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 effective to revision according to various prevalent economic and level of protection was reduced to development strategy which the 50%, income tax rates
ii2 Taxation In Sri Lanka : Current Trends and Perspectives
Taxation in Sri Lanka : Current Trends and Perspectives Introduction Acronyms A country’s taxation system reports have been released (Chairman H.S. Wanasinghe and fiscalASYCUDA policy underlying Automatedit, fromSystem time for to Customstime since Data 1915 and Secretary D.D.M. is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the is a majorBDV determinant of otherBrussels Definitionwhen Sri of Lanka’s Value (then macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on as economicBIMU growth, public Budget Implementationonly of Import, and Excise Monitoring and Unit Taxation of 2009 (Chairman debt, fiscal deficit and inflation Stamp Duties followed by Prof. W.D. Lakshman and BOI Board of Investment as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). Apart from these, a number of pattern ofBOP resource allocation,Balance ofa Payments whole lot of other taxes such Apart from these, a number of income distribution and as Profit Tax, Excess Profits other reports include the Woods economicBTT stability. Hence Business TurnoverDuty, Estate Tax Duty, Capital Commission (1926), Huxham periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report CUSDEC Customs Declaration and the tax structure, including Expenditure and Gift Taxes, (1955), Kaldor Report (1960) its administrativeDL mechanismDefence Levyetc. levied and abolished from and Cox Report (1986) among has been subject to time to time. Some of these others. examinationD – VATand proposals forDigital Valueimportant Added Tax commissions modification in order to achieve consisted of the Taxation All these stressed the modificationEPS in order to achieveEconomic consistedPolicy Statement of the Taxation All these stressed the its basic objectives in relation Commission of 1955 (Chairman importance of developing a to the government’sESC policiesEconomic ServiceK.R.K. Menon Charge and Secretary S. rational, consistent, efficient and objectives prevalent at the Sittampalam), Taxation Inquiry and simple tax system in order ESCAP Economic and Social Commission for Asia and the Pacific time. Commission of 1968 (Chairman to achieve its objectives and FDI Foreign DirectA.G. InvestmentRanasinha and Secretary functions. In this connection a number of A.G. Jegasothy), Presidential commissions,GDP committees andGross DomesticTaxation Product Commission of 1990 GST Goods and Services Tax
IMF International Monetary Fund
1.TheIPO FunctionsInitial Public of Offer a Tax System
IPS Institute of Policy Studies of Sri Lanka The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT) involve severalIRD aspects. First,Inland the Revenuevertical Department equity, i.e., different and excises. Taxation is also primary function of a taxation treatment of persons with different used as an instrument of demand system isISFTA to raise revenue forIndia the Sri Lankataxable Free capacity. Trade Agreement Thirdly, the management to eliminate or government for its public fiscal system is also employed reduce inflationary or deflationary governmentIT for its public Informationfiscal Technology system is also employed reduce inflationary or deflationary expenditure as well as for local for social purposes such as tendencies in the economy. authoritiesITMIS and similar publicIntegrated Treasurydiscouraging Management certain activities Information SystemTaxation reduces the effect of the bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can be used to LTU Large Taxpayer Unit primarily judged by whether this Excise duties on liquor and dampen upswings in a trade function NAVis performed adequatelyNet Annualtobacco, Value the Special Excises on cycle. and satisfactorily. The second luxury and semi-luxury items, the function NBTis to reduce inequalitiesNation BuildingBetting Tax and Gaming Levy are The size of the multiplier in an through a policy of redistribution examples of such taxes. open economy is through aNSL policy of redistributionNational Securityexamples Levy of such taxes. open economy is of income and wealth. The equity of income and wealth. The equity 1 principle PALin taxation implies Portsthat and AirportsThe tax Developmentsystem is also Levy used to S+M+1 taxes should be imposed in increase the level of savings and PAYE Pay As You Earn where accordance with the ability to pay capital formation apart from S= marginal propensity to save principle. This has two protecting local industries from PSFTA Pakistan Sri Lanka Free Trade Agreement M= marginal propensity to import dimensions: (a) horizontal equity, foreign competition through levies T= marginal rate of taxation i.e., similar treatment of persons such as import duties (including
