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Cover of Taxation.Pmd INSTITUTE OF POLICY STUDIES OF SRI LANKA Working Paper Series No. 25 Taxation in Sri Lanka:Current Trends and Perspectives D. D. M. WAIDYASEKERA TableTableTable of ofof Contents ContentsContents TaxationTaxationTaxation in Sri in Lanka inSri Sri Lanka :Lanka Current : Current: Current Trends Trends Trendsand Perspectivesand and Perspectives Perspectives ListList Listof Tablesof of Tables Tables ii iiii ListList Listof Chartsof of Charts Charts ii iiii AcronymsAcronymsAcronyms iii iiiiii AcknowledgementAcknowledgementAcknowledgement v vv ExecutiveExecutiveExecutive Summary Summary Summary vi vivi IntroductionIntroductionIntroduction 1 11 1.1.1. Functions Functions Functions of aof ofTax a aTax SystemTax System System 1 11 2.2.2. Economic Economic Economic Background Background Background 2 22 2.12.12.1 International International International 2 22 2.22.22.2 National National National 2 22 3.3.3. Declining Declining Declining Trend Trend Trend of Taxof of Tax Revenue/GDPTax Revenue/GDP Revenue/GDP Ratio Ratio Ratio 4 44 4.4.4. Reasons Reasons Reasons for forthe for the Decline the Decline Decline 6 66 5.5.5. Composition Composition Composition of Taxof of Tax RevenueTax Revenue Revenue – Direct – – Direct Direct and and andIndirect Indirect Indirect 6 66 6.6.6. Fiscal Fiscal Fiscal and and andTax Tax IncentivesTax Incentives Incentives 8 88 7.7.7. Elasticity Elasticity Elasticity and and andBuoyancy Buoyancy Buoyancy of theof of the Taxthe Tax SystemTax System System 101010 8.8.8. Taxation, Taxation, Taxation, Savings Savings Savings and and andCapital Capital Capital Formation Formation Formation 101010 9.9.9. Tax Tax Base Tax Base Base and and Coverage`and Coverage` Coverage` 121212 9.19.19.1 Tax Tax Free Tax Free Free Allowances Allowances Allowances and and andTreshold Treshold Treshold 121212 9.29.29.2 Deductible Deductible Deductible Expenses Expenses Expenses for forAssessable for Assessable Assessable Income Income Income 121212 10.10.10. Tax Tax Rates Tax Rates Rates 131313 10.110.110.1 Corporate Corporate Corporate 131313 10.210.210.2 Personal Personal Personal 131313 10.310.310.3 Professionals Professionals Professionals 151515 10.410.410.4 Flat Flat FlatRate Rate Rate 151515 10.510.510.5 Current Current Current Changes Changes Changes 151515 10.610.610.6 The The TheLaffer Laffer Laffer Curve Curve Curve 161616 10.710.710.7 Relevant Relevant Relevant Reforms Reforms Reforms 171717 11.11.11. Provincial Provincial Provincial and and andLocal Local Local Government Government Government Revenue Revenue Revenue 181818 12.12.12. Capital Capital Capital Gains Gains Gains Taxation Taxation Taxation 191919 13.13.13. Tax Tax Evasion Tax Evasion Evasion 202020 13.113.113.1 Tax Tax Avoidance Tax Avoidance Avoidance 212121 13.213.213.2 Withholding Withholding Withholding Taxes Taxes Taxes 212121 13.313.313.3 Tax Tax Amnesties Tax Amnesties Amnesties 222222 14.14.14. The The TheVAT VAT VATDebate Debate Debate 222222 14.114.114.1 Threshold Threshold Threshold 232323 14.214.214.2 Exemptions Exemptions Exemptions 232323 14.314.314.3 Zero Zero Zero Rating Rating Rating 242424 14.414.414.4 Rates R Ratesates 24 2424 14.514.514.5 Financial Financial Financial Services Services Services 252525 14.614.614.6 Wholesale Wholesale Wholesale and and andRetail Retail Retail Trade Trade Trade 252525 14.714.714.7 VAT VAT VATFrauds Frauds Frauds 252525 14.814.814.8 Administration Administration Administration 262626 15.15.15. Customs Customs Customs Duties, Duties, Duties, Excises Excises Excises and and Miscellaneousand Miscellaneous Miscellaneous Taxes Taxes Taxes and and Leviesand Levies Levies 272727 15.115.115.1 Tariffs Tariffs Tariffs 272727 15.215.215.2 Excise Excise Excise Duties Duties Duties 272727 15.315.315.3 Miscellaneous Miscellaneous Miscellaneous Taxes Taxes Taxes and and Leviesand Levies Levies 272727 15.415.415.4 Simplification Simplification Simplification 282828 16.16.16. Revenue Revenue Revenue Administration Administration Administration 292929 16.116.116.1 Number Number Number of Taxpayersof of Taxpayers Taxpayers and and andFiles Files Files 292929 16.216.216.2 Compliance Compliance Compliance 292929 16.316.316.3 Audits Audits Audits and and andInvestigations Investigations Investigations 313131 16.416.416.4 Default Default Default Taxes Taxes Taxes 313131 16.516.516.5 Appeals Appeals Appeals 313131 16.616.616.6 Coordination Coordination Coordination between between between Revenue Revenue Revenue Departments Departments Departments 333333 16.716.716.7 Cost Cost Cost of Administrationof of Administration Administration 333333 16.816.816.8 Measures Measures Measures Taken Taken Taken for forImprovement for Improvement Improvement 333333 17.17.17. Concluding Concluding Concluding Remarks Remarks Remarks 