Govt. targets Rs.300bn from vehicle taxes, but many remain skeptical
The maiden budget of the National Peopleâs Power (NPP) government expects to raise around Rs.300 billion from excise taxes, value added tax and other taxes on vehicle imports in 2025, but many remain skeptical of its viability amid what some considered as an overly ambitious tax revenue target set for the year.
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Speaking at a post-budget forum organised by Institute of Certified Management Accountants of (CMA) Sri Lanka, Duminda Hulangamuwa, the Senior Economic Advisor to the President said Sri Lanka can spend up to US$ 1.2 billion in foreign currency on vehicle imports in its first year of re-opening and earmarks about Rs.300 billion or roughly 1.2 percent of Gross Domestic Product from its taxes.
A couple of days later speaking at the weekly cabinet media briefing, Professor Anil Jayantha, the Minister for Labour and Deputy Finance Minister affirmed the revenue share expected from vehicle imports.
Sri Lanka has budgeted to generate Rs.885 billion incremental revenues from taxes in 2025, of which roughly Rs.300 billion is set to come from vehicle imports. The balance is expected to generate from the continuous growth in the economy which is projected to grow at a modest pace of 5.0 percent in 2025 and also the digitalisation and the enhancing the tax administration efforts.
Speaking at the same budget forum, tax expert and the Principal Tax and Regulatory at KPMG, the global auditors, Suresh Perera however wasnât that convinced. He said the target tax revenue could be in jeopardy if the vehicle imports relaxation does not result in the expected number of vehicles under the current tax structure on vehicles which remains shockingly higher.
Sri Lanka re-opened vehicle imports after five years since it was banned in 2020 March due to the pandemic induced challenges to the foreign currency inflows.
The move resulted in the government losing roughly Rs.250 billion of revenue per annum from excise taxes and other vehicle related taxes to the national coffers, bringing the total lost revenue in the five years to about Rs.1,500 billion at a minimum.
But the so-called experts all jumped in to find fault in the tax cuts by the then Rajapaksa administration to prop up the economy which was under enormous strain from higher taxes under the then International Monetary Fund programme.
In any case, Perera illustrated the likely problem with vehicle taxes using what is widely known as the Laffer curve â a bell curve analysis â which shows the relationship between tax rates and tax revenue in an economy.
According to the Laffer Curve, which is based on the theory by American economist Arthur Laffer in 1974, the tax revenue most likely will not maximise when tax rate is at 100 percent as it disincentivises those from earning wages.
And hence it plotted the revenues at different tax rates and identified an optimal rate at the top of the bell curve which the revenue is maximized and concluded by saying that either decreasing or increasing the tax rate from the optimal level would result in losing tax revenue.
Professor Jayantha last week hinted that they could revise down vehicle import taxes if the demand fails to pick up for vehicles.
The decision to re-open vehicle imports at very high taxes was made considering the need to ensure such action does not put pressure on the countryâs external sector stability.
âWe change the duties to increase the prices. But now an indication has been given by the Central Bank about the possibility of reducing import duties,â Jayantha was quoted to have said in a post-cabinet media briefing last week.
Sri Lanka aims at raising a total tax revenue of Rs. 4,590 billion, bringing up its share to 13.9 percent of GDP and expects to expense a sum of Rs.7,190 billion, 21.8 percent of GDP, resulting in a total deficit of 6.7 percent of GDP, down slightly from 6.8 percent expected for 2024.
Source: https://www.dailymirror.lk/breaking...le-taxes-but-many-remain-skeptical/108-303007
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