The recent tax concessions granted to relieve the tax burdened public and stimulate the economy, will not affect this year’s tax revenue target where over 90 percent has already been achieved, said Inland Revenue Department (IRD) Commissioner General Nadun Guruge last week.
“The tax relief measures will not hinder the IRD recording its target this year as the full impact of the fiscal stimulus package will be realised only from January next year,” Guruge said.
The tax administrator of the State, targets Rs. 800 billion in revenue this year. The revenue collector added Rs. 652 billion as tax revenue to the State coffers last year.
“We have already reached around 93 percent or Rs. 750 billion of the target this year and we are confident we could achieve the balance by the end of this year,” Guruge said.
However, IRD officials said in the short term there could be a revenue loss to State coffers due to the tax concessions which will be felt in a couple of months time. The IRD expects a drop in tax revenue next year and the revenue target too is expected to come down.
“We will see the impact of the tax reductions and removals in the next couple of months and that would impact the revenue target next year,” Guruge said.
The Central Bank Governor last week said there is scope and justification for some infusion of aggregate demand but the fiscal stimulus package should be structured in a way that it does not lead to overheating of the economy. The stimulus measures were introduced to boost the disposable income that would increase consumer spending which had been curtailed due to the large number of taxes.
The Cabinet made a slew of tax amendments last week and among them are the reduction in the Value Added Tax from 15 to eight percent, increase in the tax-free threshold for VAT from Rs. 1 million to Rs. 25 million turnover per month, and the VAT on banking, financial services and insurance to be maintained at 15 percent and the income from agriculture, fishing and livestock to be made income tax free.
However, economists and tax experts said over-stimulating of the economy could lead to inflationary pressure and its destabilisation.
A World Bank economist last week cautioned that the country should seek a fine balance to prevent the loosening fiscal policy from overheating the economy.
Finance Minister Mahinda Rajapaksa speculated that the fiscal deficit this year could be around seven percent of the GDP.
He said the government will re-calibrate operations to strengthen fiscal control and reduce the deficit to four percent in the medium term.
The government has said that it would engage in discussions with the IMF to continue the US$ 1.5 billion External Fund Facility which is due to be completed mid next year.