343434 i i i ReferencesReferencesReferences 353535 Working Paper No. 25 INSTITUTE OF POLICY STUDIES OF SRI LANKA Working Paper Series No. 25 Working Paper No 25. Taxation in Sri Lanka:CurrentFinally, Trends and Perspectives the tax system is used to includes investment incentives to always bound to be tradeoffs and achieveD. D. M. WAIDYASEKERA economic growth through attract foreign direct investment compromises. its influence on the allocation of (FDI) into the country; resources.List This of includes Tables In analyzing the current trends (c) Influencing relative factor and perspectives of taxation in (a) TransferringTable 1. resources GDP,from Per Capitaprices and for Revenue enhanced Ratio use –of Selected labour YearsSri Lanka, it is necessary04 the private sector to the and economizing the use of therefore to examine how governmentTable sector 2. to finance Fiscal the Operationscapital and and Deficits foreign 2006 exchange. – 2015 adequately and effectively05 the public investment programme; fiscal and tax system has Table 3. Composition ofThese Government objectives Revenue however 2014 may – 2015to performed these functions07 and (b) Directing private investment some degree be in conflict. For how effective the policy and into desiredTable channels 4. through Domestic Savingsinstance, and theTax objectiveRates 2004 of attaining– 2015 administrative measures11 have such measures as regulation of a more equitable distribution of been in solving the problems that Table 5. Capital Formation and Tax Rates 2004 – 2014 11 tax rates and the grant of tax income may conflict with growth have arisen. incentives and concessions. This objectives and in practice there are Table 6. Personal Tax Slabs and Rates 2003/04 - 2016/17 14 Table 7. Budget Outturn for Provincial Councils 2012 – 2015 18 2. EconomicTable 8. Results Background of Tax Amnesties since 1964 22 Table 9. VAT Revenue Performance 2002 – 2015 23 2.1 International changes in the global economy. country pursues and when these Table 10. VAT Refunds It2005 is centred – 2014 on changing oil and policies change, the fiscal24 and commodity prices, geo-political taxation policies themselves The currentTable trends 11. and Tariffs, Excise Duties and Miscellaneous Taxes 2010 – 2015 28 perspectives in fiscal policy and uncertainties and stagnating and become altered. low inflation in developed Sri Lanka witnessed two taxation inTable Sri Lanka12. have Number to be of Taxpayers and Tax Files as at 31.12.2014 30 viewed in the context of the countries. contrasting development economicTable performance 13. and Tax trends Return Compliance 2012 – 2014 strategies within the last31 four both national and international. The volatility of the global decades. The pre-1977 strategy AccordingTable to the 14. World Economic Analysis of Defaulteconomic Taxes environment 2014 posed was characterized by an32 Outlook of the International several challenges to Sri Lanka emphasis on the public sector, Monetary Fund (IMF), global during 2015 and are expected to fixed exchange rates, a controlled economic activity remained persist in 2016 and 2017. The economy with the accent on subdued Listin 2015 of Charts with the decline global economic situation is welfare and income redistribution. in growth in emerging market and important for a small developing The concomitant fiscal policies Chart 1. Composition of Government Revenue 2015 08 developing economies amidst the economy such as Sri Lanka involved high import duties, a where external demand is critical redistributive income tax structure modest recoveryChart 2. in the advanced The Laffer Curve. 17 economies. Global growth which as an enabler of sustained high with high marginal rates and was 3.4% in 2014 slowed down to growth, generating demand relatively few concessions to the 3.1% in 2015 due to slow absorbing labour surplus and private sector. recovery in the developed world raising productivity. Global and slowdown in the Chinese changes such as for example The post-1977 development economy. China’s growth rate Britain’s decision to leave the EU strategy was the reverse, the was 7.4% in 2014, 6.8% in 2015 (Brexit) tend to have accent being on an open and expected to fall to 6.3% in repercussions on Sri Lanka’s economy with deregulation and 2016. China is embracing what is economy. decontrols, flexible exchange termed the “new normal” - slower rates, stimulation of the private but slightly higher quality growth. 2.2 National sector and a market-oriented economy. Consequently, fiscal Global growth is estimated at From a national point of view, the and tax policies underwent a 3.2% in 2016 and 3.5% in 2017 taxation system has to be viewed change. Import duties were but these projections are subject as part and parcel of the relaxed, the maximum
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