Debt ridden Sri Lanka, which is now looking for financial assistance from multilateral lenders including the International Monetary Fund, has finally decided to increase tax rates. The IMF has prescribed structural reforms including overhauling the tax regime. Sri Lanka’s tax to GDP ratio is one of the lowest due to various populist measures undertaken by the Rajapaksa Gotabaya government.

The Gotabaya government has now constituted a panel to look into the issue.

The Diplomat in a report said that “mismanaged government finances and ill-timed tax cuts,” have led to the problem.

Sri Lanka has earlier shown its unwillingness to seek assistance from the IMF.

Also read: Is Rajapaksa waiting for loans to placate people and stave off challenges to power?

With a view to generating revenue on an immediate basis, Colombo has also decided to implement surcharge on a retrospective basis. Businesses as well as individuals who have earned more than 2 billion Sri Lankan rupee in 2020-21 could be charged with an additional 25 per cent tax. This could help the government garner 100 billion Sri Lankan rupees in the near term.

The IMF said that Sri Lanka is facing solvency issues primarily due to unsustainable debt levels.

The island nation’s foreign exchange reserves dropped to just $1.93 billion in March from $2.3 billion in February, crippling Colombo’s ability to import essential items including food, fuel and medicines. India has already provided a $1.5 billion line of credit to the country.

Even before Sri Lanka was hit by the Covid 19 pandemic, red lines had started to appear in the economy. “The pandemic has only expedited the fall in the economy,” an insider said.

Sri Lankan economy is now facing a twin challenge of fast eroding foreign exchange reserves and surging inflation.

Sri Lanka's total debt burden for this year is $6.9 billion. The next payment deadline of $1 billion is due in July. In January, the country averted a default by repaying $500 million international sovereign bond.