Mass registration of individuals for income tax: Misguided approach

While policymakers and tax administrators may take pride in the increasing number of individuals registered as taxpayers, mere numerical expansion of the taxpayer base does not equate to a stronger revenue system. The harsh reality is that this mass registration initiative will do little to fill the State coffers. Quite the contrary, this short-sighted and ill-conceived policy could inflict lasting damage on the integrity, efficiency, and credibility of the entire tax system

These days, not only talk of the town but even talk of the remotest villages is about the paying-in slip recently posted by the Inland Revenue Department (IRD) to every Appuhamy, Kandasamy and Abusaaly.

Six months ago, the IRD proudly announced that it had registered nearly 10 million individuals for Taxpayer Identification Numbers (TIN). This so-called achievement was carried out under Extraordinary Gazette Notification No. 2334/21, dated 31.05.2023, issued by former President Ranil Wickremesinghe in his capacity as Minister of Finance. (https://www.dailymirror.lk/breaking-news/Ten-million-registered-for-TIN-7-million-still-unregistered-IRD/108-307174)

To anyone familiar with Wickremesinghe’s political style, this came as no surprise. Known for arbitrary and deeply unpopular decisions, he had issued the gazette requiring every individual over 18 years of age to register with the IRD and obtain a TIN effective from 1 January 2024—purely based on age, without any regard to income level or tax liability.

On 2 January 2024, the author of this article wrote in the national dailies including Daily FT under the headline “Requirement for individuals over 18 years to register with CGIR not valid,” (https://www.ft.lk/columns/Requirement-for-individuals-over-18-years-to-register-with-CGIR-not-valid/4-756910). He exposed the absurdity of this exercise and warning of its adverse implications for the IRD itself. As public outrage mounted and with two major elections looming later that year, the RW Government quietly backed down—burying the scheme without a word of explanation.

What is truly regrettable, if not tragic, is that the present NPP Government—elected on a resounding promise to root out injustice and restore fairness—has chosen to cling blindly to the very same imprudent policies of the RW administration. Instead of charting a fresh course, it seems happy to recycle disgraced and shamed ideas, especially in the realms of foreign and fiscal policies. In doing so, it risks repeating history’s mistakes and ensuring the famous saying “Okkoma Yaluwoo Malli”.

Desperate attempt to make a mountain out of molehill

Policymakers with even a cursory understanding of management would know of the Pareto Principle — or the 80/20 Rule — which suggests that 80% of outcomes arise from 20% of causes. This principle holds true in almost every field: within an organisation, 20% of employees typically generate 80% of the results. The same dynamic is visible in cabinets, political parties, departments, institutions, and families alike.

The same logic applies to taxation as well: 80% of tax revenue comes from roughly 20% of taxpayers. This fact is confirmed by the Annual Performance Report 2024 issued by the CGIR. A closer examination of the data reveals that approximately 16% of income tax was collected from around 976,498 individual taxpayers, while the remaining 84% was contributed by corporate entities, numbering 100,409.

Among the total taxpayer population, 621 largest tax paying companies accounted for around 73% of the total tax revenue of Rs. 2,620 billion, while the balance 99,788 companies and 976,498 individuals together contributed only 27%.

What I gathered from this Performance Report is that around 6% of the total tax revenue was collected from the total individual taxpayers. Against this backdrop, do the policymakers and tax officials genuinely expect that registering millions of individuals will somehow result in a proportionate increase in tax revenue? Isn’t it a desperate attempt to make a mountain out of molehill?

Adverse consequences of mass registration of individuals

It is true the Inland Revenue Act empowers the CGIR to require any person to file the tax return provided the CGIR is satisfied that such person is liable to pay income tax as per Section 127(1) of the Act.

“Where it appears to the Commissioner General at any person who is liable to furnish a return and has not done so, the Commissioner General may, by notice in writing, require such person to furnish a return …”

The discretionary power given to a public official in general and to a tax official including the CGIR in particular is not an open cheque or unrestricted power as emphasised in multiple judgments and decided cases. I am of the well-considered view that such mass opening of tax files to individuals without ascertaining their tax liability – without giving them a fair hearing as was previously done or without having convincing evidence – is ultra vires the Act and arbitrary.   

