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Thursday May 02, 2024
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In terms of Section 35 of the Monetary Law Act No. 58 of 1949, the seventieth Annual Report of the Monetary Board of the Central Bank of Sri Lanka was presented to Prime Minister and Finance, Economic and Policy Development Minister Mahinda Rajapaksa, by Central Bank Governor Prof. W. D. Lakshman yesterday. They are flanked by Senior Deputy Governor Dr. P. Nandalal Weerasinghe and Economic Research Director Dr. Chandranath Amarasekara
The Central Bank Annual Report 2019 yesterday counselled the Government to ensure measures are initiated to strengthen Government revenue mobilisation, particularly in the context of renewed risks to economic recovery amidst the widespread COVID-19 outbreak and its adverse impact on fiscal policy and debt sustainability in Sri Lanka.
The Annual Report, which was released yesterday, noted that in 2019, total revenue as a percentage of GDP declined due to the reduction in both tax and non-tax revenue. Accordingly, total Government revenue declined to 12.6% of GDP in 2019 from 13.4% of GDP in 2018.
Tax revenue declined to 11.6% of GDP in 2019 from 11.9% of GDP in 2018 as a result of the lower revenue collection from excise duties, VAT, SCL, Cess, and PAL despite a significant increase in revenue collection from income taxes.
“In this backdrop, it is important that adequate measures are initiated to strengthen Government revenue mobilisation, particularly in the context of renewed risks to economic recovery amidst the widespread COVID-19 outbreak globally and its adverse impact on fiscal policy and debt sustainability in Sri Lanka,” the report said.
Similarly, non-tax revenue declined to 1% of GDP in 2019 from 1.4% of GDP in 2018 due to lower revenue from fees and charges, non-availability of distributable profits from the Central Bank and reduction in profit and dividend transfers from State Owned Businesses and Enterprises (SOBEs).
In nominal terms, total revenue declined to Rs. 1,890.9 billion in 2019 from Rs. 1,920.0 billion in 2018 as the reduction in non-tax revenue outweighed the marginal increase in tax revenue collection. Tax revenue increased by 1.3% to Rs. 1,734.9 billion reflecting the significant increase in revenue from income taxes, although revenue collection from excise duties, VAT, SCL, Cess, PAL and NBT declined during the year. Revenue from indirect taxes continued to be the major contributor to the Government coffers, accounting for 75.3% of total tax revenue in 2019.
“However, a notable increase was observed in the share of revenue from direct taxes which rose to 24.7% in 2019 from 18.1% in the previous year, reflecting the impact of the implementation of the new Inland Revenue Act, No. 24 of 2017, with effect from 01 April 2018. Meanwhile, non-tax revenue declined to Rs. 156.0 billion in 2019 from Rs. 207.7 billion in 2018, resulting in the share of tax revenue in total revenue increasing to 91.8% in 2019 from 89.2% in 2018.”
Revenue from income tax increased during the year both as a percentage of GDP and in nominal terms mainly due to the increase in revenue collection from corporate and non-corporate income taxes. Accordingly, revenue from income taxes as a percentage of GDP increased to 2.8% in 2019 from 2.2% in 2018, while in nominal terms, income tax revenue collection increased significantly by 37.8% to Rs. 427.7 billion during the year.
Revenue from corporate and non-corporate income taxes increased by 60.4% to Rs. 272.6 billion in 2019, reflecting the impact of the implementation of the new Inland Revenue Act as well as administrative improvements in the tax payment and return monitoring process of the IRD.
Revenue from PAYE tax also improved during the year by 19.5% to Rs. 49.4 billion in 2019. Further, revenue from withholding tax increased to Rs. 50.4 billion in 2019 from Rs. 46.4 billion in 2018, while revenue from ESC increased to Rs. 55.3 billion in 2019 from Rs. 53.0 billion in 2018, reflecting also the impact of awareness programs conducted by the IRD to increase the WHT and ESC registrations during 2019. Further, revenue collection from Capital Gains Tax (CGT) increased to Rs. 602.4 million in 2019 from Rs. 104.1 million in 2018.
In 2019, revenue from VAT declined both as a percentage of GDP and in nominal terms due to dampened economic activity during the year.
Accordingly, as a percentage of GDP, revenue from VAT declined to 3% in 2019 from 3.2% in 2018, while in nominal terms VAT revenue declined by 3.9% to Rs. 443.9 billion in 2019. The revenue collection from VAT on domestic economic activities declined by 3% to Rs. 274.0 billion in 2019, while revenue from VAT on import related activities declined by 5.2% to Rs. 169.9 billion.
Accordingly, VAT revenue as a percentage of total tax revenue declined to 25.6% during the year from 27% in 2018.
“In view of strengthening the medium term fiscal framework, further measures are needed to ensure the effective implementation of revenue enhancement and expenditure rationalisation measures,” the Annual Report said, pointing out that despite several reform measures initiated to enhance Government revenue in the recent past, the level and structure of Government revenue remain highly susceptible to aggregate demand management measures implemented from time to time.
“Interest payments have become the single largest component in recurrent expenditure, while the wage bill of the Government employees and pension payments continue to rise, limiting the fiscal space for much needed public investment. Meanwhile, the rising levels of expenditure on welfare payments and subsidies continue to weigh on the Government budget.”
Moreover, the financially constrained SOBEs with large debt liabilities continue to pose risks on the Government budget. The measures initiated in 2019 to curtail non-priority Government expenditure are commendable. It is important that the benefits accrued from such measures are sustained, particularly amidst rising pressures in the near term due to bulk recruitments to the public sector, the report added.
Moreover, reforms to transform loss-making SOBEs need to be expedited to ease pressure on the Government budget and strengthen fiscal consolidation over the medium term. Further, an effective use of active liability management operations and adherence to the Medium Term Debt Sustainability measures could prove critical to help smooth debt service payment obligations, while reducing Government debt to a sustainable level over the medium term.
“In this context, measures to strengthen fiscal discipline by adopting stringent and binding fiscal rules remain essential to bolster investor confidence and improve the country’s macroeconomic outlook in the period ahead.”
