Road to increasing Government revenue

15 May 2022

Road to increasing Government revenue

15 May 2022

By Shenal Fernando The Government tax revenue to Gross Domestic Product (GDP) ratio of Sri Lanka has been on a downward trend for the past three decades, which is closely associated with weaknesses of the tax structure and administration combined with various tax exemptions, tax avoidance, and non-compliance of taxes. However, this ratio fell to a historic low of 7.7% in 2021 as per data published by the Central Bank of Sri Lanka (CBSL) due to the current Government’s misguided commitment to maintaining a low tax regime over the past two years under the rationale of promoting swift economic recovery and growth, which in turn resulted in a lacklustre performance in Government revenue. Consequently, the budget deficit during these two years was in the double digits, recording 11.1% in 2020 and 12.2% in 2021. According to data published by the CBSL, tax revenue in 2021 was Rs. 1.2 trillion which accounted for 88.7% of total Government revenue. Furthermore, as per the CBSL, in 2021 income taxes amounted to 23.3% of total Government revenue, and indirect taxes on goods and services (VAT) amounted to 23.7% of total Government revenue. In the face of the rapidly deteriorating economic conditions in Sri Lanka, then Finance Minister Basil Rajapaksa announced the introduction of an interim budget. Speaking to The Sunday Morning Business, former Treasury Deputy Secretary R.M.P. Rathnayake stated that improving Government revenue would be the priority of the interim budget, which would introduce tax reform. Furthermore, the most recent occupant of the newly-vacated Finance Ministerial portfolio, MP Ali Sabry claimed during several interviews with foreign media that the 2019 tax reforms were a mistake and hinted that efforts would be made to return to the status quo prior to the 2019 tax reforms. At this juncture, The Sunday Morning Business reached out to several economists for their views on the nature of the tax reform required to address the prevailing economic crisis in the country. Bring back Mangala Samaraweera era Tax Bill? Advocata Institute Senior Visiting Fellow Dr. Roshan Perera claimed that when considering tax reform, it was essential that Sri Lanka return to the tax system that existed before the significant changes made in late 2019. “At the time (2019), no one was really asking for the tax reforms to be implemented. It is essential that we return to the status quo that existed before these changes were made and then we can proceed from there,” Dr. Perera stated. Similar sentiments were expressed by Advocata Institute Chief Operating Officer (COO) Dhananath Fernando who told The Sunday Morning Business that based on the public statements made by the former Finance Minister Ali Sabry, it appeared that the Government was considering bringing back the Tax Bill of the previous Government which involved 15-18% of VAT and other taxes such as pay-as-you-earn (PAYE). However, he questioned the appropriateness of such a measure: “This was appropriate during Mangala’s time, but now the context has changed. Now people are really suffering. How can you then ask them to pay a higher tax as well? Yes, we may not have any other option but we must acknowledge that implementing this will be very difficult, as it will exert a huge pressure on the people. But I admit that I don’t see an alternative solution. So, my recommendation would be to start with VAT and slowly implement the other reforms. Then again when you move slowly it has its own issues and it is sometimes better to do difficult reforms such as this at once.” Increase revenue through direct taxes In Sri Lanka, direct taxes include Personal Income Tax (PIT), Corporate Income Tax, Advance Personal Income Tax (APIT), Withholding Tax (WHT), and tax on interests. According to data published by the CBSL, revenue from direct taxes increased by 12% YoY in 2021 to Rs. 302.1 billion. Speaking to The Sunday Morning Business, Colombo University’s Economics Department Head Prof. Sirimal Abeyratne stated that in his opinion it was necessary to increase the share of direct taxes in the Government’s tax revenue by widening the tax base. According to him, while the tax rates in Sri Lanka were lower than its South Asian counterparts, it would be more effective to expand our tax bases which were at present quite narrow. He pointed out that only a few people were paying income tax while a majority did not, despite being within the tax threshold. Similar sentiments were expressed by Dr. Perera, who stated that the Government must decrease the tax threshold through a scientific method to increase the tax base. She further stated that following the reimplementation of the old tax system and the imposition of the PAYE tax, an improvement in indirect taxes would be observed because tax authorities would not have to wait until the taxpayers open a tax file; instead, under the PAYE tax, tax would be automatically deducted if you were above the threshold. According to her, the PAYE tax which was deducted by the employer, was a beneficial tax system to employees working in the formal sector as they wouldn’t have to go to the trouble of opening a tax file and it’s also easy for the tax collecting authorities due to the lack of paperwork. However, she admitted that the reimplementation of the PAYE tax alone was insufficient to increase direct tax revenue because of Sri Lanka’s growing informal sector and the increasing tendency for those employed in the formal sector to seek out other informal revenue streams. She further pointed out that monitoring all these informal revenue streams to ensure tax compliance wasn’t easy as our public databases were not linked, which was a problem that had plagued our country for years and there was little to no interest to rectify this situation. Prof. Abeyratne noted: “The direct and indirect tax composition of Sri Lanka is not consistent with our state of development. Currently, direct taxes account for only around 20-25% of our tax revenue. In my view, the share of direct taxes in