State revenue: What happened to the tax amnesty?
- IRD refuses to provide info on tax amnesty funds
- Tax amnesties in SL have been ineffective: Think tank
- Balance between voluntary tax compliance and deterrence needed
By Vinu Opanayake
The Government of Sri Lanka last year presented a controversial proposal to introduce a Finance Bill (Tax Amnesty Bill) which enables individuals to voluntarily disclose undisclosed taxable supplies, income, and assets that are required to be publicised under some laws.
In addition, the legislation allows the imposition of taxes on taxable income and assets. Further, the bill enables granting tax amenities and indemnification of individuals who voluntarily disclose taxable supplies, income, or assets against liability from the investigation, prosecution, and penalties under specified laws.
The Tax Amnesty Bill was passed in Parliament on 7 September last year, but little has been heard of it since.
Govt. tight-lipped on tax amnesty progress
When passing the Bill in Parliament, Sri Lanka expected to attract at least $ 500 million worth of monies to flow in through this. With these funds, the Government anticipated that it would be able to solve some of the problems it is currently facing.
In November last year, Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal stated that the amount of funds registered and revenue earned from the controversial tax amnesty was “confidential information”.
When The Sunday Morning contacted the Inland Revenue Department (IRD) to determine the taxes raised under this amnesty, the Department refused to give any information. Our Right to Information (RTI) request sent to the Department afterwards, requesting the amount of taxes raised, is yet to receive a response.
When contacted, the Treasury also directed us to speak to either the CBSL or to the IRD.
Effectiveness of tax amnesties in Sri Lanka
According to Verité Research, Sri Lanka has had a history of providing frequent tax amnesties from 1964 till 2009.
It added that tax amnesties provided until 2003 were mainly focused on income tax or foreign exchange amnesty. However, from 2003 onwards, tax amnesties also covered a range of taxes, including Income Tax, Value Added Tax, Wealth and Gifts Tax, Turnover Tax, Surcharge on Wealth Tax, Goods and Services Tax, Nation Building Tax, Betting and Gaming Levy, and Stamp Duty.
“The number of declarations – meaning the number of individuals disclosing income through the tax amnesty – has been low in the past, as can be seen in the above infographic. However, in 2003 and 2009 the number of declarations increased to 51,805 and 20,395 respectively,” Verité Research notes.
According to Verité, past tax amnesties in Sri Lanka have not translated to a higher income tax revenue or an increase in tax files. This is despite a higher number of declarations being recorded in 2003 and 2009. This conclusion thereby suggests that the tax amnesties were ineffective in achieving their goal.
It stated that frequent tax amnesties can also have other unintended negative consequences which can have lasting impacts on a tax system and also may lead to lower tax compliance as they could create an incentive for non-compliant entities to avoid declarations until the next amnesty.
“Further, they discourage compliant taxpayers since non-compliance is rewarded; tax evaders can be indemnified with a low one-off payment, whereas the complaint has paid the full tax rate. Frequent tax amnesties can also result in a loss of Government revenue due to the foregone collection of previous years’ taxes,” Verité concluded.
How do other countries with tax amnesties perform?
According to Bloomberg Tax, Australia launched its tax amnesty programme in 2014. At the end of the programme, thousands of High-Net-Worth Individuals (HNWIs) reported billions of dollars in undeclared assets and income.
It also added that Indonesia implemented a nine-month tax amnesty programme that ended on 31 March 2017. The programme was largely successful as it generated about 80% of the expected revenue. According to a 2017 BNP Paribas Asset Management report, the programme boosted Indonesian Government tax revenues by 3.6% year-on-year in 2016 and helped to fund infrastructure spending and keep the fiscal deficit within the statutory limit of 3% of GDP.
South Africa has implemented tax amnesty programmes at different times. In 2003, the programme resulted in additional tax revenue of 2.9 billion South African rands from about 69 billion South African rand wealth declared. Interestingly, about 70% of the wealth declared was held offshore illegally.
The country also launched another amnesty programme from 1 October 2016 to 31 August 2017, to give an opportunity to non-compliant taxpayers to report unauthorised offshore assets and income. According to Business Day, about 3.3 billion South African rands of the planned amnesty revenue of 4.5 billion South African rands was generated, representing about 73% performance.
Bloomberg Tax further noted that in 2016, in response to the need to boost tax revenues and reduce the fiscal deficit, the Nigerian Federal Inland Revenue Service (FIRS) launched a 45-day tax amnesty programme for corporate organisations. According to available FIRS reports, the programme generated about 94 billion Nigerian nairas and brought 2,700 taxpayers into the tax net.
Why isn’t it working in Sri Lanka?
Speaking to The Sunday Morning, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando stated that lack of confidence in the Sri Lankan economy, driven by the foreign exchange crisis and volatility in policy measures, could be a reason why individuals were not willing to come forward and disclose their assets.
“Given there are so many other options for people to go for, they are hesitant to disclose it to a country with lower ratings and economic volatility. Inconsistent policies are also a big negative. People are not fond of policies that remain only for a couple of years,” Fernando stated.
Fernando stated inconsistent policies were a discouragement for whoever was willing to come and park their money in Sri Lanka as they could do it in other tax haven countries with ease.
Why do some tax amnesty programmes fail?
As per the research done for this article, tax amnesties are not a success in every country. According to a case study done by Bloomberg Tax taking into account successful as well as unsuccessful cases of tax amnesties, one of the reasons why tax amnesties fail is because some non-compliant taxpayers believe that if they participate in an amnesty programme and declare complete and accurate information, they will be targeted for enhanced security in the future. Consequently, these taxpayers will choose not to participate unless they receive an assurance that this will not be the case.
Another reason is the fact that most amnesty programmes only focus on a short-term increase in revenue. Further, there is no adequate cost-benefit evaluation of the programme.
“Amnesty programmes should be geared towards enhancing voluntary compliance. However, if they are not properly evaluated, it may discourage already compliant taxpayers from remaining compliant, especially if they feel that the tax authorities are not acting in their interests. Therefore, any amnesty programme that does not strike an adequate balance between encouraging voluntary tax compliance and deterring non-compliance will not succeed,” the case study by Bloomberg Tax further elaborated.