1iii 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 influencePSDG on the allocationProvince of Specific(FDI) Development into the country; Grant resources. This includes In analyzing the current trends R & D Research and (c)Development Influencing relative factor and perspectives of taxation in (a) Transferring resources from prices for enhanced use of labour Sri Lanka, it is necessary RAMIS Revenue Administration Management Information System the private sector to the and economizing the use of therefore to examine how governmentRIDL sector to financeRegional the Infrastructurecapital and Development foreign exchange. Levy adequately and effectively the public investment programme; fiscal and tax system has RTVAT Real Time ValueThese Added objectives Tax however may to performed these functions and (b) Directing private investment some degree be in conflict. For how effective the policy and SAARC South Asian Association for Regional Cooperation into desired channels through instance, the objective of attaining administrative measures have suchSAFTA measures as regulationSouth of Asian Freea more Trade equitable Agreement distribution of been in solving the problems that tax rates and the grant of tax income may conflict with growth have arisen. incentivesSCL and concessions.Special This Commodityobjectives Levy and in practice there are SMEs Small and Medium Enterprises
SNA System of National Accounts
2. SRLEconomicSocial BackgroundResponsibility Levy
SVAT Simplified Value Added Tax changes in the global economy. country pursues and when these 2.1SWS InternationalSingle Window System It is centred on changing oil and policies change, the fiscal and The currentTIN trends and Taxpayer Identificationcommodity Number prices, geo-political taxation policies themselves perspectives in fiscal policy and uncertainties and stagnating and become altered. TL Telecommunications Levy taxation in Sri Lanka have to be low inflation in developed Sri Lanka witnessed two countries. contrasting development viewedTOR in the context of Termsthe of Reference economic performance and trends strategies within the last four both UNnational and international.United NationsThe volatility of the global decades. The pre-1977 strategy According to the World Economic economic environment posed was characterized by an VAT Value Added Tax Outlook of the International several challenges to Sri Lanka emphasis on the public sector, MonetaryVLN Fund (IMF), globalValue Added Taxduring Location 2015 andNumber are expected to fixed exchange rates, a controlled economic activity remained persist in 2016 and 2017. The economy with the accent on subdued in 2015 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 developing economies amidst the economy such as Sri Lanka involved high import duties, a modest recovery in the advanced where external demand is critical redistributive income tax structure 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 effective to revision according to various prevalent economic and level of protection was reduced to development strategy which the 50%, income tax rates
iv2 Taxation In Sri Lanka : Current Trends and Perspectives
Taxation in Sri Lanka : Current Trends and Perspectives Introduction
A country’s taxation system Acknowledgementreports have been released (Chairman H.S. Wanasinghe and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M. Theand creditfiscal policyfor initiating underlying the project it, of analyzingfrom time the to currenttime since trends 1915 and perspectivesand Secretary of taxation D.D.M. and fiscal policy is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the must first of all go to Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies of Sri Lanka at macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on whose request the author prepared this report. Thanks are also due to Ayoni Rangala of the Institute for the as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman assistancedebt, fiscal indeficit formatting and inflation the publication.Stamp Duties followed by Prof. W.D. Lakshman and as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of income distribution and as Profit Tax, Excess Profits other reports include