KPMG Principal Tax and Regulatory Suresh Perera

• KPMG Principal Tax and Regulatory Suresh Perera highlights simplified and practical solutions to boost revenue via tax reforms 
• Suggests reviving Mansion Tax as simpler solution for taxing luxury living and high-net-worth individuals than Imputed Rental Income Tax 
• Stresses need to consider practical and economic implications when designing tax policies
• Opines implementing IRIT involves significant administrative challenges
• Warns replacing SCL with 18% VAT could significantly increase prices of essential goods
• Explains potential challenges of imposing VAT on non-resident digital service providers; suggests digital service tax
• Cautions on removing VAT exemptions for service exporters could encourage retaining earnings outside Sri Lanka

By Charumini de Silva

KPMG Principal Tax and Regulatory Suresh Perera last week critiqued the complexity of the proposed Imputed Rental Income Tax and suggested the revival of the Mansion Tax as a more straightforward solution for taxing luxury living and high-net-worth individuals.

His analysis was presented at a webinar organised by the CMA Sri Lanka titled ‘Tax reforms in the IMF report’, where he shed light on several tax measures agreed and included in the Staff Level Agreement at the second review of Sri Lanka’s Extended Fund Facility (EFF) program of the IMF.

Perera made an extensive presentation on Imputed Rental Income Tax, substitution of Special Commodity Levy (SCL) on essential goods with Value Added Tax (VAT), removal of Income Tax exemption of service exporters, increase of Corporate Tax of alcohol, tobacco, betting and gaming industries, VAT on digital services, Stamp Duty on leases and importation of motor vehicles and other goods.

His comments underscored the importance of considering both practical and economic implications when designing tax policies to achieve revenue generation measures amid economic recovery and growth.

Acknowledging the urgency for Sri Lanka to generate revenue amid its economic crisis, he proposed that a revived Mansion Tax could be swiftly implemented to meet 2025 revenue targets without the extensive administrative overhaul required for the Imputed Rental Income Tax.

Perera questioned the necessity of introducing an Imputed Rental Income Tax to achieve the goal of taxing the wealthy. “A more straightforward and effective approach would be to revive the Mansion Tax introduced in 2015, targeting high net worth individuals and luxury living,” he said.

Perera pointed out that implementing a rental income tax involves creating a comprehensive database, updating existing ones, developing a digital register and amending the Notaries Ordinance.

These administrative measures, he argued, might be cumbersome and time-consuming given the tight deadline of 1 April 2025.

“The Mansion Tax could be quickly operationalised through Ministerial regulation, aligning with fundamental tax principles that taxes should be levied based on the ability to pay,” he said.

He questioned the efficiency of such measures compared to the Mansion Tax, which he argued could immediately contribute to the revenue required for 2025.

Perera also discussed the broader implications of tax policies, noting that taxes should align with individuals’ ability to pay.

He drew comparisons with Greece’s tax regime, which imposes taxes on luxury items such as private cars, swimming pools and helicopters, suggesting that a similar approach could be effective in Sri Lanka.

He raised questions about how the Imputed Rental Income Tax would be integrated into the existing Inland Revenue Act and whether it would involve a new set of progressive tax rates.

Perera discussed the potential impact of replacing the SCL with an 18% VAT, which he warned could significantly increase the prices of essential goods.

He cautioned against its potential unconstitutionality due to the discretionary power it grants the Finance Minister, recommending abolishing the levy to prevent further misuse of authority and ensuring Parliamentary control over public finances.

“It is critical to ensure careful consideration of VAT rates and exemptions to prevent adverse effects on the prices of essential goods in the marketplace,” he said.

About the challenges of imposing VAT on non-resident digital service providers, he stressed the need to create tax parity between local and foreign digital service providers.

Perera suggested that more comprehensive measures, such as introducing a digital service tax, might be necessary to achieve this goal.

Regarding the exemption of service exporters from VAT, he cautioned that removing this exemption could lead to structuring arrangements that keep foreign currency earnings outside Sri Lanka.

He asserted the need to balance equity with the potential adverse impact on the economy.

“Policymakers should be mindful that while creating equity is commendable, it should not adversely impact the economy by encouraging service exporters to retain their earnings outside Sri Lanka. This would exacerbate the current economic challenges,” he added.

Noting that the SVAT refund process is under review, he said the IMF report notes that work has begun to overhaul the system to ensure its full repeal by April 2025. “A committee has been formed to oversee this transition, with a project management plan expected by April 2024. We are now in July, so whether this has happened is something that we can see. The aim is to identify eligible exporters, validate payments and ensure adequate refund funding,” he said.

On stamp duty, he said there appears to be confusion in the IMF report. The current rate on leases is 1%, not 0.01%. The report incorrectly suggests that increased Stamp Duty would benefit Provincial Councils, but in reality, it is collected by the Commissioner General of the Inland Revenue Department. “These inaccuracies need revisiting,” he pointed out.

He also said as part of the IMF program, Sri Lanka must permit free trade and gradually phase out import restrictions, including those on motor vehicles, with a targeted removal by mid-2025.

“Lifting the motor vehicle import ban could boost GDP by 0.8%.,” he said.

Perera urged policymakers to carefully consider these proposals to enhance the effectiveness and fairness of Sri Lanka’s tax system, ultimately aiming for a balanced approach that supports economic recovery and growth.

His presentation followed a panel discussion featuring Gajma & Co. Senior Partner N.R. Gajendran and Ranaweera Associates Managing Partner Athula Ranaweera. The session was moderated by Ernst and Young Partner Tax Nisthar Sulaiman.