Yesterday, the Colombo Magistrate’s Court ordered a Deputy Commissioner of the Inland Revenue Department (IRD), who was arrested on suspicion of accepting a bribe from a businessman, to be remanded till the 22nd of this month. It is alleged the state official attempted to aid in the clearance of tax arrears amounting to nearly Rs. 1.1 million owed to the State by the businessman. The Courts order the suspect to be remanded following facts present before Court by the Commission to Investigate Allegations of Bribery or Corruption (CIABOC), which reported that the Deputy Commissioner was arrested for allegedly soliciting a bribe of Rs. 50,000 from a businessman in exchange for issuing a tax clearance report for an institution operated by the businessman in Dematagoda. 

The arrest and remand of the Deputy Commissioner of the nation's main state-revenue-raising arm, is indicative of how deep-rooted corruption is in the Sri Lankan bureaucracy. What some observers find surprising was that the deputy commissioner was charged for a bribe which was less than Rs. 100,000. However, this is the nature of the virus – bribery and corruption. And in Sri Lanka, systemic corruption over the years has developed an entire ‘eco-system’ and sub-culture where officials have been encouraged to believe that taking bribes is the norm.

This is illustrated by the recent arrest of several senior officials at the Department of Motor Traffic (DMT), a long-recognised hotspot for bribery, and perhaps a contributing factor for the high death toll on the roads annually. A Deputy Commissioner and two officials of the DMT have been arrested by officers of the Bribery Commission for possession of Rs. 4 million in cash, believed to have been collected from soliciting bribes. Authorities believe and have said so openly that the Rs. 4 million in cash was to be distributed amongst a number of staff members within the DMT, implicating that a wide segment of the institution is part of mass bribery scandal. If what the investigators suspect is validated, it only reinforces a long-held public view about the said institution. Here lies the rot which the current Government is trying to counter.

Along with compliance issues, and corruption within the IRD, the taxation system of Sri Lanka has more issues which plague effective revenue raising. Amongst key issues are tax avoidance and evasion, which is also aided by bribery. There are long-standing concerns, articulated by domestic and foreign observers, about tax avoidance and evasion, with a significant number of companies and individuals failing to pay taxes owed. This undermines the Government's ability to collect sufficient revenue and creates an unfair burden on compliant taxpayers.

Lack of understanding about taxation also impacts compliance. The lack of awareness and understanding of tax laws and regulations among the general public contributes to non-compliance. It would be beneficial to have an improved taxpayer education programme, and to simplify tax procedures that are necessary to enhance voluntary compliance. The state of financial and policy literacy amongst the Sri Lankan population was quite evident in the lead up to the economic collapse of 2022. Since there has been much enthusiasm to learn about financial and political mechanisms and governance in general, post-2022, the State should seize the opportunity to build public awareness. Another key issue that has negatively impacted state revenue raising has been political interference and instability. Political interference, especially for ‘friends’ to avoid or evade tax compliance has long been a significant challenge. It directly impacts the integrity and effectiveness of the system. Also, frequent changes to tax policies and rates, often driven by political considerations, create uncertainty and instability in the tax system.

Political interference in tax administration can undermine the integrity and effectiveness of the system.

Sri Lanka needs to urgently reform its revenue raising system if the nation gears up to begin repaying debt in 2028 and rebuilding its economy. With the ongoing anti-corruption drive, the time is right for a robust awareness building mechanism to ensure that the public literacy on taxation and its importance, to be improved.