the Woods economic stability. Hence Duty, Estate Duty, Capital Commission (1926), Huxham periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report and the tax structure, including Expenditure and Gift Taxes, (1955), Kaldor Report (1960) its administrative mechanism etc. levied and abolished from and Cox Report (1986) among has been subject to time to time. Some of these others. examination and proposals for important commissions modification in order to achieve consisted of the Taxation All these stressed the its basic objectives in relation Commission of 1955 (Chairman importance of developing a to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient and objectives prevalent at the Sittampalam), Taxation Inquiry and simple tax system in order time. Commission of 1968 (Chairman to achieve its objectives and A.G. Ranasinha and Secretary functions. In this connection a number of A.G. Jegasothy), Presidential commissions, committees and Taxation Commission of 1990 1.The Functions of a Tax System
The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT) involve several aspects. First, the vertical equity, i.e., different and excises. Taxation is also primary function of a taxation treatment of persons with different used as an instrument of demand system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or government for its public fiscal system is also employed reduce inflationary or deflationary expenditure as well as for local for social purposes such as tendencies in the economy. authorities and similar public discouraging certain activities Taxation reduces the effect of the bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can be used to primarily judged by whether this Excise duties on liquor and dampen upswings in a trade function is performed adequately tobacco, the Special Excises on cycle. and satisfactorily. The second luxury and semi-luxury items, the function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an through a policy of redistribution examples of such taxes. open economy is of income and wealth. The equity of income and wealth. The equity 1 principle in taxation implies that The tax system is also used to S+M+1 taxes should be imposed in increase the level of savings and where accordance with the ability to pay capital formation apart from S= marginal propensity to save principle. This has two protecting local industries from M= marginal propensity to import dimensions: (a) horizontal equity, foreign competition through levies T= marginal rate of taxation i.e., similar treatment of persons such as import duties (including
1v 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. itsExecutive influence on the allocation Summary of (FDI) into the country; resources. This includes In analyzing the current trends and perspectives of taxation in A country’s fiscal policy and holidays(c) Influencing and other relative concessions factor to The paper also discusses other (a) Transferring resources from Sri Lanka, it is necessary taxation system is a major attractprices muchfor enhanced needed useForeign of labour Direct revenue issues such as capital the private sector to the and economizing the use of therefore to examine how determinant of macro-economic Investment (FDI), these have to be gains taxation, its abolition and the government sector to finance the capital and foreign exchange. adequately and effectively the policy and sustainable economic made more realistic and the current attempt to re-introduce it as public investment programme; fiscal and tax system has well as customs duties, excise growth particularly in such areas as incentiveThese objectives system must however be designed may to performed these functions and (b)government Directing privaterevenue, investment public debt, andsome implementeddegree be in conflict.in a more For dutieshow effective and miscellaneous the policy and taxes. intofiscal desired deficit, channels inflation through as well as methodicalinstance, the andobjective cost of effectiveattaining Decentralizationadministrative measures and provincial have suchresource measures allocation, as regulation income of manner.a more equitable distribution of revenuebeen in solvingis discussed the problems in detail that taxdistribution rates and and the economicgrant of tax stability. income may conflict with growth includinghave arisen. the abolition of the incentives and concessions. This Otherobjectives issues and indiscussed practice there in thisare provincial BTT and its implication for Currently, Sri Lanka’s fiscal and context is the