Explainer: The Proposed Property Tax in Sri Lanka

Jun 15, 2024 | Articles

Avishka Jayaweera

On 13 June 2024, the International Monetary Fund (IMF) published the Country Report on Sri Lanka following the second review under its Extended Fund Facility. The relevant staff report published under the review included a proposal to introduce a property tax.

The initial IMF Report in 2023 envisaged the introduction of a property tax and gift and inheritance taxes by 2025. However, the Government of Sri Lanka maintained that there would be delays in introducing these taxes due to constitutional restrictions on revenue sharing between the central and local authorities and the lack of adequate information on property values. The latest IMF report refers to the introduction of an ‘imputed rental income tax’ on ‘owner-occupied and vacant residential properties’. This tax is to be introduced by 1 April 2025. It will be subject to an exemption threshold and a tax rate schedule (details of which are currently not available) to ensure ‘progressivity’.

An ‘imputed rental income tax’ is a tax on the deemed income that homeowners could earn if they rented out their homes. The tax is imposed on the estimated income of individuals (rather than real property itself).

How will this property tax work in practice?

For example, imagine a person owns three properties: (a) a property the person lives in; (b) a residential property that is vacant; and (c) a property that is rented out to a third party. According to a literal reading of the report, it appears that the proposed tax would only apply to properties (a) and (b), subject to the exemption threshold. Any rental income derived from property (c) would be subject to the existing income tax regime and would not be brought under the property tax regime.

The report, however, does not provide further details.

To ensure the said tax is fully operational by 2026, the following structural benchmarks were proposed:

1. Establish a database on estimated current market values of properties by the end of 2024, by:

a. Digitising the valuation records held by government valuation departments; and

b. Collecting information from a representative sample of 5,000 standard properties, including annual values, latest assessment dates and the property type.

This information will help determine the capital values of properties.

2. Introduce a provisional nationwide digital Sales Price and Rents Register (SPRR) by August 2024 and be fully operational by end-March 2025.

The SPRR will be accessible by the Inland Revenue Department, Valuation Department, Land Registry and the public. It will be utilised to calculate capital gains tax, stamp duty, local recurrent property taxes, and the proposed imputed rental income tax.

3. Improve data sharing among related government entities.

Amendments will be introduced to the Notaries Ordinance of 1907 by April 2025 to ensure that the information (such as valuation roll, cadastral number and the unique tax ID) with respect to each notarised real property transaction is automatically fed into the digital SPRR.

(The author is an attorney-at-law and a Junior Associate at LexAG — Legal Consultants: https://lexag.co/)

To access the full IMF report, visit https://www.imf.org/en/Publications/CR/Issues/2024/06/13/Sri-Lanka-2024-Article-IV-Consultation-and-Second-Review-Under-the-Extended-Fund-Facility-550261.