Government tax revenue should go up to around 40-50%. This doesn’t require an increase in our tax rates, instead, it is sufficient to widen our tax base in order to achieve this target. Secondly, I recommend introducing a wealth tax on property. However, all our former governments up to now have shown a reluctance to put things in order and improve the efficiency of direct tax revenue collection.” He further stated that improving revenue generated through direct taxes was the most effective approach available to the Government in improving its revenue and stated that obtaining further revenue from indirect taxes was unlikely and counterproductive. “The situation of Sri Lanka’s indirect taxes is quite complicated and it has a negative impact on our production and exports. On one hand, we have multiple taxes on commodities, and on the other hand, our taxes on international trade are remarkably high in comparison to other countries in the Asian region. In fact, our taxes on international trade are comparable to the tax rates levied in African countries. In 2019, prior to the imposition of the current import controls, the tax share from taxes levied on import trade amounted to 18% of the Government tax revenue. Whereas in India it was only 4.5%. So, you can understand that even before the Covid pandemic we were not functioning as an open economy in practice. Therefore, I do not see much room for increasing Government tax revenue through indirect taxes,” he opined. Sri Lanka’s current composition of indirect taxes is imposing a disproportionate tax burden on the poorer segments of society. Accordingly, the poorest 20% of society pay as much as 13% of their income in the form of indirect taxes, and the poorest 10% pay as much as 23% of their income in the form of indirect taxes. In contrast, the richest 10% of the population pay less than 1% of their income as indirect taxes. Tax administration reform Prof. Abeyratne pointed out that the current tax administration system was woefully inadequate and criticised the current system where the taxpayer was expected to open up a tax file voluntarily. “The basic problem is that the Government doesn’t know or doesn’t want to know the exact income of its citizens,” he said. He pointed out that with the development of technology there were many easy methods under which the Government could measure people’s wealth and income, but throughout Sri Lanka’s history, successive governments had ignored this problem. He further pointed out that under the current tax administration system, tax collection was a complicated process. “Income information is available only for a small fraction of the country’s population who are engaged in the formal sector. An increasing number of people in this country are not employed in the organised sector but they earn a significant income which is beyond the tax threshold,” he noted. In Sri Lanka, non-compliance with taxes is an increasing trend over the last three decades not only due to the weaknesses in the tax administration but also due to several other factors such as growing informal sector businesses and transactions, complexity in calculations, and many discretionary tax measures in operation which leads to evading tax payments. Recently, several attempts have been made to improve tax administration, such as the mandatory use of a Taxpayer Identification Number (TIN) in all tax-related source documents and making e-filing compulsory for all limited liability companies. However, such efforts are unlikely to make a significant difference, and thus it is essential that the Government focuses further on simplifying the tax structure and improving the tax administration and compliance monitoring processes. Other measures to be considered Advocata Institute COO Ferndando claimed that merely increasing Government revenue was not sufficient to address the current budget shortfall and that it was necessary to implement concurrent reform targeting Government expenditure. Accordingly, he stated: “In my view tax revenue has to be increased but at the same time Government expenditure needs to be considered as well. Our tax to GDP ratio is one of the lowest in the world at around 7-8% while the global average is around 14%. However, maintaining a 14% tax to GDP ratio isn’t sufficient, if we continue spending our taxpayer money on unnecessary things.” He explained that Sri Lanka must consider increasing revenue while decreasing unnecessary spending and claimed that merely increasing tax revenue wasn’t sufficient because a considerable extent of Government spending wasn’t productive and added no benefit to the economy. Further, Fernando pointed out that Sri Lanka’s expenditure to GDP ratio was also comparatively low compared to other countries, while the current spread of Government expenditure was improper. “My view is that we are spending on wrong things, like State-Owned Enterprises. For example, our Samurdhi spending and the expenditure incurred to cover SriLankan Airlines losses are similar during 2018 and 2019, which doesn’t make any sense. That’s why we must address both sides of the formula [Government revenue and expenditure].”

Kapruka

Discover Kapruka, the leading online shopping platform in Sri Lanka, where you can conveniently send Gifts and Flowers to your loved ones for any event. Explore a wide range of popular Shopping Categories on Kapruka, including Toys, Groceries, Electronics, Birthday Cakes, Fruits, Chocolates, Automobile, Mother and Baby Products, Clothing, and Fashion. Additionally, Kapruka offers unique online services like Money Remittance, Astrology, Medicine Delivery, and access to over 700 Top Brands. Also If you’re interested in selling with Kapruka, Partner Central by Kapruka is the best solution to start with. Moreover, through Kapruka Global Shop, you can also enjoy the convenience of purchasing products from renowned platforms like Amazon and eBay and have them delivered to Sri Lanka.Send love straight to their heart this Valentine's with our thoughtful gifts!

Road to increasing Government revenue

Road to increasing Government revenue

More News..