Government's displeasure with the IMF proposal to tax those who own a second home

A divergence of views has emerged between the Sri Lankan government and the International Monetary Fund (IMF) regarding the IMF's proposal to introduce a Secondary Property Tax through the 2027 budget proposals. The International Monetary Fund has proposed that this tax be introduced in the upcoming budget, targeting additional or second residences or houses.

However, the government points out that there is no need to levy such a tax as other sources of income exist and the stipulated revenue targets have already been met. As a measure to increase state revenue under the Extended Fund Facility (EFF) program, which has been in effect since 2023, the International Monetary Fund intends to impose taxes on second and subsequent homes owned by individuals. However, the government has informed the IMF that there is no need to introduce such a tax, as the revenue-generating measures proposed for the 2027 budget will be sufficient to meet the stipulated targets.

Furthermore, it is the government's view that it will take time to establish a proper database of property ownership, and that it would be difficult to implement this without such a data system. Although this tax is not included in the 2027 budget proposals, it is reported that the International Monetary Fund may continue to pressure for its implementation.

According to the initial 2023 agreement, a traditional property tax applicable to the entire country was planned to be imposed by 2025. However, during a technical review conducted in February 2024, two major obstacles emerged. These were: the inability of the central government to directly impose taxes on properties, as tax revenues related to properties accrue to provincial councils according to the 13th Constitutional Amendment, and the lack of updated, usable data on the nearly five million properties in the country with the Valuation Department.

To circumvent this constitutional issue, the International Monetary Fund proposed an alternative called "Imputed Rental Income Tax" in August 2024. Accordingly, it was planned to impose a tax by considering the estimated rental value of an individual's home as income, and to implement it from April 2025. However, with the current government, which assumed office after the November 2024 election, deciding that this method was impractical, the proposal was abandoned.