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Homeowner’s nightmare: The looming tax on imaginary rent

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Imputed Rental Income Tax

by Sherika De Silva

LLB (University of London)
Bachelor of Commerce (Special) Degree in Business Technology (University of Kelaniya)
CIMA – Passed Finalist
Tax Analyst at KPMG

Sri Lanka is set to introduce a new tax on homeowners as part of a wider effort to boost Government revenue. This levy, known as the Imputed Rental Income Tax (IRIT), will extend to both owner-occupied and vacant residential property. The tax burden will be determined by the deemed rental income these homeowners could generate if they rented out their homes.

While the IRIT is expected to bring in new revenue for the Government, whether this will translate into significant revenue generation is still uncertain. The IMF Staff Level Report, published recently, recommends seeking the Parliamentary approval of revenue measures for the 2025 Budget ahead of the Presidential Elections. Additionally, it emphasizes the need to expedite preparatory work for the IRIT’s implementation before the beginning of the tax year, April 2025.

Sri Lanka’s housing policy strives to achieve shelter for all by 2025. However, the proposed IRIT may inadvertently create a disincentive for homeownership, potentially undermining the very goal of the housing policy. Hence, the IRIT brings about a clear contradiction between Sri Lanka’s housing policy and tax policy.

What is IRIT in General?

Sri Lanka’s tax system adheres to the principle of taxation on realized income. This means that taxpayers are generally liable for taxes only on income they have actually earned, not on potential future earnings. Exceptionally, the tax laws outline specific instances where income tax applies to unrealized income.

The concept of “imputed income” is the focal point of IRIT, which mandates the payment of taxes on income that may never materialize. In simpler terms, taxpayers would be liable for taxes on a fictional/ hypothetical income, not on actual earnings they receive. Taxation ideally reflects the economic realities of income generation. If income isn’t received, the burden of taxation on such “imputed income” can create a significant financial strain for taxpayers.

Income tax operates on a clear principle: individuals receive income and contribute a share to the State through tax payments. However, the IRIT introduces a novel concept – taxation on “imaginary income”. The potential disconnect between this imaginary income and the taxpayer’s financial reality sparks debate about the fairness and equitability of the IRIT.

It is worth noting that a similar tax (Net Annual Value concept) was previously included in the Inland Revenue Act. No. 10 of 2006. Under this regime, the “net annual value of not more than one place of residence, owned by and occupied by or on behalf of an individual” was exempt and the assessed values for rating purposes were used to determine the base. The concept of Net Annual Value extended to land and improvements thereon.

Is IRIT a Common Concept in the Global Tax System?

The concept of taxing the potential rental income, or “imputed rent,” on owner-occupied properties is rare, and it is only implemented by a select few OECD nations: Denmark, Greece, the Netherlands, and Switzerland.

According to Swiss tax law, a resident taxpayer owning a house or an apartment and living in this house or apartment is generally taxed on the deemed rental value of this property, which will be added to the individual’s taxable income.

In order to determine the imputed rental value of a home, Swiss authorities consider several factors such as the property value (including land and construction costs), living space, age, and location. The tax administration in the Canton of residence then compares or estimates how much rent a similar property costs. Generally, the imputed rental value falls between 60% and 70% of the potential rental income.

While both Greece and Sri Lanka faced economic challenges necessitating IMF intervention, their approaches to taxation differ. Greece imposed an imputed income tax on luxury living such as private cars with large engine power, airplanes, helicopters, swimming pools as well as private yachts/boats exceeding five meters. In contrast, Sri Lanka is set to implement IRIT primarily targeting homeowners.

Understanding the Rationale for IRIT in Switzerland and other similar nations

The rationale behind the IRIT implemented in Switzerland centres on achieving tax parity between homeowners and renters.

Traditionally, renters pay tax on their income but cannot deduct their rent payments, a significant expense. Conversely, homeowners can deduct mortgage interest and maintenance costs from their taxable income, reducing their overall tax burden. This tax system that favoured homeowners over renters, created a disparity. The introduction of the IRIT aimed to rectify this imbalance by imposing a tax on imputed rental income of homeowners.

As a means of achieving the objective of creating tax parity, when IRIT was introduced, homeowners were allowed to deduct certain expenses such as maintenance costs and mortgage interest expenses in order to offset the imputed income charge.

Is there a Rationale for IRIT in Sri Lanka?

