Sri Lanka cabinet approves reintroduction of capital gains tax

Jun 15, 2016 (LBO) - The cabinet committee on economic management has agreed to reintroduce the capital gains tax (CGT) to rectify the increase in the inequality of income distribution, a cabinet proposal said. "The cabinet also approved to draft a new capital gains tax regime," it said. During the last few decades there has been a massive increase in the private capital in the country. The increase in prices of land attributable to the large infrastructure development carries out through government funds have enabled the land owners to make significant capital gains free of taxation. The proposal said this situation resulted in the increase in the inequality of income distribution. Cabinet proposal further said the former CGT regime is outdated and no longer reflective of international good practice. The cabinet committee has advised not to simply reintroduce the former CGT regime and to draft a new CGT Regime with the technical assistance from the IMF. The latest staff report of the IMF also said that income from capital can be taxed at a low flat rate and collected at source. CGT previously operated in Sri Lanka until 2002. Under that regime, capital gains were made liable to income tax by the Inland Revenue Act. The maximum rate of tax for capital gains was set at 45 percent, until it subsequently reduced to 25 percent in 1978, and finally abolished in 2002. (Updated)