• Increase direct taxes: Prof. Samarajiva
• Simplify tax system, expand tax base: Moramudali

By Vinu Opanayake  Economists are of the view that Sri Lanka’s current tax system needs revamping, as it currently makes the poor poorer while making the rich richer.   Speaking to The Sunday Morning, LIRNEasia Founding Chair Professor Rohan Samarajiva stated that Sri Lanka’s tax ratio was wrong as it enforced too many indirect taxes. He suggested that the direct tax percentage should be 40% at least in the short term while it was now merely 20%. “The tax threshold for income tax is quite low in Sri Lanka, compared to all the countries I have been to including the US. Shortcomings are repressive. As people get richer and prosper, they tend to spend more on non-food items. Food has every kind of tax embedded in it. Every potato you buy, you will have all sorts of levies embedded. Now for the poor, food items are a larger percentage of their expenditure than the food expenditures of those who are on a higher income level. The higher-end people do not spend much of their income on food-related items,” Prof. Samarajiva explained.   He stated that when the Government imposed indirect taxes on food items, as a percentage of expenditure, it hit the poor harder; instead what we need is a system that takes more from the rich and shields the poor. “As Ranil Wickremesinghe said, a farmer who goes nowhere near the airport should not be paying to subsidise SriLankan Airlines,” Prof. Samarajiva added. Meanwhile, Economist and University of Colombo Lecturer Umesh Moramudali stated that currently Sri Lanka had too much reliance on indirect taxes.   “These include lots of import taxes, Ports and Airport Development Levy, and also Value Added Tax (VAT). Sri Lanka has a very low tax-to-GDP ratio, which means we cannot see a further reduction in it. What Sri Lanka needs is a lot more focus on direct taxes while keeping indirect taxes at their current levels.” He stated that more people should be paying direct taxes. “Our tax system is fairly complicated; it should be simplified. The revenue administration system needs to be fixed too. Tax administration needs to be fixed. Bring the revenue agencies, and establish better coordination,” Moramudali suggested.  University of Colombo Faculty of Arts Department of Economics Senior Lecturer Dr. Shanuka Senarath told The Sunday Morning that the current tax system was making the poor even poorer.  “When the former (2019) Government came into power, it increased the threshold of direct taxable income while cutting off most other taxes. After this, to meet Government expenditure, it started imposing indirect taxes. Indirect taxes are inflationary, as such taxes are imposed on goods and services,” Dr. Senarath explained.  According to him, indirect taxes impact the poor more than the rich because, despite the income level, the public – be it a low-income earner or high-income earner – pays the same price to buy a good or service. This would mean that a person who is making Rs. 1 million per month and a person making Rs. 500 per day would both be paying the same amount of tax when purchasing the same good or service, thereby making the poor pay more of their income in taxes while the rich pay a considerably negligible amount on the same. “As a result, poor people are getting poorer while rich people are getting richer. When you impose direct taxes, you are getting tax revenue from people who can afford to pay taxes. This is a good measure as the more a person makes, the more tax they have to pay. This type of tax system is reasonable and justified,” he opined. According to the Central Bank of Sri Lanka data, the average tax-to-GDP ratio from 1959 to 2021 is 16%. In 2021 the tax-to-GDP ratio dropped to 8%, which is the lowest ratio since 1959 and is half of the average ratio. How much do individuals pay as taxes on their income? [caption id="attachment_210851" align="aligncenter" width="533"] As per the Budget Proposals for 2022, presented in the Parliament on 12 November 2021, there have been no significant individual tax developments in Sri Lanka. According to PricewaterhouseCoopers Sri Lanka (PwC), resident individuals are subject to income tax on their worldwide income. Non-resident individuals are taxed only on their Sri Lanka-source income (Source: IRD) [/caption] [caption id="attachment_210850" align="aligncenter" width="562"] Concessionary tax rates apply to sums paid to an employee on cessation of employment when the scheme is uniformly applicable to all employees by way of compensation, commuted pension, retirement gratuity, and contributions to the Employees’ Trust Fund. Accumulated employers’ contribution to an approved or regulated provident fund, when withdrawn, is exempt from tax (Source: PwC) [/caption]   [caption id="attachment_210849" align="aligncenter" width="473"] WHT on payments to resident persons has been removed with effect from 1 January 2020 (Source: PwC) [/caption] Other taxes for individuals 

• Employees’ Provident Fund (EPF)

Employers and employees are required to contribute specified percentages (employer 12%, employee 8%) of each employee’s monthly emoluments/salary to the EPF established by the Government. Alternatively, employers and employees can contribute to certain private provident funds approved by the labour authority.

• Employees’ Trust Fund

Employers are also required to contribute a specified percentage (currently 3%) of each employee’s monthly emoluments/salary to the Employees’ Trust Fund established by the Government.

• Gratuity

Employers are required to pay a half-month’s salary for each year of completion of the employee’s service period that exceeds five years at the time of retirement, resignation, or retrenchment. Consumption taxes

• Value-Added Tax (VAT)

VAT is payable on the prescribed valuations of imports and domestic supplies at a standard rate of 12% (prior to 1 June 2022, the rate was 8%).

• Tourism Development Levy

Tourism Development Levy is payable by every person (such as tourist hotels) licensed under the Tourist Development Act on the turnover of such institutions at the rate of 1%.

• Excise duties

Excise duties and special excise levies are charged on tobacco, cigarettes, liquor, motor vehicles, selected petroleum products, paints, air conditioners, dishwashers, household washing machines, and other products at various rates and at unit rates.

• Local taxes

Taxes (more usually called ‘rates’) are currently assessed and collected annually from the owners of land and premises by the local authorities of the areas in which the properties are located. These authorities also impose and collect annual licence fees from certain businesses as well as taxes based on the annual gross takings of certain businesses, such as hotels.