Given the absence of deductions for mortgage interest and maintenance expenses for homeowners in Sri Lanka, unlike Switzerland that has introduced IRIT, the rationale behind Sri Lanka’s implementation of IRIT becomes questionable. Maybe if IRIT is to be implemented, policymakers should provide a deduction for mortgage interest and maintenance expenses to Sri Lankan taxpayers.

Sri Lanka’s tax landscape regarding deductions for expenses incurred by homeowners, has undergone several changes over the years, with amendments to income tax laws. The previous Inland Revenue Act (No. 10 of 2006) allowed deductions for capital repayments and interest payments on approved housing loans obtained before 01 April 2011. The subsequent Inland Revenue Act (No. 24 of 2017) introduced an expenditure relief for interest on housing loans. However, this relief was abolished in December 2022. Consequently, the current tax system in Sri Lanka offers no deductions for either housing loan interest or any other housing-related costs.

Unlike countries like Switzerland, since there is no deduction currently available for homeowners in Sri Lanka, there is no disparity between homeowners and renters. Therefore, implementing IRIT in Sri Lanka without allowing deductions may end up creating a disparity and this would discourage the concept of homeownership, and favour living in rented houses.

Therefore, to mitigate potential inequities arising from the implementation of IRIT in Sri Lanka, policymakers should consider establishing an allowance for deductions such as mortgage interest, maintenance cost and similar expenses as referred to above. This would ensure a level playing field and achieve true tax neutrality for homeowners. Without such deductions for mortgage interest and maintenance costs, homeowners would shoulder a disproportionate tax burden.

First House Exemption

Recent comments made by policymakers in Sri Lanka in relation to the implementation of IRIT as per the IMF Report, suggests that the focus of IRIT is on high wealth individuals, and not on average income earners. Further, policymakers have indicated that an exemption would be granted for primary residences.

The “Net Annual Value” concept in the IRA 2006, is criticized in the IMF report for its reliance on exemptions (such as exempting the primary residence) and the use of assessed values. The IMF report also states that IRIT would be implemented with an exemption threshold and a graduated tax rate schedule, which would make this tax highly progressive. However, there is no indication whatsoever in the IMF report with regard to the “first house exemption.” Nonetheless, it is very likely that a first house exemption would be included when the law is being passed.

Granting a first-house exemption, while potentially appealing to some taxpayers, may undermine the revenue targets associated with the IRIT. The IMF report estimates that the IRIT should contribute 0.15% to Sri Lanka’s GDP. However, a broad exemption for primary residences could significantly reduce the IRIT tax base, posing a challenge for the Government in achieving its projected revenue goals.

Despite the ambiguities surrounding the implementation of the IRIT, the use of fictional income for taxation would surely create a significant change to the existing taxing mechanism used in Sri Lanka’s tax framework. Moreover, this approach will impose a substantial financial burden on taxpayers as they will be taxed on imputed, rather than actual earnings.

(Views expressed in this article are personal.)



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Fractious West facing a more solidified Eastern opposition

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An Iranian attack on a neighbouring Gulf state. Image courtesy BBC.

Going forward, it is hoped that a reported ceasefire agreement between the US and Iran would provide a basis for a degree of stability in the Middle East and pave the way for substantive peace talks between the powers concerned. The world is compelled to fall back on hope because there is never knowing when President Donald Trump would change his mind and plans on matters of the first importance. So erratic has he been.

Yet, confusion abounds on who has agreed to what. The US President is on record that a number of conditions put forward by him to Iran to deescalate tensions have been accepted by the latter, whereas Iran is yet to state unambiguously that this is so. For instance, the US side claims that Iran has come clear on the point that it would not work towards acquiring a nuclear weapons capability, but there is no official confirmation by Iran that this is so. The same goes for the rest of the conditions.

Accordingly, the peace process between the US and Iran, if such a thing solidly exists, could be said to be mired in uncertainty. Nevertheless, the wider publics of the world are bound to welcome the prospects of some sort of ceasing of hostilities because it would have the effect of improving their economic and material well being which is today under a cloud.

However, questions of the first magnitude would continue to bedevil international politics and provide the breeding ground for continued tensions between East and West. Iran-US hostilities helped highlight some of these divisive issues and a deescalation of these tensions would not inevitably translate into even a temporary resolution of these questions. The world community would have no choice but to take them up and work towards comprehending them better and managing them more effectively.

For example, there are thorny questions arising from the Treaty on the Non-Proliferation of Nuclear Weapons (NPT). Essentially, this treaty bans the processing and use of nuclear weapons by states but some of the foremost powers are not signatories to it.