relatively low both provincial revenue and taxation system is at a critical elasticity and buoyancy of the tax provincial administration. The juncture. With the end of the 30 year system in Sri Lanka both being resultant complexity of the tax 2.old insurgency,Economic Sri Lanka Backgroundhas below unity, the role of taxation in system due to all these factors and entered into a new era of growth, savings and capital formation and the need for simplification is also reconciliation and reconstruction. the low tax base and coverage which stressed including the importance of changes in the global economy. country pursues and when these 2.1Development International challenges are many affect the growth of tax revenue. promulgating a new Tax Act It is centred on changing oil and policies change, the fiscal and both in the international and national Another factor that has led to this incorporating all the required The current trends and commodity prices, geo-political taxation policies themselves contexts. In this background, this situation is the unplanned and ad changes. uncertainties and stagnating and become altered. perspectivesstudy attempts in fiscal to policyanalyze and the hoc nature of fiscal policy and tax low inflation in developed Sri Lanka witnessed two taxationcurrent intrends Sri Lanka and perspectives have to be of changes made in respect of In the final analysis, it is the level viewed in the context of the countries. contrasting development taxation and fiscal policy in Sri allowances, slabs and tax rates from of efficiency of the revenue economic performance and trends strategies within the last four Lanka. time to time in order to meet revenue administration which determines the both national and international. The volatility of the global decades. The pre-1977 strategy requirements. This lack of level of effectiveness of any revenue According to the World Economic economic environment posed was characterized by an Commencing with analyzing the consistency leads to taxpayer system. In the current context of Outlook of the International several challenges to Sri Lanka emphasis on the public sector, functions of a tax system, it Monetary Fund (IMF), global confusionduring 2015 and and inconvenience are expected toand thefixed exchangenecessity rates, to a controlledincrease identifies the declining revenue ratio economic activity remained problemspersist in for2016 the and tax 2017. administration The governmenteconomy with revenue,the accent theon tax to GDP as perhaps the dominant subdued in 2015 with the decline asglobal well. economic The recent situation changes is in administration,welfare and income its redistribution. structures, factor in Sri Lanka’s current fiscal in growth in emerging market and incomeimportant tax for rates, a small changes developing to VAT systemsThe concomitant and procedures fiscal policies need developingproblems. economiesThe study analysesamidst the the thresholdeconomy andsuch rates as Srias Lankawell as other throughinvolved highexamination, import duties, a its modestreasons recovery for the in thedecline advanced and miscellaneouswhere external taxesdemand like is NBT critical etc. weaknessesredistributive incomeidentified tax structure and as an enabler of sustained high with high marginal rates and economies.measures necessary Global growth to reverse which this can be cited as examples. measures taken to rectify them. The growth, generating demand relatively few concessions to the wastrend 3.4% and inmake 2014 the slowed tax system down toan unsatisfactory number of taxpayers absorbing labour surplus and private sector. 3.1%effective in 2015 instrument due to slow of economic All these ad hoc changes also lead comprising about 3% of the raising productivity. Global recoverygrowth. in theIn developedthis context, world the to tax evasion which is rampant in population, low compliance, high and slowdown in the Chinese changes such as for example The post-1977 development composition of tax revenue reveals Sri Lanka and which issue is default taxes, improvement of audit economy. China’s growth rate Britain’s decision to leave the EU strategy was the reverse, the the preponderant role indirect taxes discussed in this paper. The and investigation and lack of co- was 7.4% in 2014, 6.8% in 2015 (Brexit) tend to have accent being on an open play in the tax system in Sri Lanka problems relating to Value Added Tax ordination between revenue and expected to fall to 6.3% in repercussions on Sri Lanka’s economy with deregulation and in relation to direct taxes and the (VAT) which has attracted much 2016. China is embracing what is economy. departmentsdecontrols, areflexible discussed exchange at length necessity to change the proportion attention recently, is discussed in termed the “new normal” - slower asrates, well stimulationas recent attemptsof the private already to a more realistic figure. detail, its pros and cons, the but slightly higher quality growth. 