Tax problems

Thursday, 1 April 2021 01:44 - - {{hitsCtrl.values.hits}}

Sri Lanka has a tax problem. And never was it more apparent than at a recent Committee on Public Accounts (COPA) meeting where the Inland Revenue Department revealed tax arrears of Rs. 144 billion to be collected.

Taxation in Sri Lanka is overwhelmingly from indirect taxes. As much as 80% of taxes are collected indirectly, in part because the Government depends on imports for much of its revenue. The second reason is because Sri Lanka’s private sector is not large enough and has limited export capability to really fuel tax income. There are also conflicts over some industries being given protection via taxes, which also costs the Government revenue.

The challenge with having a large chunk of public revenue dependent on indirect taxes is that it overburdens the poor. Despite successive Governments coming to power, pledging to make pro-poor policies, the reality is none of them have been able to tilt taxation more towards direct taxes. The reliance on indirect taxes also means that when import restrictions are placed, it hits public revenue hard and can expand the Budget deficit, as is happening now.

The Government is then forced to turn to securities to fund its expenses and that can lead to inflation and currency pressures. According to experts, public revenue must at least be 15% of GDP for a government to sustainably fund universal healthcare, education, housing and maintain a large public sector, but Sri Lanka’s public revenue has been well below that for decades.

So, the importance of expanding and deepening the tax net, especially towards direct taxes has been impressed upon Sri Lanka repeatedly, but to little avail. One important part of taxation is actually collecting taxes and minimising leaks. However, this requires a strong anti-corruption movement by the Government that includes strengthening the powers of the IRD, Customs and Local Authorities that collect taxes.

Clearly, this is not the case, as the IRD has received 6,878 dishonoured cheques worth Rs. 2.4 billion, as of 31 December 2020. COPA may have ordered the IRD to collect the unpaid Rs. 2,451,465,383, but this is easier said than done.

Dozens of court cases have been filed by IRD in the Colombo Magistrate’s Court to recover Rs. 2,670 million in tax arrears from the casino business, which are direct taxes, but to no avail. According to Section 12 of the Default Taxes (Special Provisions) Act No. 16 of 2010, the amount of tax arrears that could be collected as of 31 December 2020 by the IRD was around Rs. 144,537,364,916.

To put this amount of uncollected taxes in context, Samurdhi was allocated Rs. 43 billion in 2017. The level of public revenue leakage is problematic on multiple levels and needs to be urgently addressed by policy makers. Such funds could be used for much public good.

Many private sector stakeholders complain that the Government often increases tax pressure on taxpayers but does little to bring the informal sector into the tax fold. This is especially critical given the expansion of the gig economy and the challenge of tailoring regulations that capture services and semi-formal economic activity. Unless these economic sectors are also drawn into the tax net, other regulations such as labour laws and social protections could also be harder to implement.

Making it easier to pay taxes is just part of the riddle.