It said under the EFF arrangement, the authorities committed to revamping the property tax system and introducing a wealth transfer tax to support fiscal consolidation.

However, in accordance with Sri Lanka’s constitution, property-related tax revenue, currently amounting to around 0.2% of GDP, fully accrues to subnational Governments.

An increase in subnational property-related tax revenues could, in principle, reduce the need for transfers from the central Government somewhat. But the potential reduction in transfers that could be achieved is, at least in the short term, severely limited (less than 0.05% of GDP).

Taxing the imputed rental income from owner-occupied and vacant residential property, rather than taxing real property directly, would allow raising central government revenue, the IMF said in a recent Technical Assistance Report titled “Sri Lanka: Property taxation at the National and Sub-national level.”