2.2 National takensector (including and a market-oriented computerization) to relatively poor performance and improveeconomy. the Consequently,administrative fiscalsystem. One of the main reasons for the Global growth is estimated at factorsFrom a nationalsuch as point the of threshold,view, the and tax policies underwent a decline in government revenue is 3.2% in 2016 and 3.5% in 2017 exemptions,taxation system zero has torating, be viewed rate change. Import duties were the proliferation of tax incentives but these projections are subject changes,as part and parcelrefunds, of theetc. and relaxed, the maximum effective toand revision exemptions. according While to various there are measuresprevalent economic to remedy and these level of protection was reduced to pros and cons in granting tax problems.development strategy which the 50%, income tax rates
vi2 Taxation In Sri Lanka : Current Trends and Perspectives
Taxation in Sri Lanka : Current Trends and Perspectives Introductionldrl uKav, idrdxYh rglA country’s fmdÿ foafmd< taxation iy system nÿ whlsÍfï ,ndreports §u iïnkaOj have been jvd;a released h:d¾;j;a iy m%dfoaYSh(Chairman BTT wj,x.=H.S. Wanasinghe lsÍu iy m%dfoaYSh moaO;shand fiscal hkq policyid¾j wd¾Ólunderlying m%;sm;a;sfhys it, Èß.ekaùïfrom time moaO;shla to time sinceks¾udKh 1915 l< hq;= wdodhugand Secretary iy m%dfoaYSh D.D.M. mßmd,khg tys iyis a ;sridrmajor determinantwd¾Ól j¾Okfhys of other b;d w;rwhen jvd;a Sri úêu;aLanka’s iy (then msßjeh M,odhS;d iïnkaOhWaidyasekera) idlÉPd lrkand the,§' fuu lreKq jeo.;amacro-economic ks¾Kdhlhls' indices m%Odk such jYfhkau l%ufõohlaCeylon’s) yrydtax system l%shd;aul consisted l< hq;=h' ish,a,Presidential ksid nÿCommission moaO;sfhys onwe;sjk rdcHas economic wodhu" uyck growth, Kh" public fmdÿ foafmd< only of Import, Excise and ixlS¾K;djhTaxation of 2009ksid (Chairmantys ir, lsÍul ys`.;djh"debt, fiscal WoaOukh deficit and fukau inflation iïm;a fuuStamp ikao¾Nh Duties ;=< followed idlÉPd by l< fjk;a wjYH;djhProf. W.D. Lakshmanmek ke.S and;sfnk w;r fn§hdu"as well aswdodhu attaining fnodyeÍu a proper iy wd¾Ól lreKqExport w;rDuties, wfkHdakH Income Tax jYfhka and wjYHlrkSecretary P.D.K.fjkialïj,g Fernando). wkqj ia:dhS;djhpattern of jeksresource wxYhkays allocation, fmdÿ foafmd< kuH;djha whole lot wvqùu of other iy taxesY%S ,xldfõ such nÿ ks¾udKhApart from l< these,kj nÿ a mk; number l%shd;aul of iyincome nÿ whlsÍfï distribution moaO;shg and ysñjkafka whlsÍfïas Profit moaO;sfhaTax, Excess ieye,a¨Ndjh Profits hk lsÍuother yryd reports fndfyda include wd;;shka the Woods ÿre jkq by
INSTITUTE OF POLICY STUDIES OF SRI LANKA
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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. itsepiwNtw;Wr; influence on the allocation of (FDI)rhuhk;rk into the country; resources. This includes In analyzing the current trends (c) Influencing relative factor and perspectives of taxation in (a)murhq;f Transferring tUkhdk;> resources nghJf;fld;> from epjprhu; tpyf;fopg;Gfisprices for enhanced toq;Ftjpy; use of gylabour rhjf ftdk;Sri Lanka, nrYj;jg;gl;Ls;sJ. it is necessary ,tw;iw rPu; thegw;whf;Fiw> private sectorgztPf;fk; to thekw;Wk; tsq;fs; ghjfand economizingfUj;Jf;fs; thekw;Wk; use ntspehl;Lof nra;af;$batherefore to examine Kiwfs; how gw;wpAk; xJf;fPL> tUkhd gfpu;T kw;Wk; Neub KjyPLfis ftu;tjw;F ngUksT Muhag;gl;Ls;sJ. government sector to finance the capital and foreign exchange. adequately and effectively the nghUshjhu cWjpg;ghL Nghd;w gpupTfs; rYiffs; toq;fg;gLfpd;w NghjpYk;> public investment programme; fiscal and tax system has mlq;fyhf epiyNgwhd nghUshjhu ,it eilKiwr;rhj;jpakhditahf %yjd Mjha tup> mJ ,y;yhky; tsu;r;rp kw;Wk; gue;j nghUshjhu mike;jpUf;fThese objectives Ntz;Lk;. however mj;Jld;> may to nra;ag;gl;likperformed these kw;Wk; functions jw;NghJ and mij nfhs;if(b) Directing Mfpatw;wpd; private investment gpujhd rYifsome degree Kiwbe in conflict.vd;gJ> For kPshow mwpKfk; effective nra;athe policy Kw;gLfpd;wik and jPu;khdnkLf;Fk;into desired channels fhuzpahf through ehl;bd; fl;Lf;Nfhg;ghdjhfTk;instance, the objective ofnrytPdk; attaining kw;Wk;administrative Rq;fj;jPu;it> measures ,iw tuphave kw;Wk; suchepjprhu; measures