As Sri Lanka explores various avenues to enhance its tax revenue, it is likely that the country will opt for a property tax instead of implementing a comprehensive wealth tax, according to KPMG Sri Lanka.

As Sri Lanka has continued to show hesitancy in bringing in direct taxes, resulting in the country having a dangerous direct-to-indirect tax ratio of 20:80 percent, a property tax over a wealth tax is highly possible, said KPMG Tax and Regulatory Principal Suresh Perera, addressing a webinar on the topic last evening.

To reach a primary fiscal surplus of 2.3 percent of GDP by 2025, Sri Lanka has assured the International Monetary Fund (IMF) to revamp the property tax system and introduce a wealth transfer tax. 

In particular, Sri Lanka is slated to introduce a nationwide real property tax, and adjust the system of transfers between the central and provincial governments.

The country has also committed to introduce a gift and inheritance tax with a tax-free allowance and minimal exemptions. 

Preparatory work for these tax reforms is supposed to have commenced by mid-2023, supported by IMF technical assistance.

According to KPMG Sri Lanka, the primary reason for imposing the property tax is to have it as an incentive for efficient land use. While it is a tax base that cannot be withdrawn, it helps to establish an autonomous revenue source for the local government.

However, there are issues in the area around property tax that need to be addressed before its implementation, Perera said.

The challenge is how the properties will be valued, on what value will the next tax be collected, and who will collect the tax.

“According to what I hear, since Sri Lanka has a system of collecting taxes from the real estate properties paid to the local government authorities, it is unsure if they are going to use the same mechanism for collection or they’re going to bring a different statute and appoint a different collection authority like the Commissioner General of inland Revenue to collect the taxes,” he said. 

“But to me, in the implementation of the property tax, the challenge is going to be the valuation of the property. What are the values? What is to be taken at the value for the calculation of the property tax? Rate is a simple thing,” added Perera.

In drafting the property tax laws, Perera pointed out that some of the areas that need attention are: defining the tax base, the valuation methodology, identifying the parties responsible for payment and the collecting authority, determination of the tax rate, and the assignment of the administrative function and tax revenues among levels of government.