Inland Revenue Dept. to provide free tax advisory

The Inland Revenue Department (IRD) will offer free tax advisory services at provincial level for citizens and enterprises in a bid to encourage voluntary compliance as well as promote savings and investments by highlighting various Budget proposals.

IRD will use its network of around 15 provincial offices for this purpose.

The move depending on how IRD officials carry out the advisory service is likely to draw more people and enterprises to its offices, otherwise shunned for fear of being brought under the tax net.

“The idea is not to hound prospective tax payers but offer them advisory services that will benefit individuals and enterprises to better understand the obligations as well as incentives offered under successive Budgets,” Finance Ministry sources said.

The Ministry is of the view that at present tax advisory is lacking at provinces, some of the consultants do not offer proper advise whilst they also charge an exorbitant fee.  IRD believes via its free services a proper understanding of tax regime, the host of incentives can be achieved.

Tax revenue in the first nine months of 2012 had increased by 6.5% or Rs. 38.7 billion to Rs. 629.5 billion. That was 68% of the full year estimate for 2012 of Rs. 921 billion. Income tax component for 2012 was Rs. 185 billion.

Target for 2013 is a tax revenue of Rs. 1.13 trillion of which income tax is to be Rs. 222 billion.

In 2011 Budget the Government spearheaded landmark tax reforms to simplify and broadbase the tax system and this was further consolidated in 2012 and 2013 Budgets.

Tax reforms introduced in 2011 have been designed to eliminate weaknesses such as complexities, wide range of exemptions, high and multiple tax rates and cumbersome refund/setting off mechanisms in the country’s tax system. These are also expected to create an investment-friendly environment in the country while providing support to small and medium enterprises to prosper. The enhancement of the valued added exports and the encouragement of the items that could be produced in the country are also being encouraged through the tax system, said President and Finance Minister Mahinda Rajapaksa during his 2013 Budget presentation.

The Government also introduced appropriate amendments to the relevant legislations to bring the country’s taxation in line with other emerging economies. To promote predictability and improve level-play in relation to investment, concessions and tax holidays were rationalized under three categories - SMEs, large scale investments and strategic investments. The VAT rate was unified and VAT concessions were expanded to cover targeted sectors, specific activities and certain local manufacturing. The Nation Building Tax and Provincial Turnover Tax were combined. Debit Tax, Social Responsibility Levy and Regional Infrastructure Levy, were removed, to simplify taxation. Corporate and personal tax rates were further rationalized and simplified.

The new system also includes a single unit for the interpretation of the laws at the Department of Inland Revenue, Independent Tax Appeals Commission headed by a retired Supreme Court Judge and an Investment Fund Account which is created by using the 8 percent savings from the VAT on financial services and 5% of the reduction of the maximum corporate income tax rate for the provision of medium to long-term loans for agriculture, industry and SME related activities.

In the 2012 Budget the Government removed Debit Tax and Economic Service Charge (ESC) whilst amalgamated the Nation Building Tax (NBT) and Provincial Turnover Tax. This gave a considerable relief to small businesses. In 2013 Budget presented in November last year, the Government exempted such businesses from NBT and Value Added Tax (VAT) so that they can operate in a completely tax free environment. It was proposed that the applicable annual turnover for taxation be raised to Rs. 500 million, to allow SMEs to benefit from the low tax rate of 10%.

In 2013 Budget the Government also exempted people earning less than Rs. 50,000 per month from Personal Income Tax. Businesses engaged in exports, construction, tourism, commercial agriculture and the SME sector now pay only 12% Income Tax.

In a move further simplify tax system to enable tax administration to focus on the highest level of the taxpaying community, President Rajapaksa proposed to exempt businesses having an annual turnover less than Rs. 12 million from Nation Building tax (NBT) and Value Added Tax (VAT), with effect from January 2013.

Out of the 27,645 businesses in the Large Taxpayer Unit only 11,101 companies have a turnover above Rs. 10 million. They generate 97% of revenue from VAT and NBT in addition to Corporate Income Tax. Since the Inland Revenue Department needs to pay greater attention to corporate entities and intensify its tax audit activities, the management of such large tax files will be brought under one consolidated unit.

President also proposed to streamline related operations and expand tax audits on the Simplified VAT System, which the Government introduced in 2011 to improve the VAT refund system to enable exporters to overcome their difficulties.

In order to improve the efficiency of the tax administration which is complemented by the Tax Appeals Commission, the time-bar applicable to the filling of a tax return was reduced to 18 months and a 6 month time-bar fixed to issue interpretation by the Tax Interpretation Committee. He also proposed to expand the concessions available to tax payers who are maintaining a 10 year minimum tax payment of Rs. 250,000 per annum.