Imputed rental income tax: Gateway to corruption on a massive scale

This flawed system provides the assessor a great deal of authority and gives them the opportunity to pocket a buck for themselves

By 1 April 2025 the Government proposes to implement a wealth tax by way of an “imputed rental income” on property as a precursor to a land tax. In simple terms the meaning of “imputed rental income” is the estimated rental income of a property if it were rented. The mere assumption of a rental income is very much subjective and cannot in any effect be a guide to govern taxes.

In reality, imputed rent is exactly what the Local Councils are already obtaining from property owners by way of Municipality Rates. Hence the new “imputed rental income” is just a facade to re-tax the citizen who is already taxed twice over on the same income, first by the Municipality on the imputed rent and secondly by the Inland Revenue based on actual income of the same property.

Taxation based on any form of actual income and wealth accrued should be of the interest of the Inland Revenue and not a subject for Municipalities. 

Furthermore, the imputed rent used to assess Municipality rates presently is discriminatory and leaves the rate payer at the mercy of the assessor.

The Assessor department of the Colombo Municipal Council uses three criteria for the calculation of rates; 1. Area of the building (sq. ft.), 2. Age of the building 3. Condition and facilities (air conditioned, tiled, carpeted, etc.). This method is notoriously faulty as the age and facilities of the building has very little relevance to actual (or imputed) rental income. The Assessor stands at liberty to determine at his whim and fancy the rate to be imputed. 

Pettah by example, as anyone who understands business knows, rental income is dependent directly on the location and the type of business. A 100-year-old building with basic facilities located in the wholesale trading area of Pettah could be rented for many times the rent income of a similar sized building with the best facilities located elsewhere in Pettah itself. Age and finishes of a building cannot be a guide to determine a rental value and furthermore encourages landowners to not upkeep their premises to maintain lower rates.

In the high footfall retail sections of Pettah, the rental value of road facing shops are vastly different to the shops located in the interior of shops or on upper floors. The actual rent in the bazaar environment of Pettah is highly complex and dependent on many factors such as location, type of business and supply and demand. In fact, the demand for retail space is so great that in some areas it has been the practice of renting out areas of pavement on a daily basis. 

It is in this environment that the Government is now preparing to re-calculate an imputed rental income in addition to the existing rates and taxes which is already based on an imputed rental income. This flawed system provides the assessor a great deal of authority and gives them the opportunity to pocket a buck for themselves. It is not surprising that the former mayor of Colombo, Rosy Senanayake during a meeting of the General Assembly of the Council stated that a Municipal assessor had offered her late husband a reduction in rates for a fee. This is a good indication of how serious this problem is. Any imputed tax system on a country wide basis, is to open more doors to abuse on a massive scale.

Wherein does the solution lie? The Government must take in to account the present schemes and amalgamate them to re-introduce a unified solution where the councils and the new land taxation is clear, not replicated and computable by the citizen itself as in the case of Income Tax.

To enable such a process, Council tax should only be based on the 1. land extent, 2. built area, and 3. type of usage (commercial, manufacture, factories, residential, educational, religious, etc.) 

These criteria i.e.: 1. land extent, 2. built area and 3. usage is objective and thus can be assessed by the rate payers themselves and not be affected by any individual’s whim and fancy. An inspection process by Council should be made available to validate the assessment made by the rate payer as such performed by the IRD. Additionally, an appeal process must be made available where the extent, built area and use of the building is altered.

The purpose of this letter is to alert property owners and the general public to the dangers of the Government’s plan to implement an ill-conceived, unfair and inequitable tax which will be a gateway to large scale abuse. 

(The writer is a former member of the Colombo Municipal Council.)