Bankrupt Sri Lanka raises taxes, rolls back Rajapaksa cuts

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Economic crisis in Sri Lanka: Sri Lanka announced that it was in default on all of its external debt.

Dove:

Cash-strapped Sri Lanka on Tuesday announced steep sweeping tax hikes to shore up revenue as the country endures its worst economic downturn and seeks an IMF bailout.

Value Added Tax (VAT) applied to almost all goods and services has been raised from 8.0% to 12% with immediate effect, while corporate taxes have also been increased from 24% to 30%.

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The personal income tax exemption threshold was lowered from 3.0 million rupees ($8,330) per year to 1.8 million rupees.

The increases were a rollback of generous cuts ordered by President Gotabaya Rajapaksa shortly after his November 2019 election victory.

Prime Minister Ranil Wickremesinghe, who is also finance minister, said Rajapaksa’s tax cuts cost the state some 800 billion rupees ($2.22 billion) a year and widened the budget deficit sharply.

International rating agencies, as well as independent economists, have pointed to Rajapaksa’s fiscal policy as fueling the current financial crisis.

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Wickremesinghe, an opposition lawmaker, was named prime minister this month.

His predecessor and the president’s older brother, Mahinda, resigned after months of deadly anti-government protests.

The South Asian nation is in talks with the International Monetary Fund for a bailout after running out of dollars to pay for even the most essential imports such as oil, food and medicine.

Sri Lanka also defaulted on its $51 billion foreign debt.

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Wickremesinghe said he was also removing several tax breaks given to companies in recent years.

The government has not specified how much it will get from the new tax measures.

However, the prime minister said they had run out of rupees to pay the salaries of 1.5 million civil servants and would have to ‘print money’. This would in turn fuel inflation, which is already at a record 33.8%.

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