Government to lower Inland Revenue target to 2016 level

– Target likely to be around 2016’s total collection

By Madhusha Thavapalakumar

Bucking the trend of annually increasing tax revenue targets, this year the Government is likely to set the Inland Revenue Department (IRD) a target close to that of 2016’s total revenue collection, The Sunday Morning Business learns.

This reduction in the target is due to the various tax relief measures provided by the Government over the past three months to stimulate consumer spending and economic growth.
The target for 2020 is expected to be set before the end of this week. Well-placed sources confirmed to us that the target is expected to be around revenue collected by the IRD in 2016, which amounted to Rs. 641 billion.

The IRD recorded revenue of Rs. 836 billion in 2017, while in 2018, it managed to collect over Rs. 900 billion. When contacted, both the Ministry of Finance and the IRD refused to disclose the revenue collection targets given to the IRD by the Government since 2016. However, according to reports, the targets given for the years 2017 and 2018 were Rs. 651 billion and Rs. 792 billion, respectively.

In 2019, the revenue target given for the IRD was Rs. 799 billion. The IRD had managed to get much closer to the target by achieving Rs. 785 billion last year. But it fell short of Rs. 14 billion.

The current Government elected in November last year announced massive tax cuts in the same month, the most notable one amongst them being the reduction of the value-added tax (VAT) from 15% to 8% with effect from 1 December 2019. In addition to this, the nation building tax (NBT) of 2.2% was also removed with effect from 1 December 2019, including for financial service businesses. The threshold for registration of VAT purposes was increased from Rs. 12 million per annum to Rs. 300 million per annum with effect from 1 January 2020 in order to provide immediate relief, particularly for small and medium-sized businesses in all sectors of the economy.

Furthermore, the telecommunication levy (TL) was reduced by 25% while the income tax levied from the construction industry was reduced by 14% from 28% earlier from the year of assessment, 2019/2020. The debt repayment levy (DRL), which was impacting banks’ and financial institutions’ profit, was removed while the withholding tax (WHT) on interest income was also removed for those with a monthly interest income of less than Rs. 250,000. IT and enabling services were made free from all the taxes.

The income earned from the supply of services for the receipt of foreign currency was exempted from income tax with effect from 1 December 2019, and tourism businesses were told to be treated as “zero-rated exports” for the purpose of VAT, if 60% of the value of inputs is sourced from local supplies or sources.

The economic service charge (ESC) was removed, and income from agriculture, fishing, and livestock were made income tax-free from the year of assessment, 2019/2020. Religious institutions were also exempted from income tax with effect from 1 December last year.

The tax-free threshold for turnover for VAT is to be raised from Rs. 1 million per month to Rs. 25 million per month while the pay as you earn (PAYE) tax-free threshold was increased to Rs. 250,000 from Rs. 100,000 per month for all public and private sector employees with effect from 1 January 2020. Excessive personal income is liable for income tax at the progressive rate of 6%, 12%, and 18% for every tax slab of Rs. 250,000 effective from 1 January 2020.

During a meeting on Monday (24) with Secretary to the President Dr. P.B. Jayasundara, tourism industry officials, including The Hotel Association of Sri Lanka (THASL) President Sanath Ukwatte and Sri Lanka Tourism Development Authority (SLTDA) Chairman Kimarli Fernando, requested the 60% input requirement for “zero-rate export” to be annualised, citing the impracticality of the requirement.

Moreover, during the same meeting, travel agents were exempted from VAT and Dr. Jayasundara assured that tourism entities will not be charged 1% of their turnover as a trade license fee and will be treated as other establishments.

The treatment of travel agents as part of the thrust tourism sector and exempting them from VAT as opposed to an 8% rate at present was also agreed upon in principle.

Following the announcement of these tax concessions in November, Moody’s Investors Service stated that these tax concessions are “credit negative”, implying that it would lead to a downgrading of the country’s present rating of B1/Stable, unless it is managed properly. Fitch Ratings also warned that the stimulus package would derail the budget disciplining exercise started by the previous Government and revised Sri Lanka’s outlook to “negative”.

Releasing a statement to the media on 19 December following the Fitch rating, the Ministry of Finance noted that Fitch’s analysis is lacking the impact of offsetting measures that the Government is undertaking to meet any revenue loss, and lack of due recognition of the favourable macroeconomic impact that tax concessions would deliver over the medium term.