nfhs;if kw;Wk;as regulation tupf;fl;likg;G of Fiwe;ja more tifapYk;equitable distributiontbtikf;fg;gl;L of ,jubeen intupfs; solving theNghd;w problems that,ju vd;gJ mike;Js;sJ. tUkhdkPl;lf;$ba gpur;rpidfs; gw;wpAk; tax rates and the grant of tax eilKiwg;gLj;jg;glincome may conflict Ntz;Lk;. with growth have arisen. ,e;j Ma;T ftdk; nrYj;jpAs;sJ. incentives and concessions. This objectives and in practice there are jw;NghJ ,yq;ifapy; epjprhu; kw;Wk; ,e;j Ma;tpy; ftdk; nrYj;jg;gl;Ls;s gutyhf;Fjy; kw;Wk; khfhz tupfl;likg;G vd;gJ ,f;fl;lhd Vida tplaq;fspy;> Fiwe;jkl;l tUkhdkPl;ly; vd;gJk; tptukhf epiyapy; fhzg;gLfpwJ. ehl;by; 30 kPs;jpwd; kw;Wk; ,yq;ifapy; Muhag;gl;Ls;sJld;> ,jpy; khfhz Mz;Lfshf epytpa mikjpaw;w tupf;fl;likg;gpd; kpjit jd;ik Kiwikia ,y;yhky; nra;jy; BTT #o;epiy epiwtile;Js;s epiyapy;> Nghd;wd mlq;fpAs;sd. ,it kw;Wk; mjd; %ykhf khfhz tUkhdk; 2.tsu;r;rp> Economic ,zf;fk; kw;Wk; BackgroundxUikg;ghL Fd;wpa epiyapy; kw;Wk; khfhz epu;thfk; Nghd;wtw;Wf;F kPsf;fl;bnaOg;gy; vDk; xU Afj;jpDs; fhzg;gLtJld;> tup mwtPl;L Kiw Vw;glf;$ba tpisTfs; Nghd;wdTk; ,yq;if gpuNtrpj;Js;sJ. vd;gJ Nrkpg;G kw;Wk; %yjd Muhag;gl;Ls;sd. ,e;j rfy tplaq;fs; 2.1mgptpUj;jprhu;e;j International rthy;fs; vd;gJ Nru;khdj;jpy;changes in thegq;fspg;G global economy.nrYj;JtJ fhuzkhfcountry pursuestupf;fl;likg;gpy; and when fhzg;gLk; these ru;tNjr kl;lj;jpYk;> Njrpa kl;lj;jpYk; kw;Wk;It is centred Fiwe;jsT on changingtup nrYj;Jk; oil and ,Ug;G rpf;fy;policies change,epiyfs; the fiscal andkw;Wk; fhzg;gLfpwJ. ,jd; gpd;dzpapy; ,e;j kw;Wk;commodity tiyaikg;G prices, geo-political Mfpad tup vspikg;gLj;jg;gltaxation policies themselvesNtz;ba Njit Ma;tpD}lhfThe current trendstup mwtPLand njhlu;gpy; tUkhd tsu;r;rpapy; ghjpg;ig vd;gJk; ftdk; nrYj;jg;gl;Ls;sJld;> uncertainties and stagnating and become altered. jw;NghJperspectives fhzg;gLk; in fiscal epiyikfs; policy and kw;Wk; Vw;gLj;Jfpd;wd. ,e;j epiyf;F ,jpy;> mtrpakhd rfy khw;wq;fisAk; taxation,aYWj;Njhw;wq;fs; in Sri Lanka kw;Wk; have ,yq;ifapy; to be fhuzkhflow inflation kw;WnkhUin developed tplakhf> Nkw;nfhz;LSri Lanka witnessedGjpa tup rl;l%ynkhd;iw two viewedfhzg;gLk; in theepjprhu; context nfhs;if of the Nghd;wd jpl;lkplg;glhj>countries. vOkhw;whd eilKiwg;gLj;jcontrasting development Ntz;bajd; economicnjhlu;gpy; performance MuhAk; andtifapy; trends epjpf;nfhs;if kw;Wk; Nkyjpf Kf;fpaj;JtKk;strategies within Muhag;gl;Ls;sJ. the last four mike;Js;sJ. nfhLg;gdTfs;> ntt;NtW fl;lq;fs; both national and international. The volatility of the global decades. The pre-1977 strategy Nghd;wtw;wpy; tup khw;wq;fs; kw;Wk; ,Wjpahf Ma;tpy;> tup epu;thf Kiwapd; economic environment posed was characterized by an tupAccording fl;likg;gpd; to the Worldnraw;ghLfs; Economic gw;wp tUkhd Njitfis eptu;j;jp nra;J tpidj;jpwd; kl;lk; vd;gJ ve;jnthU Muha;tJld;Outlook of the Muk;gpf;Fk; International ,e;j Ma;tpy;> nfhs;tjw;Fseveral challenges tup tPjq;fis to Sri Lankakhw;Wjy; tUkhdemphasis fl;likg;gpd; on the public nraw;jpwd; sector, Monetarynkhj;j Njrpa Fund (IMF),cw;gj;jpapy; global mjd; vd;gJduring 2015mike;Js;sJ. and are expectednjhlu;r;rpaw;w to kl;lj;ijfixed exchange epu;zapg;gjhf rates, mike;jpUf;Fk;. a controlled economictUkhd gq;fspg;G activity remained tpfpjk; vd;gJ jd;ikpersist fhuzkhf>in 2016 and tup 2017. nrYj;Jgtu;fs; The murhq;feconomy tUkhdj;ijwith the accent mjpfupf;f on Fiwtile;J nry;tij ,dq;fhz;gjhf mjpfsT Fog;gkiltJld;> Ntz;ba Njit fhzg;gLk; jw;Nghija subdued in 2015 with the decline global economic situation is welfare and income redistribution. mike;Js;sJ. ,yq;ifapd; jw;Nghija mnrsfu;aj;ijAk;important for a small vjpu;nfhs;fpd;wdu;. developing #o;epiyapy;>The concomitant tup fiscalepu;thfk;> policies mjd; epjprhu;in growth gpur;ridfSf;Fin emerging market Kf;fpa and ,J tup epu;thfj;jpYk; gpur;rpidfis fl;likg;Gfs;> kw;Wk; nrad;Kiwfs; economy such as Sri Lanka involved high import duties, a fhuzpahfdeveloping ,J economies mike;Js;sJ. amidst ,jw;fhf the Vw;gLj;JfpwJ. tUkhd tup tPjq;fspy; njhlu;gpy; Mokhd kjpg;gPLfis modestfhuzpfis recovery ,e;j Ma;Tin the Muha;tJld;>advanced mz;ikapy;where external Nkw;nfhs;sg;gl;ldemand is critical Nkw;nfhs;sredistributive Ntz;bAs;sJ> income tax structure mjpy; economies.,e;j epiyia Global khw;wpaikg;gjw;Fk;> growth which khw;wq;fs;>as an enabler VAT of(ngWkjp sustained Nru;f;fg;gl;l high fhzg;gLk;with high gytPdq;fs;marginal rates ,dq;fhzg;gl;L> and wasnghUshjhu 3.4% in tsu;r;rpf;F2014 slowed tpidj;jpwd; down to tup)growth, tup generatingtPjj;jpy; Nkw;nfhs;sg;gl;ldemand mtw;iwrelatively fewrPu; concessions nra;tjw;fhf to the tha;e;j xU fl;likg;ghf