Sri Lanka to impose Tax on owner-occupied houses - details

Saturday, 15 June 2024 - 10:49

Sri Lanka is expected to introduce a range of new tax measures, including a tax on owner-occupied houses, value added tax on digital services, and the removal of exemptions on service exports, as part of a revised agreement with the International Monetary Fund (IMF).

The IMF has strongly advocated for a wealth tax, describing it as ‘critical’ for the country's fiscal health. According to the new agreement, a tax on owner-occupied houses will be calculated based on imputed rent and will take effect from April 2025. The revenue generated from this tax will be allocated to Municipal Councils and Pradeshiya Sabhas.

Sri Lanka is expected to introduce taxes on owner-occupied and vacant residential houses based on imputed or ‘imaginary’ rents starting April 2025, as part of an agreement with the International Monetary Fund (IMF). This decision follows aggressive macroeconomic policies that have led the country into sovereign default.

The imputed rents will be calculated using a property price register, with an exemption threshold for smaller houses to ensure the tax remains progressive. A report released after the deal emphasizes the importance of this measure for revenue mobilization.

A nationwide digital Sales Price and Rents Register (SPRR) will be established by March 2025, accessible to the Department of Inland Revenue. This digital SPRR will be a crucial tool for assessing property values and the imputed rental income tax, according to the IMF report. A provisional SPRR is suggested for August 2024.

By August 2024, a database on property valuations is expected to include information such as assessed values, the latest assessment date, and property type across all municipal councils. Additionally, Sri Lanka will amend the Notaries Act by April 2025 to improve data-sharing among government entities, ensuring that information on each notarized real property contract is automatically fed into the digital SPRR.

To make the tax progressive, there will be increasingly higher rates, with small houses being exempted. The introduction of an imputed rental income tax is deemed critical to sustaining revenue mobilization efforts, with an expected addition of 0.15 percent to revenue relative to GDP.

Municipal councils will also benefit from increased revenue by doubling the tax on leases from 0.1 to 0.2 percent. This comes amidst existing constraints in building houses due to high protectionist taxes on building materials, although the IMF program supports trade liberalization.

Wealth-style taxes, such as the imputed rent tax, must be paid without cash flow, unlike taxes on actual income. Actual rents are already captured under income tax. 

This move by Sri Lanka reflects a broader effort to stabilize its economy and improve fiscal health through enhanced revenue measures, despite the challenges posed by implementing such taxes.

Concerns have been raised regarding the wealth-style taxes, especially those imposed on assets that do not generate cash flows to cover the tax payments. This issue is particularly sensitive in Sri Lanka, where past measures have discouraged house building, making housing costs prohibitive and unaffordable due to currency depreciation.

Sri Lanka is undertaking these tax increases as part of a 'revenue-based fiscal consolidation' strategy, which focuses on raising revenue rather than cutting spending. This approach has been a contentious issue, particularly given the country's history of economic challenges, including a sovereign default and increased spending relative to GDP.

In December 2019, some tax cuts were reversed following currency crises caused by flexible inflation targeting and potential output gap targeting, which reduced growth and increased external debt, leading to trade controls and a change in administration. The current tax hikes come in response to extreme macro-economic policies involving both tax cuts and additional money printing, which have driven Sri Lanka into an external default and negative growth.

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