Dealing with defaults

Thursday, 11 November 2010 23:08 - - {{hitsCtrl.values.hits}}

AS the budget draws closer, the focus on taxes is increasing. Numbercrunching reached a new peak last week with the Inland Revenue Department (IRD) releasing a report to Parliament that Rs. 194 billion in defaulted taxes exist in Sri Lanka. What is even more startling is that Rehabilitation and Prisons Reform Minister D. E. W. Gunasekara on Wednesday proposed in Parliament that all irrecoverable taxes be written off.

The argument seems to be that since the taxes are irrecoverable, then they should be written off completely. This makes sense to a certain extent, but this is also Rs. 194 billion that can be used for other purposes. To put the massive amount of money that is lost to the system in context, consider the following statistics.

In the Appropriation Bill for the 2011 Budget, the Economic Development Ministry has been allocated Rs. 75 billion while Rs. 62 billion has been approved for the health sector and Rs. 31 billion for the education sector. Even the Defence Ministry, which received the lion’s share of funding, was given Rs. 214 billion. This clearly shows that the Government has to consider more pragmatic ways of collecting taxes, especially income tax.

According to the report, the total collectible tax excluding penalty had been Rs. 47 billion for the year. Income tax as a percentage of Government revenue has dropped from 62 per cent to 50 per cent between 2005-2009, while income tax revenue as a percentage of GDP has come down from eight per cent to seven per cent. In addition income tax collection as percentage of the department’s estimates is 92 per cent, thus a shortfall of eight per cent.

The report also points out that income tax return compliance on the due date ranges between 37 percent and 49 per cent in the case of corporate tax payers and between 28 per cent and 39 per cent in the case of non-corporate tax payers. Non-compliance is thus a factor to be reckoned with, but hardly one that will elicit surprise.

It has been reiterated that the tax net must not just be widened but also given teeth to catch the offenders while promoting a fair system that would include the public as well as the private sector. It is not fair to fleece one section of society so that the other can waste it — a point that is equally relevant to all spheres of the economy.

Even though the IRD has a division to catch tax defaulters, it is clear that it needs to be given more powers, both in terms of better facilities and legal empowerment, to deal with this massive problem, which has only been growing year on year. Reports such as this need to find a ground for public discourse and should not be limited to simple Parliament perusal. Most of the time the exposure given to it even in some form of mainstream media is limited and this is a fact that needs to change if everyone is to concentrate equally on the task of development.

Defaulted taxes are within the system and perhaps they are better off that way, one might argue. However, the point of a government is to act as a fiscal regulator and control the system so that money is funnelled to the people who need it the most. Not only should Government departments be efficient, they must also ensure that the tax money is utilised in a constructive manner and this, more than anything else, will negate the non-compliance factor.