khw;wq;fs; kw;Wk; ,ju tupfshd NBT Nkw;nfhs;sf;$ba eltbf;iffs; 3.1% in 2015 due to slow absorbing labour surplus and private sector. tupf;fl;likg;ig khw;wpaikg;gJ (Njrj;ijf; fl;bnaOg;Gk; tup) gw;wpAk; ftdk; nrYj;jg;gl;Ls;sJ. raising productivity. Global vt;thWrecovery vd;gJin the developednjhlu;gpYk; world ftdk; Nghd;wtw;iw cjhuzkhf Fwpg;gplyhk;. nkhj;j rdj;njhifapy; 3 rjtPjkhNdhu; nrYj;jpAs;sJ.and slowdown in,jd; the Chinesembg;gilapy;> changes such as for example jpUg;jpaw;wThe post-1977 developmentepiyapy; tup economy.tup tUkhdj;jpd; China’s mlf;ff;$Wfs; growth rate vd;gJ ,e;jBritain’s midj;J decision vOkhw;whd to leave khw;wq;fSk; the EU nrYj;Jdu;fshfstrategy was the fhzg;gLfpd;wdu;.reverse, the wasNeub 7.4% tupfSld; in 2014, 6.8% xg;gpLifapy; in 2015 tup(Brexit) va;g;Gf;F tend fhuzkhf to have mike;Js;sd. Fiwe;jaccent beingkl;l onxOf;fk;> an open cau; tup ngUthupahd kiwKf tup mwtPLfis ,yq;ifia nghWj;jkl;by; ,J fl;lw;w nrYj;jhik> fzf;FkPsha;Tfis and expected to fall to 6.3% in repercussions on Sri Lanka’s economy with deregulation and ,yq;ifapd; tupf;fl;likg;gpy; epiyahfeconomy. mike;Js;sJ. ,J Nkkk;gLj;jy;decontrols, flexiblekw;Wk; exchangetprhuizfis nfhz;Ls;sjhf2016. China is embracingfz;lwpe;Js;sJld;> what is njhlu;ghd gpur;rpidfs; ,e;j Ma;tpy; Nkw;nfhs;sy; kw;Wk; tUkhd rates, stimulation of the private ,e;jtermed cs;slf;fj;ijthe “new normal” - ngUksTslower ftdk; nrYj;jg;gl;Ls;sJ. mz;ikapy; jpizf;fsq;fs; kj;jpapy; NghjpasT sector and a market-oriented buteilKiwr;rhj;jpakhd slightly higher quality ngWkjpahf growth. mjpfsT2.2 National ftdj;ij
viii2 Taxation In Sri Lanka : Current Trends and Perspectives
Introduction
A country’s taxation system reports have been released (Chairman H.S. Wanasinghe and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M. is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman debt, fiscal deficit and inflation Stamp Duties followed by Prof. W.D. Lakshman and as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of income distribution and as Profit Tax, Excess Profits other reports include the Woods economic stability. Hence Duty, Estate Duty, Capital Commission (1926), Huxham periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report and the tax structure, including Expenditure and Gift Taxes, (1955), Kaldor Report (1960) its administrative mechanism etc. levied and abolished from and Cox Report (1986) among has been subject to time to time. Some of these others. examination and proposals for important commissions modification in order to achieve consisted of the Taxation All these stressed the its basic objectives in relation Commission of 1955 (Chairman importance of developing a to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient and objectives prevalent at the Sittampalam), Taxation Inquiry and simple tax system in order time. Commission of 1968 (Chairman to achieve its objectives and A.G. Ranasinha and Secretary functions. In this connection a number of A.G. Jegasothy), Presidential commissions, committees and Taxation Commission of 1990 1.The Functions of a Tax System
The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT) involve several aspects. First, the vertical equity, i.e., different and excises. Taxation is also primary function of a taxation treatment of persons with different used as an instrument of demand system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or government for its public fiscal system is also employed reduce inflationary or deflationary expenditure as well as for local for social purposes such as tendencies in the economy. authorities and similar public discouraging certain activities Taxation reduces the effect of the bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can be used to primarily judged by whether this Excise duties on liquor and dampen upswings in a trade function is performed adequately tobacco, the Special Excises on cycle. and satisfactorily. The second luxury and semi-luxury items, the function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an through a policy of redistribution examples of such taxes. open economy is of income and wealth. The equity of income and wealth. The equity 1 principle in taxation implies that The tax system is also used to S+M+1 taxes should be imposed in increase the level of savings and where accordance with the ability to pay capital formation apart from S= marginal propensity to save principle. This has two protecting local industries from M= marginal propensity to import dimensions: (a) horizontal equity, foreign competition through levies T= marginal rate of taxation i.e., similar treatment of persons such as import duties (including