In recent weeks, hundreds of individuals — both known and unknown to me — have contacted me in distress after receiving paying-in slips demanding payment of their final instalment of income tax by 30 September 2025. Many of them are self-employed, eking out a living by hiring buddy lorries, driving three-wheelers, or selling home-cooked string hoppers and pittu.

When I explained to them that they had been issued TINs for income tax purposes, their reactions were far from pleasant. Many, in anger and disbelief, began reciting the names of the forefathers of our current rulers. As a staunch supporter of the present Government, I attempted to defend the Government, suggesting that this file opening had originated from the policy decision (gazette dated 31.05.2023) of the previous administration. They retorted, “We voted for this Government to bring the change — not to continue the follies of the past 76 years.” I was left speechless.

Short and long term adverse impacts

While policymakers and tax administrators may take pride in the increasing number of individuals registered as taxpayers, mere numerical expansion of the taxpayer base does not equate to a stronger revenue system. The harsh reality is that this mass registration initiative will do little to fill the State coffers. Quite the contrary, this short-sighted and ill-conceived policy could inflict lasting damage on the integrity, efficiency, and credibility of the entire tax system.

I. Violation of fundamental principles of taxation

Fairness and efficiency are two cardinal principles of taxation—fairness ensures that taxpayers contribute according to their ability to pay, while efficiency ensures that tax collection occurs at minimal cost to both taxpayers and the administration.

Such arbitrary mass registration undermines these principles. It exposes ordinary citizens to undue vulnerability, as even submitting a NIL return online is a rocket science for many, since it is neither simple nor affordable for them.

II. Non-compliance becoming the rule instead of exception

The level of public compliance is the key indicator of a system’s success. When the majority fail to comply—despite deterrent measures—the system risks collapse and voluntary compliance diminishes.

Following the introduction of mandatory e-filing for individual tax returns in 2023/24, the non-compliance rate on the due date reached 86% out of 776,807 individual files. It is not difficult to foresee a much higher non-compliance rate when millions more are brought into the tax net. In such circumstances, non-compliance would become the rule rather than the exception, rendering deterrent measures ineffective and inefficient.

III. Wastage of limited IRD resources

Both public and private institutions operate with limited human resources, and success depends on their optimal deployment. Reportedly, about 15% of IRD’s workforce contributes to the collection of 73% of total tax revenue, while the remaining 85% of the workforce handles only 27% of the total tax revenue.

Adding millions of new individual files will severely dilute the Department’s efficiency, diverting valuable resources from monitoring high-value taxpayers and core revenue-generating activities. Consequently, the overall effectiveness of the IRD would be weakened and undermined.

Way forward

The recent mass registration of individuals for tax purposes demands a more balanced and lawful approach. The Inland Revenue Department should prioritise fairness, due process, and practicality to ensure genuine and sustainable compliance.

I. Ensuring fair hearing before registration

Mass registration based on age or arbitrary criteria ignores the right to a fair hearing. Each person’s tax liability must first be verified under Section 127(1) of the Inland Revenue Act. A simple self-declaration or screening process can identify genuine taxpayers and prevent unnecessary administrative burdens.

II. Relaxing e-filing requirements

Requiring every new registrant to use the e-filing system is impractical, especially for those lacking digital skills or resources. The IRD should allow manual filing for first-time or low-income taxpayers and set up service centres or mobile help desks to assist them.

III. Phased and risk-based approach

Instead of registering everyone at once, the IRD should adopt a phased or risk-based strategy, focusing first on identifiable income earners such as professionals and business owners. This aligns administrative capacity with enforcement capability and improves compliance.

Conclusion

True reform lies not in mass statistics but in fairness, simplicity, and trust. A data-driven, just tax system that respects citizens’ capacity will achieve sustainable revenue while preserving public confidence and institutional integrity.

(The writer is a retired Deputy Commissioner General, Inland Revenue Department and could be reached via email at [email protected].)