• 45 State institutions among entities identified in Auditor General’s audit
• Institutions account for nearly 64% of total Rs. 961 b in arrears
• Rs. 59.5 b in collectable dues outstanding for over 2 years
• Special recovery mechanism sees only 18% cash recovery

Nearly 468 major State and private institutions have accounted for more than Rs. 613 billion in tax arrears, penalties, and interest, as Sri Lanka’s total outstanding tax dues surged past Rs. 961 billion as at 30 June 2024, a special audit by the Auditor General has revealed.

The Special Audit Report on Taxes in Arrears, Penalties, and Interest to be recovered to the Inland Revenue Department from Registered Taxpayers, issued by Auditor General L.S.I. Jayarathna recently, has raised concerns over delays in recovering collectable taxes, billions of rupees remaining unresolved for years, and weaknesses in the tax administration systems of the Inland Revenue Department (IRD). 

According to the report, the total tax arrears, penalties, and interest recorded in the IRD’s Legacy system and Revenue Administration Management Information System (RAMIS) of Rs. 961.448 billion as at 30 June 2024 is an increase of Rs. 18.445 billion from the Rs. 943.003 billion recorded a year earlier. 

Significantly, an audit examination of 468 major institutions found that they alone accounted for Rs. 613.709 billion, or 63.83%, of the total outstanding amount.

The group comprised 45 Government institutions, including banks, financial corporations, and companies, 101 private financial companies, and 322 other major private institutions. Of the Rs. 613.709 billion attributable to these institutions, Rs. 154.440 billion related to Government institutions, Rs. 255.815 billion to private financial companies, and Rs. 203.454 billion to other major private institutions.

However, the audit found that only Rs. 48.743 billion of this amount had been classified as collectable, while Rs. 564.966 billion had been temporarily held over. 

Against this backdrop, the Auditor General has recommended that the IRD separately identify sectors and institutions with a greater tendency to default on taxes and conduct tax audits to determine their correct liabilities and recover amounts due.

The report has also raised concerns over the age of arrears already classified by the department as collectable. Of Rs. 168.366 billion in collectable tax arrears, penalties, and interest, Rs. 59.483 billion, or 35%, had remained outstanding for more than two years as at 30 June 2024.

The Auditor General observed that the recovery of amounts already identified as collectable had not been carried out with sufficient efficiency and called for recovery measures to be expedited. The report further recommended that significant delays in recovering tax arrears be investigated in order to identify the reasons for such delays and determine whether any irregularities had occurred.

Meanwhile, hundreds of billions of rupees classified as temporarily held over have also remained unresolved for prolonged periods.

Under RAMIS, Rs. 639.07 billion had been classified as temporarily held-over arrears, penalties, and interest, of which Rs. 239.071 billion, or around 37%, had remained unresolved for more than two years.

The position under the Legacy system was more striking. Of Rs. 154.012 billion temporarily held over, Rs. 151.703 billion – approximately 99% – had remained outstanding for more than two years. 

As at 30 June 2024, 55% of temporarily held-over tax arrears were at the appeal or review stage, while a further 15% were subject to legal proceedings, according to the audit. 

The effectiveness of the special mechanism for recovering defaulted taxes has also come under scrutiny. 

The Auditor General found that between 31 December 2019 and 30 June 2024, only around 18% of outstanding taxes dealt with through the special recovery mechanism had actually been recovered in cash. 

Of the balance, 54% related to corrections, settlements, and adjustments, while 28% had been written off under provisions of the Finance Act.

Separately, arrears handled by the Tax Recovery Division under the Special Provisions for the Recovery of Taxes in Default Act declined from Rs. 33.263 billion as at 30 June 2019 to Rs. 21.056 billion as at 30 June 2024.

The audit has also flagged shortcomings in RAMIS, including its inability to automatically generate tax arrears reports.

According to the Auditor General, the reporting formats used under RAMIS and the Legacy system did not provide sufficient information to determine changes in individual arrears balances between the beginning and end of each six-month period, resulting in officers having to spend additional time compiling recovery information. 

The report also highlighted a Rs. 2.647 billion balance in a suspense account that had remained unresolved for more than five years. 

Further concerns were raised over the reporting of arrears relating to the Social Security Contribution Levy (SSCL).

The audit found that SSCL arrears had not been included in tax arrears reports as at 31 December 2024. An examination of a sample of around 52 tax files identified approximately Rs. 277 million in arrears that had not been reported, leading the Auditor General to warn that the total amount omitted could be material.

The Auditor General has recommended that the IRD expedite the recovery of collectable arrears, examine long-outstanding amounts that have been temporarily held over, strengthen internal controls, effectively utilise legal provisions available for recovering taxes in default, and address weaknesses in its tax arrears reporting systems.

Attempts by The Sunday Morning to contact IRD Commissioner General R.P.H. Fernando to ascertain how much of these outstanding arrears has since been recovered were unsuccessful.