brand logo

'Either haircut on local debt or hike taxes'

17 Oct 2022

  • Ceylon Chamber Vice Chair Duminda Hulangamuwa says only two options for debt sustainability
By Imesh Ranasinghe  The Government will have to opt for a haircut on domestic debt if taxes are not raised to achieve debt sustainability as per the requirements of the International Monetary Fund (IMF), stated Ceylon Chamber of Commerce Vice Chairman Duminda Hulangamuwa.  Speaking during an interview with Derana TV last Friday (14), he said that Sri Lanka would have to opt for a haircut on domestic debt to achieve debt sustainability, if it wants to avoid tax hikes. “We will have to go for a local (domestic debt) haircut if we do not increase the taxes,” he said, adding that the Government had to opt for increasing taxes, as going for a haircut in Treasury Bills and Treasury Bonds could pose a huge risk to the banking system. Last week, the Government gazetted the amendments to the Inland Revenue Act, where the Advance Personal Income Tax (APIT) threshold was decreased to Rs. 1.2 million from Rs. 3 million per annum, while the rates were increased to a maximum of 36%, and corporate income tax in the SME, export, and production sectors was adjusted upto a maximum of 30%. The total domestic debt stock of Sri Lanka increased to Rs 12.5 trillion at the end of May, from Rs 12.4 trillion in April, while the T-bill and T-bonds amounted to Rs 10.8 trillion. The staff-level agreement with the IMF states that Sri Lanka should achieve a primary surplus of 2.3% by 2025 from the primary deficit of 4% forecasted for 2022. Further, Hulangamuwa said that there should be a balance between indirect and direct taxes, as the Government cannot earn sufficient tax revenue only through indirect taxes. He said the current balance between the indirect and direct taxes is appropriate, as decreasing indirect taxes, which are at 17.5% (with the VAT at 15% and Social Security Contribution Levy at 2.5%), will cause the direct taxes to increase from 36% to at least 50%, which is not something that can be done. “An increase in direct taxes will impact the development of the economy, as the spending power reduces, leading to a decrease in demand, which will reduce production, while no new investments can be made to businesses with tax rates at 40-50%,” he added.  He said that if Sri Lanka continues on the current path for 1½-2 years, the country can overcome the ongoing crisis.  


More News..