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The Value added Tax (VAT) will be the major revenue component of Sri Lanka's budget next year and it will definitely not be a temporary measure as some Sri Lankan politicians predict, the International Monetary Fund (IMF) mission head Jaewoo Lee said on Friday (23) evening. 

The mission welcomes the effective tightening of fiscal and monetary policies that contributed to improving market confidence and easing pressures on external balances.

He said Sri Lanka needs to implement a tax reform package without delay.

"Sri Lanka has to bring to Parliament a Bill to implement a value added tax to meet IMF requirements for June." he said.

An IMF mission, which concluded their two weeks of discussions with authorities, commended Sri Lanka for implementing the IMF-supported economic programme under 'difficult circumstances' and for meeting all June-end targets. Discussions will continue in October in Washington DC during the annual meetings of the IMF and World Bank.

"However, some forward looking aspects of the programme review, mainly related to the implementation of the tax reform package need to be addressed without further delay," Jaewoo Lee said.

The government has delayed implementation of tax hikes expected to take effect on 2 May, due to two Supreme Court rulings. The government is considering bringing an amended tax hike proposal in the near future after addressing public concerns.

He said, Sri Lanka's 2017 Budget should be underpinned with a well-crafted tax policy strategy addressing lower tax revenue-to-GDP ratio.

"Accordingly, it is important that the government expedites the legislative process of implementing the VAT amendments that are needed to support revenue targets for 2016 and 2017."

They also said that commencing the legislative process for the new Inland Revenue Act would be an important step in rebalancing the tax system toward a more predictable, efficient and equitable structure and in generating the needed resources in support of the country's ambitions social and development objectives.

The mission welcomes the Cental Bank's move to preemptively raise policy rates to maintain inflation within its target band.

"The CBSL should remain vigilant in monitoring inflation pressures and stand to tighten further should inflation or credit growth continue to rise".

The IMF team also encourages the government to make concerted efforts in implementing structural reforms in public financial management and State- owned enterprises, building on the substantial technical assistance received over the years.
Sri Lanka's economic growth to be around 5% this year and in 2017, they predicted.
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