Saturday, 10 May 2014 00:00
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A Sri Lankan court this week handed a 102-year suspended jail term and imposed a fine of Rs. 11.98 billion to a former Deputy Commissioner of the Inland Revenue Department over the staggering VAT fraud that has been unfolding for over a decade.
Sri Lanka’s quest for an equitable and simple tax policy is a long one, and perhaps the reason for this is that the people who guide such policies are not honest in their intentions to reduce the inequality seen in society. An overloaded and inefficient legal system has also made matters worse and, despite the massive fraud, little has been done to make the country’s tax system more efficient.
This has been observed by the Parliamentary Committee on Public Enterprises (COPE) that has warned of Sri Lanka’s continued inattention to providing a tax system that efficiently takes from the rich to give to the poor, rather than a system where the rich get richer while the poor are taxed heavily.
The tax-to-GDP ratio is the lowest since independence and non-direct taxes account for the bulk of the Government’s tax receipts. This shows that income disparity is huge, intimating that the best solution is a comprehensive taxation policy with the restructuring of Customs, Excise and Inland Revenue Department as the three “houses” that bring in the bulk of public expenditure.
These problems have been articulated by top economists in the country and organisations such as the International Monetary Fund (IMF). Reports have indicated that the ratio for direct-indirect taxation in Sri Lanka is close to 20:80 whereas the number should ideally be 60:40.
In 2012, revenue declined to 13% of GDP from 14.3% of GDP in 2011, mainly due to tax revenue declining from 12.4% of GDP in 2011 to 11.1% in 2012. Revenue from VAT declined by 0.8% of GDP in 2012 compared to 2011 (3.5% to 2.7% of GDP), mainly due to many exemptions or zero ratings. Income tax declined from 2.4% GDP in 2011 to 2.3% of GDP in 2012 due to rate adjustments not being matched by broadening the tax base in 2012.
The IMF has repeatedly called on the Government to revamp their tax policy and increase the efficiency of their tax collection system. During their last visit to Sri Lanka the delegation noted that other countries gain higher revenue for each percentage of tax that is imposed. Not only does this mean that income for public services such as healthcare and education are lower but it also places high tax burdens on legitimate businesses. Therefore, instead of creating a culture that rewards tax payers, it encourages tax evaders.
This is clearly a phenomenon that gains mileage on a daily basis. The carrot of tax concessions is not essential if the investment environment is efficient and corruption-free. But rather than addressing these concerns, policymakers prefer to heap more misery on the masses.
While it is positive that fresh steps have been introduced to stop VAT fraud, the new measures are also prohibitive and result in massive delays that can be ironed out with greater resources.
Strengthening direct taxation, launching investigations into as many as 30 Sri Lankans holding accounts in tax havens and implementing a simplified and equitable tax policy is arguably the biggest development challenge faced by the Government.