Moreover, the NPT does not provide for the destroying of nuclear arsenals by those signatory states which are already in possession of these WMDs. Consequently, there would be a glaring power imbalance between the latter nuclear-armed states and others which possess only conventional weapons.

Such a situation has grave implications for Iran’s security, for instance. The latter could argue, in view of the NPT restrictions, that the US poses a security threat to it but that it is debarred by the Treaty from developing a nuclear arms capability of its own to enable it to match the nuclear capability of the US. Moreover, its regional rival Israel is believed to possess a nuclear weapons capability.

Accordingly, a case could be made that the NPT is inherently unfair. The US would need to help resolve this vexatious matter going forward. But if it remains, US-Iran tensions would not prove easy to resolve. The same goes for Iran-Israeli tensions. Consequently, the Middle East would remain the proverbial ‘powder keg’.

Besides the above issues, the world has ample evidence that it could no longer speak in terms of a united NATO or West. Apparently, there could be no guarantee that US-NATO relations would remain untroubled in future, even if the current Iran-US standoff is peacefully resolved. US-NATO ties almost reached breaking point in the current crisis when the US President called on its NATO partners, particularly Britain, to help keep open the Hormuz Straits for easy navigation by commercial vessels, militarily, on seeing that such help was not forthcoming. Such questions are bound to remain sore points in intra-Western ties.

In other words, it would be imperative for the US’ NATO partners to help pull the US’ ‘chestnuts out of the fire’ going ahead. The question is, would NATO be willing to thus toe the US line even at the cost of its best interests.

For the West, these fractious issues are coming to the fore at a most unpropitious moment. The reality that could faze the West at present is the strong opposition shown to its efforts to bolster its power and influence by China and Russia. Right through the present crisis, the latter have stood by Iran, materially and morally. For instance, the most recent Security Council resolution spearheaded by the US which was strongly critical of Iran, was vetoed by China and Russia.

Accordingly, we have in the latter developments some marked polarities in international politics that could stand in the way of the West advancing its interests unchallenged. They point to progressively intensifying East-West tensions in international relations in the absence of consensuality.

It is only to be expected that given the substance of international politics that the West would be opposed by the East, read China and Russia, in any of the former’s efforts to advance its self interests unilaterally in ways that could be seen as illegitimate, but what is sorely needed at present is consensuality among the foremost powers if the world is to be ‘a less dangerous place to live in.’ Minus a focus on the latter, it would be a ‘no-win’ situation for all concerned.

It would be central to world stability for International Law to be upheld by all states and international actors. Military intervention by major powers in the internal affairs of other countries remains a principal cause of international mayhem. Both East and West are obliged to abide scrupulously with this principle.

From the latter viewpoint, not only did the West err in recent times, but the East did so as well. Iran, for instance, acted in gross violation of International Law when it attacked neighbouring Gulf states which are seen as US allies. Neither Iran nor the US-Israel combine have helped in advancing international law and order by thus taking the law into their own hands.

Unfortunately, the UN has been a passive spectator to these disruptive developments. It needs to play a more robust role in promoting world peace and in furthering consensual understanding among the principal powers in particular. The need is also urgent to advance UN reform and render the UN a vital instrument in furthering world peace. The East and West need to think alike and quickly on this urgent undertaking.

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Science-driven health policies key to tackling emerging challenges — UNFPA

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Dr. Dayanath Ranatunga

Marking World Health Day on April 7, health experts have called for a stronger commitment to science-based decision-making to address increasingly complex and evolving health challenges in Sri Lanka and beyond.

Dr. Dayanath Ranatunga, Assistant Representative of the United Nations Population Fund, stressed that health is no longer confined to hospitals or traditional medical systems, but is shaped by a broad spectrum of social, environmental, and technological factors.

“This year’s theme, ‘Together for Health. Stand with Science,’ reminds us that science is not only for laboratories or policymakers. It is a way of thinking and a tool that shapes everyday decisions,” he said.

Dr. Ranatunga noted that modern health challenges are increasingly interconnected, ranging from infectious diseases such as COVID-19 to climate-related risks, demographic shifts, and emerging forms of online violence.

He warned that maternal and newborn health continues to demand urgent attention despite progress. Globally, an estimated 260,000 women died from pregnancy and childbirth-related causes in 2023 alone—many of them preventable through timely, science-based interventions.

“In countries like Sri Lanka, where fertility rates are declining and survival rates improving, every pregnancy carries greater significance—not just for families, but for the future of communities and economies,” he said.

