ECONOMYNEXT – Sri Lanka’s tax revenues grew 27 percent from a year ago to 543.6 billion rupees up to April 2022 partly helped by one-off retrospective tax, official data showed while inflation also started to gallop which tends to boost nominal turnover based taxes.

By April Sri Lanka’s 12-month inflation had hit 29.8 percent but many traded goods had risen higher.

The first installment of a retrospective tax had brought 59.6 billion rupees, a Finance Ministry report said. Income tax revenue was up 170 percent to 149.2 billion in the first four months.


Value Added Tax (VAT) on domestic activities increased by 36.6 percent to Rs 85.3 billion in the first four months of 2022 from Rs62.4 billion while revenue collected from excise duty on domestic activities increased 14.6 percent to Rs 94.7 billion.

VAT, CESS and PAL had marginally increased by 1.4 percent to Rs 203.6 billion in the first four months of 2022 from Rs 200.7 billion in the same period of 2021.

Customs Import Duties (CID) fell 44.7 percent to Rs. 17.5 billion and Special Commodity Levy (SCL) 22.9 percent to Rs. 15.8 billion, respectively due mainly to the import restrictions and downward revisions of SCL rates.

The realization of revenue from income tax as against the annual estimated revenue of Rs. 496.0 billion was 30.1 percent in the first four months of 2022.

Petroleum taxes had fallen 20 percent to Rs 16.4 billion with import volumes falling to 2.9 million metric tonnes from 3.4 million a year ago.

With non-tax revenues, total revenues were up 31 percent to 630.9 billion rupees boosted by central bank profits.

The central bank had transferred profits (as domestic liquidity) despite reserve losses and forex shortages.

Sri Lanka’s central bank had projected 20.7 trillion gross domestic product for 2022, sharply up from 16.8 trillion a year ago with a 22 percent inflation.

However it is not clear whether inflation would further increase nominal GDP, despite fall in real activity due to fuel shortages and lower spending power from a currency crisis expected to trigger a contraction in real GDP.

The statistics office had meanwhile also revised the GDP up based on a re-basing.

Inflation Hair Cut

When inflation go up, nominal government revenue go up and domestic debt holders, pensioners bear a key part of a real hair cut on debt as they lose the value of their savings, unlike foreign dollar debt holders and the cost of living and taxes go up.

Rupee wage earners including state workers also lose living standards and pay more taxes contributing to the fiscal correction as the rupee is depreciation. If they had rupee bank deposits or government debt, they pay the fall in the real value of savings as well.

Dollar debt holders are generally protected from depreciation and inflation unless a debt restructuring is done, though bond holders automatically suffer a hair cut and higher nominal tax payments as the currency depreciations.

Based on the central bank projection and last year’s GDP, tax revenues was 2.6 percent of GDP up from 2.5 percent a year ago as revenue grew 27 percent.

Current spending grew at a slower rate of 14 percent to Rs 1,016 billion rupees and was down to 4.9 percent of GDP from 5.3 percent based on the inflated GDP.

The revenue deficit was down to Rs 385.9 billion rupees (1.9 percent of GDP) from Rs 408.4 billion a year ago (2.4 percent of GDP).

Capital spending was Rs138.4 billion up 23 percent, giving an overall deficit of 524.3 billion rupees or 2.5 percent of GDP, compared to 3.1 percent last year.

The primary deficit was 97 billion rupees, down from 154 billion rupees last year.

Foreign borrowings were a net repayment of 127 billion rupees while domestic net borrowings were 651 billion rupees.