A NEW TAX: Imputed Rental Income Tax

According to the International Monetary Fund's (IMF) report on the second review of Sri Lanka's Extended Fund Facility (EFF) program, the government of Sri Lanka is poised to introduce an imputed rental income tax by April 1, 2025, with the aim of boosting tax revenue.

The imputed rental income tax is a novel approach to taxation, targeting the potential income homeowners could earn by renting out their properties. Unlike traditional property taxes, which are levied on the property itself, this tax is imposed on the deemed income individuals could potentially generate from their residential properties, whether occupied or vacant.

This tax is aimed at addressing the institutional impediments faced by the initially planned property tax for 2025.

Typically, property taxes are a key revenue source for local governments. However, under this new system, gov targets the income homeowners could potentially earn from renting their properties, rather than the properties themselves. As a result, the tax can be imposed on individuals' income, allowing the central government to directly receive the tax revenue.

To implement this new tax, the government is establishing two major property data databases:

Property Valuation Database: This database will compile comprehensive data on residential properties, including assessed values, latest assessment dates, and property types. It is expected to be completed by August 2024.
Sales Price and Rents Register (SPRR): The SPRR will capture real-time sales prices and rental information for properties nationwide, providing a dynamic basis for the tax. It is set to be fully operational by the end of March 2025, with a provisional version available by August 2024.

The Notaries Act will be amended by April 2025 to ensure that notarized real property contract information is automatically fed into the SPRR, improving data accuracy and access for relevant government entities.

According to the government, Both the Property Valuation Database and the SPRR will be made accessible to the Inland Revenue Department (IRD), the valuation department, the land registry, and the public.

Notably, not every property owner will be subject to this tax. The imputed rental income tax will have an exemption threshold, likely exempting primary residences up to a certain assessed value or imputed rental income level. For example, if the threshold is set at a specific amount, any imputed rental income below this amount would not be taxed.

This article is based on second review report on Sri Lanka under EFF by IMF.
https://www.imf.org/-/media/Files/Publications/CR/2024/English/1LKAEA2024001.ashx