such as a social security contribution levy and a 2.5% tax on imports liable to VAT.
  • Increasing the capital gains tax to 30% for corporates from October 1, 2022.

5. Recommendations and Way Forward

• Introduce a minimum corporate tax to ensure a minimum effective tax rate.
• Strengthen capital taxation through progressive rates on capital income.
• Revamp property taxation based on current market values.
• Introduce wealth, gift, and inheritance taxes.
• Rationalize and make tax expenditures more transparent through comprehensive reviews and regular publication of tax expenditure statements.
• Implement the Tax Administration Modernization Strategy to improve revenue collection.
• Prioritize e-filing, third-party information utilization for compliance risk management, dispute resolution, and tax recovery from defaults.
• Improve taxpayer segmentation to better target high-net-worth individuals.
• Invest in IT infrastructure to support tax administration reforms.

6. Conclusion

• Improved revenue mobilization is essential for Sri Lanka's return to macroeconomic stability.
• The government must continue with structural reforms, carefully navigate political and social pressures, and ensure the effective implementation of tax reforms to restore fiscal sustainability and economic growth.

Key Information

• Tax-to-GDP Ratio: 7.3% in 2022, one of the lowest globally.
• IMF Program: Approved in March 2023, a 48-month Extended Fund Facility (EFF) of approximately US$3 billion.
• Debt Restructuring: Ongoing with France, India, and Japan as co-chairs, and China as an observer.
• Domestic Debt Restructuring: Aimed at reducing annual GFN by 1.5% of GDP in 2027-2032.
• Fiscal Deficit: High in 2022, with the primary deficit declining in 2023 but the overall deficit remaining elevated due to interest payments.
• Poverty Rate: Doubled to 25% in 2022.
• Inflation: Peaked at 69.8% in 2022, returned to single digits in July 2023.
• Usable Official Reserves: Increased to about 5 to 6 weeks of imports by end-July 2023.

Figures and Tables

• Figure 1: Inflation trends (2022-2023).
• Figure 2: Usable official reserves (US$ million).
• Figure 3: Composition of tax revenue as a share of GDP.
• Figure 4: Contributors to growth (production side).
• Figure 5: Index of Industrial Production (2015=100).
• Figure 18: Composition of tax revenue as a share of GDP.
• Figure 28 and 29: Incidence of taxes and transfers in 2019 and 2023.
• Figure 30: Tax Administration Modernization Focus Areas.
• Table 1: Post-crisis major tax reforms.
• Table 2: Real GDP growth in 1H2023.
• Table 5: Summary Macroeconomic Indicators.
• Table 6: Benchmarking Sri Lanka's tax performance.
• Table 7: Declining share of GDP of Sri Lanka's major taxes, 2005-19.
• Table 8: Growth of consumption expenditure compared to VAT.
• Table 9: Tax buoyancy of major taxes in Sri Lanka (2000-2018).
• Table 10: Benchmarking Sri Lanka's tax rates.
• Table 11: Post-crisis major tax reforms.

Annex

• Annex 1: Highlights the multiplicity of taxes and levies in Sri Lanka and frequent policy changes as contributing factors to the tax underperformance.

Conclusion

• Sri Lanka's recovery is contingent on successful debt restructuring, structural reforms, and improved tax administration.
• The government must ensure the effective implementation of tax reforms and maintain fiscal discipline to restore macroeconomic stability and reduce poverty.