By Skandha Gunasekara
Experts commended the new Government’s decision to introduce a new tax system but stressed the need to address the issue of lost revenue as a result of the recently introduced tax concessions.
The main goal of the new tax reforms is to enable an easier, more efficient system for taxpayers.
“We want to simplify the tax system. At present, many taxpayers, particularly businessmen, are finding it overly complicated and thus, there are shortcomings and discrepancies in tax payments and collection.
“We want to simplify it so that it’s easily accessible for everyone to pay their taxes,” Government Spokesman and Minister of Mass Media Keheliya Rambukwella told The Sunday Morning.
Senior economist and former Central Bank Deputy Director Dr. W.A. Wijewardena said the current system was too complex.
“The President’s manifesto in November last year (stated that he) wanted to simplify the tax system, which is a good thing. The current tax system is very complex and if it can be made simple, it actually reduces the inconvenience to taxpayers as well as the difficulty of collecting taxes by the tax authority.”
He said that one key step would be to make the facility to pay taxes available online as well as through other commercial banks.
“People must be provided facilities to make it (tax payments) online. (Currently,) people can’t pay it online; instead, you have to pay it through the Bank of Ceylon (BOC) where you have to visit a few designated branches and pay it in cash or by cheque, which is not something that should be done in this day and age.
“Taxes should be paid online and you should be able to pay through other banks, because a majority of people don’t have accounts in BOC. For example, I cannot pay my taxes through the bank in which I maintain my account. To pay taxes, I have to write a cheque, visit one of the designated branches – here too only 10 or 12 designated branches – hand over the cheque, and wait until the cheque is realised to be notified that I paid my taxes.”
He said that the simplification process itself was straightforward and required minimum legislative changes.
“Simplification means you have to first provide facilities for taxpayers to file their tax returns online, which you can do through the Revenue Administration Management Information System (RAMIS). But on the payment side, we still have to do it physically. You don’t need government legislation to simplify the tax system. These changes can be made within the Inland Revenue Department (IRD). A lot of work has been done in this direction, but it has not been completed.”
He then charged that the Government’s tax concessions at the beginning of the year had a negative effect on the economy.
“Simplification is a must, but what’s been done is not a mere simplification. Instead, they gave a very general tax concession which has eaten into the revenue of the Government; in 2020 alone, it hammered a reduction of Rs. 600 billion (in revenue), which the Government had to fund by borrowing from the banking system, which will have long-term adverse implications.”
Further concessions unlikely
Dr. Wijewardena said the Government could not afford to give any more tax concessions.
“They (Government) might commit suicide if they give additional tax concessions because it has already eaten into government revenue by around 4-5% of GDP (gross domestic product), which is not a small thing – it runs into the billions. So, how can you give additional tax concessions?”
He said a solution to recovering the revenue lost through the concessions would be to widen the current tax net.
“What they can do is simplify the tax system and then, probably, they may be able to collect more tax by getting more people into the tax net.
“In my view, what was proposed in the manifesto was not a viable or sustainable tax reform, because the Government would face an immediate reduction in tax revenue, whereas its expenditure has multiplied now.
“If people want public services, they have to be prepared to pay taxes. It’s clear the Government needs more revenue today. Therefore, more people should be brought into the tax net, not the tax range. For example, have the same simplified income tax at the current low rate but widen the tax net and get more people to pay income tax.”
He said that a record amount of borrowings had been taken by the Government in the first half of 2020 to balance the loss in state revenue.
“Within the first seven months of 2020, the Government has borrowed, on a net basis, Rs. 1.4 trillion from the banking system. This is unprecedented.”
He said the IRD could make the necessary changes to broaden the tax net – particularly that of income tax.
“The Government has already set up the Large Taxpayers Unit in the IRD which will cover 20% of the total income taxpayers. Presently, those people are only paying 60% of the taxes now according to the Government, but the taxpayers say they are paying up to 100%. So there is a dispute between the Government and the large taxpayer.
“As such, the Government’s objective is to expand the operations of the Large Taxpayers Unit and get that 20% of the large taxpayers to pay not 60% but 100%. The large taxpayers will have to pay more in terms of the amount and not the rate.”
He said state banks had suffered unparalleled losses due to tax and interest reforms and that the Government may have to bail out these banks if the trend continues.
“We are after this disastrous Covid-19 outbreak. The performances of the banks for the first half of the year have been hit hard. People’s Bank’s net profits for the first half of the year have dropped by 80% to Rs. 2 billion from Rs. 8 billion. This is because the reduction in the interest rates ate into their revenue. This is an anomaly in the interest policy.
“All banks are making less profit, which in itself will become a problem in the future because if they don’t retain profits to improve their capital in these two state banks, the Government will have to pump in money.”