Monday, 25 November 2013 00:49
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Income tax collection turns around to register 4% growth in first nine months from a 5% dip in first half
Rebound linked to pick up in economy and revenue reforms and collection
Despite improvement, total revenue reflects Rs. 145 b deviation from estimates confirming both economy and revenue effort are below their full potential
After a major setback in the early part of the year, government revenue has bounced back reinforcing that the economy has turned around and the tax effort is improving.
As Daily FT reported on 19 November, in the first half total revenue and grants of the Government amounted to Rs. 484.1 billion down 8.6% from Rs. 529.4 billion a year earlier. Tax revenue had dipped by Rs. 23 billion or 5% to Rs. 435.4 billion, whilst non-tax revenue was down by Rs. 16 billion or 26%.
However, as indicated in the article, the third quarter has picked up and the Government’s Fiscal Management Report released on Thursday with the 2014 Budget presentation confirms the turnaround.
Nominal growth in total revenue was 2.7% to Rs. 780.2 billion whilst tax revenue rose by 4.2% to Rs. 706.6 billion thereby turning around the declining trend experienced until June 2013.
Though the rebound is encouraging, end-September data however reflects a shortfall of Rs. 145 billion or 15% from the original estimated figure of Rs. 925.6 billion. The double digit deviations were seen in VAT Domestic and Nation Building Tax collected by Inland Revenue whilst at Customs level the deviations were on import duty, Port and Airport Levy and Excise Special Provisions.
Analysts said the shortfall confirms the continued difficulties faced by the economy and revenue efforts, and both are performing below their full potential.
Despite the shortfall and the increase in government expenditure, President Mahinda Rajapaksa on Thursday expressed confidence that the original Budget deficit of 5.8% of GDP will be met and the Government remains committed to fiscal consolidation moving towards 5.2% by 2014 and 3.8% levels by 2016.
The Fiscal Management Report said the Government revenue is expected to increase in the final quarter with the continued improvement in income taxation, full impact of the extension of VAT coverage to retail trade, the normalisation of imports and acceleration of domestic economic activities. The Government estimates economy to grow by over 7% in 2013.
“The Government revenue reflected a turnaround of its declining trend since July 2013 as circumstances which led to a weak tax revenue collection have begun to wane with the signs of accelerated economic activities complemented by the impetus from the gradual recovery of the global economy,” the Fiscal Management Report said.
It said the aberration in revenue collection in the first half of 2013 which was a result of a drop in revenue collection mainly from taxes levied at the point of import due to the erosion in value of motor vehicle imports as the tax base, has started to reverse with the gradual improvement in external trade.
However, reflecting the turnaround, revenue from income tax rose by 14.4% to Rs. 154.7 billion in the first nine months. The Treasury said this was a reflection of a favourable consolidation of the impact of 2011 tax reforms, which is aimed at lower rates and broader base.
The increase in PAYE rose by 26% to Rs. 14.2 billion despite lower rate structure and higher threshold inbuilt in the new tax system unveiled in 2011. Higher wage income and employment liable to PAYE, improved compliance from employers and collection at the source as the final tax have also helped.
Tax on interest recorded a higher growth of 31% to Rs. 64.5 billion reflecting a growth in deposit base in the banking and financial system, as well as the increase in the amount of government securities issued.
Corporate and non-corporate income and profit tax rose by 15.6% due to a gradual completion of tax holiday periods by many companies and improved performance of commercial banking, financial and insurance, imports and export trade, tobacco and alcoholic beverages, tourism and manufacturing sectors. This was despite the impact of continued slowdown in credit growth and business of motor vehicles and financial leasing activities.
VAT on domestic consumption rose by 11% to Rs. 91.85 billion, reflecting the improvement in the system under the newly introduced single rate system. Revenue from Cess rose by 12% to Rs. 26.4 billion. The Special Commodity Levy rose by 38% reflecting a higher rate imposed to support domestic producers.
On the negative side, there was a decline in revenue due to lower importation of motor vehicles and sales volumes of cigarettes and liquor. The decline of 14% in import-based taxes experienced in the first four months of 2013 has been moderated significantly to record only a 1.3% dip in the first nine months. The decline in import duties was 1.7% owing to lower value of imports subject to these duties. Owing to the same reason, VAT revenue on imports declined by 4.6% and NBT revenue from imports dipped by 7.6%. Revenue from Excise (Special) Provision dipped marginally.
Revenue from the Ports and Airports Development Levy dipped by 16% due to the contraction in imports of motor vehicles, home appliances, textiles, chemical products, wheat and maize and continuation of the exemption of several items in support of exports. The overall dip in import based taxes was Rs. 4 billion.
