Business

Government to whitewash undisclosed assets

 

  • Mere 1% tax penalty on voluntary disclosure to be introduced

  • Aimed at encouraging disclosure and investments

 

By Imsha Iqbal 

The Government yesterday (6) approved a proposal encouraging people to invest their undisclosed assets and income after settling a mere 1% of such asset value as tax without being subjected to investigation or prosecution, in a move to pick up the State’s tax revenue.

The tax proposal, which was tabled by Prime Minister Mahinda Rajapaksa in his capacity as Minister of Finance, will be published as a Bill in the Government Gazette, and is thereafter expected to be presented to Parliament for approval. 

Speaking to The Morning Business, Finance Ministry Fiscal Policy Department Director General Dr. M.K.C. Senanayake stated that with this tax exemption strategy, undisclosed money or assets are anticipated to come into the system, following settling a tax of 1% of asset value. 

He added: “Due to this proposal, an amount of informal money that we didn’t know existed will come into the system.” He explained that, according to research, the informal sector in Sri Lanka is enormous in comparison with developed countries. It is as huge as 35%, he said, indicating that such voluntary disclosures would create a pathway for the investment of such funds.

Accordingly, the capital collected through this tax is expected to result in an improvement to the Government’s deteriorating tax revenue. He further said that any undisclosed money or assets – even Treasury bills and bonds – can thus be disclosed, followed by a payment of the 1% tax on voluntary disclosure, but such funds would need to be invested.

The Tax on Voluntary Disclosure applies when an individual has not disclosed any income or asset, and such can be disclosed by paying only 1% of the value of the  particular income or asset.

Accordingly, entrepreneurs who voluntarily disclose their income and assets would be exempted from the obligation to pay taxes, any penalties, or interest, as well as being free from investigation or prosecution.

Dr. Senanayake said there is no exact time frame for this tax exemption; however, such assets need to be declared prior to 31 December 2021.  

“We all know that people have informal money, but there is no method to quantify the amount,” he noted, reiterating that this tax exemption will contribute to bringing such monies into the system. 

Trade Minister Dr. Bandula Gunawardena revealed on an earlier occasion that an “Investment Promotion Tax Liberator Package” would be presented to Parliament, allowing people to invest what they have earned either locally or overseas by disclosing these earnings to the Inland Revenue Department of Sri Lanka. 

The Minister had said: “An ‘Investment Promotion Tax Liberator Package’ will be introduced. A law will be passed in Parliament to rebuild this country by locals raising the undisclosed funds to the Inland Revenue Department and investing them in certain projects by paying a very small tax of about 1%. From that point onwards, they will be freed from their past, and a new tax file will be opened.”

In this vein, the 2021 Budget proposed the imposition of legal provisions to exempt entrepreneurs willing to invest undisclosed income and assets from any penalty, except for the “Tax on Voluntary Disclosure”, with the objective of encouraging entrepreneurs to make such investments.