• IRD cites Advanced Personal Income Tax as reason

• Tax compliance not at pre-pandemic level even by end-2021

• Tax-to-GDP ratio at 7.7%, one of the lowest in the world

By Imesh Ranasinghe    Sri Lanka’s registered taxpayers have dropped by 55% by the end of 2021 compared to 2020, mainly due to the revision of the rules regarding employees required to pay tax under the Advanced Personal Income Tax (APIT), which replaced the Pay As You Earn (PAYE) tax at the end of 2020, according to the 2021 annual report of the Inland Revenue Department. Accordingly, the number of registered taxpayers, which totalled 1.13 million at the end of 2020, reduced to 677,613 due to the revision of the APIT guidelines, which then reduced to 507,095 by the end of 2021, as the number of employees paying income tax under APIT decreased from 664,828 to 32,702 after the tax’s monthly income threshold was lifted to Rs. 250,000. Moreover, the report shows that the compliance rates of Corporate Income Tax (CIT), Individual Income Tax (IIT), and Partnership Income Tax (PIT), despite a grace period being granted until 31 December 2021, were at 26% and 20% for the corporate sector and non-corporate sectors, respectively. This compliance rate had not reached pre-pandemic levels, even by the end of 2021. Further, the default tax amount as of 31 December 2021, as the percentage of the revenue estimate given by the Ministry of Finance was 17.6%, The facility to write off tax arrears was granted to the IRD Commissioner General under Section 58 (1) of the Inland Revenue (Amendment) Act, No. 10 of 2021 and part 2 of the Finance Act No. 10 of 2021 as tax relief measures to facilitate post-Covid-19 economic recovery. The report showed that Sri Lanka’s tax-to-GDP ratio of 7.7% in 2021 was one of the lowest in the world and the lowest reported since Independence, while highlighting that the system within the country fails to gather sufficient tax revenue for the State coffers. The tax-to-GDP ratio was at 11.6% in 2019 and 8.1% in 2020. According to the International Monetary Fund (IMF), the tax-to-GDP ratio should be at least 15% to achieve sustainable economic growth. The IRD said that the newly revised Inland Revenue Act aims to widen the net tax revenue and to increase the direct tax component in the coming two to three years by reducing the number of indirect taxpayers. In terms of the above, the IRD had exceeded the given target of opening 3,096 tax files, as in 2020, 11,792 income tax files were opened.