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Finance Minister Mangala Samaraweera this week revealed that 46,000 new tax files had been opened since the new Inland Revenue Act came into effect on 1 April. This is a positive start and indicates that the new law is helping to broaden the tax net but collection, especially of direct taxes, still remains a challenge. 

Even with the new Income Tax laws, the focus remains on indirect taxation. Direct taxing, particularly on income, is much more challenging than indirect taxes because a robust collection system is needed to collect direct taxes. The Central Bank has proposed closer monitoring of high end car and real estate sales, which would then be crossed checked with tax declarations, to catch tax evaders more effectively. It would also solve the riddle of declining tax revenue in a country where the luxury market is expanding. 

Tax evasion by individuals and corporates has been one of the primary reasons for the decline in direct tax revenue as a percentage of GDP, insists the Central Bank report, pointing out that tax evaders deliberately understate or avoid reporting the true state of their net worth and income to the tax authorities to reduce tax liability. This requires reconciling income declarations with data retrieved from high-end transactions such as luxury car sales and property sales.  

Although the Inland Revenue Department (IRD) carries out such examinations and follows up with semi-automated systems, a sophisticated electronic system linking up relevant institutions with the tax system is essential to efficiently confront tax evasion.  The full implementation of the RAMIS is expected to connect the system with over 20 other external institutions including the Central Bank, licensed banks, Sri Lanka Customs, Registrar of Motor Vehicles, Condominium Management Authority, Colombo Stock Exchange and the Land Registry for effective tax reconciliation.

However, the Central Bank believes addressing the remaining infrastructure and human resource bottlenecks to implement the much-needed system would enable authorities to tackle tax evasion efficiently. Taxes are also important because they force the public to demand a greater voice in how funds are administered by a government. 

Direct taxation is also more challenging because wealthy corporates and individuals have strong lobbying power with politicians, which gives them the power to influence laws and their implementation. This, together with an inefficient tax collection system and opaque Government operations, discourages direct taxation significantly.  Sri Lanka has long been favoured indirect taxation with 80% or more of its taxes collected via indirect means. 

Finance Minister Mangala Samaraweera told reporters in early April that he had instructed the Inland Revenue Department (IRD) to target opening 200 new tax files each month. The idea being that every citizen above 18 years of age should have a tax file, irrespective of whether or not they are paying direct taxes. The fact that tax files have increased in a short period of time shows this is a sound policy and should be matched with greater governance and transparency of tax administration. 

Taxation can only be justified in the eyes of the public if it is linked to greater government and governance reform. It is this that the Government will ultimately be judged on and will decide the success of the new laws.


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