The UNFPA official also highlighted the growing threat of Technology Facilitated Gender-Based Violence (TFGBV), including cyber harassment and online abuse, noting that these forms of violence can have deep psychological consequences despite lacking visible physical harm.

He emphasised the need for multidisciplinary, science-informed approaches that integrate mental health, digital safety, and survivor-centered care.

Turning to demographic trends, Dr. Ranatunga pointed out that increasing life expectancy is bringing new challenges, particularly the rise of non-communicable diseases such as diabetes, cardiovascular illnesses, and cancers.

In Sri Lanka, nearly 13.9% of mothers develop diabetes during pregnancy, a trend attributed to obesity and unhealthy lifestyles, underscoring the urgent need for preventive healthcare strategies.

“Are we investing enough in prevention?” he asked, noting that early intervention and healthier lifestyles could significantly reduce long-term healthcare costs, especially in a country with a free public healthcare system.

He underscored the importance of data-driven policymaking, stating that scientific research and analytics enable governments to identify gaps, anticipate future needs, and allocate resources more effectively.

The UNFPA, he said, is already leveraging tools such as Geographic Information Systems (GIS) to improve access to maternal healthcare, including mapping travel times for pregnant women to reach health facilities.

Digital innovation is also transforming healthcare delivery, from telemedicine to real-time data systems, improving efficiency and ensuring continuity of care even during emergencies.

In Sri Lanka, partnerships between the government and development agencies are helping to modernise training institutions, including facilities in Batticaloa, equipping healthcare workers with both clinical and digital skills.

However, Dr. Ranatunga cautioned that technology alone is not a solution.

“It must be guided by evidence and grounded in equity,” he said, pointing out that women’s health remains significantly underfunded, with only about 7% of global healthcare research focusing on conditions specific to women.

He also drew attention to the growing health impacts of climate change, including extreme weather, food insecurity, and displacement, describing it as an emerging public health crisis.

“Health does not begin in hospitals. It is shaped by the environments we live in, the choices we make, and the systems we build,” he said.

Calling for renewed commitment, Dr. Ranatunga urged stakeholders to invest in prevention, embrace innovation, and ensure that science remains central to policy and practice.

“Science is not just about knowledge—it is about ensuring that everyone has the opportunity to live healthy, dignified lives, and that no one is left behind,” he added.

 

By Ifham Nizam

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Sharing the festive joy with ‘Awurudu Kaale’

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The visually impaired who make up Bright Light Band in Awurudu attire

Melantha Perera is well known as a very versatile musician.

He was involved with the band Mirage, as their keyboardist/vocalist, and was also seen in action with other outfits, as well, before embarking on a trip to Australia, as a solo artiste.

I now hear that he has plans to operate as a trio.

However, what has got many talking about Melantha, these days, is his awesome work with the visually impaired Bright Light Band.

They have worked out a special song for the Sinhala and Tamil New Year, aptly titled ‘Awurudu Kaale.

Says Melantha: “This song has been created to celebrate the spirit of the Sinhala and Tamil New Year and to share the joy of the Awurudu season with all Sri Lankans”.

Yes, of course, Melantha composed the song, with the lyrics written collaboratively by Melantha, Badra, and the parents of the talented performers, whose creative input brought the song to life during moments of inspiration.

Melantha Perera: Awesome work with Bright Light Band

This meaningful collaboration reflects the strong community behind the Bright Light Band.

According to Melantha, accompaning the song is a vibrant video production that also features the involvement of the parents, highlighting unity, joy, and togetherness.

Beyond showcasing their musical talents, the visually impaired members of Bright Light Band deliver a powerful message, through this project, that their abilities extend beyond singing, as they also express themselves through movement and dance.

Melantha expressed his satisfaction with the outcome of the project and looks forward to sharing it with audiences across the country during this festive season.

He went on to say that Bright Light Band extends its sincere gratitude to Bcert Australia for their generous Mian sponsorship, the CEO of the company, Samath Fernando, for his continuous support in making such initiatives possible, and Rukshan Perera for his personal support and encouragement in bringing this project to completion.

The band also acknowledges Udara Fernando for his invaluable contribution, generously providing studio space and accommodating extended recording sessions to suit the children’s availability.

Appreciation is warmly extended to the parents, whose unwavering commitment from ensuring attendance at rehearsals to supporting the video production has been instrumental in the success of this project.

Through ‘Awurudu Kaale’, Bright Light Band hopes to spread festive cheer and inspire audiences, proving that passion and talent know no boundaries.

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