1 Working Paper No. 25
INSTITUTE OF POLICY STUDIES OF SRI LANKA
Working Paper Series
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. This includes In analyzing the current trends (c) Influencing relative factor and perspectives of taxation in (a) Transferring resources from prices for enhanced use of labour Sri Lanka, it is necessary the private sector to the and economizing the use of therefore to examine how government sector to finance the capital and foreign exchange. adequately and effectively the public investment programme; fiscal and tax system has These objectives however may to performed these functions and (b) Directing private investment some degree be in conflict. For how effective the policy and into desired channels through instance, the objective of attaining administrative measures have such measures as regulation of a more equitable distribution of been in solving the problems that tax rates and the grant of tax income may conflict with growth have arisen. incentives and concessions. This objectives and in practice there are
2. Economic Background
2.1 International changes in the global economy. country pursues and when these It is centred on changing oil and policies change, the fiscal and The current trends and commodity prices, geo-political taxation policies themselves perspectives in fiscal policy and uncertainties and stagnating and become altered. taxation in Sri Lanka have to be low inflation in developed Sri Lanka witnessed two viewed in the context of the countries. contrasting development economic performance and trends strategies within the last four both national and international. The volatility of the global decades. The pre-1977 strategy According to the World Economic economic environment posed was characterized by an 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 in 2015 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 developing economies amidst the economy such as Sri Lanka involved high import duties, a modest recovery in the advanced where external demand is critical redistributive income tax structure 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 effective to revision according to various prevalent economic and level of protection was reduced to development strategy which the 50%, income tax rates
2 Taxation In Sri Lanka : Current Trends and Perspectives
progressively reduced and a wide National savings increased from According to the statistics of the ranging framework of tax 21.5% of GDP in 2000 to 33.3% Introduction Central Bank Annual Report 2015, incentivesIntroduction and concessions were in 2012; investment increased domestic savings declined from incorporated in the tax system in from 28% of GDP in 2000 to 27.2% of GDP in 2012 to 24% in theA country’s form of taxtaxation holidays, system 39.1%reports in have 2012; been unemployment released as (Chairman H.S. Wanasinghe 2014 and 22.6% in 2015 while exemptionsand fiscal policy and reliefs.underlying it, afrom percentage time to timeof the since labour 1915 force and Secretary D.D.M. national savings declined from is a major determinant of other inwhen 2012, Sri was Lanka’s 4% and (then 4.3% in Waidyasekera) and the 33.3% of GDP in 2012 to 27.8% in Themacro-economic changes in governments indices such 2014;Ceylon’s) and inflationtax system of 7.6% consisted in 2012 Presidential Commission on 2015. The growth in the industry sinceas economic 1994 onwards growth, had public little wasonly reducedof Import, to Excise3.3% in and 2014, Taxation of 2009 (Chairman sector which was 9% in 2012 impactdebt, fiscal on the deficit broad and lines inflation of whileStamp the Duties head followedcount poverty by was Prof. W.D. Lakshman and went down steadily to 4.1% in fundamentalas well as attaining policies a exceptproper downExport to Duties, less than Income 7%. TaxThe and Secretary P.D.K. Fernando). 2013, 3.5% in 2014 and 3% in changespattern of in resource emphasis allocation, depending overalla whole budget lot of otherdeficit taxes which such was Apart from these, a number of 2015 reducing the share of onincome the socio-economicdistribution and 9.5%as Profit of GDP Tax, inExcess 2000 wasProfits other reports include the Woods industry in GDP to 26.2%. The philosophieseconomic stability. of successive Hence reducedDuty, Estate to 7% Duty, in 2010, Capital 5.6% in Commission (1926), Huxham unemployment rate which was governments.periodically, the These fiscal included policy 2012Gains and Tax, 5.7% Land in Tax,2014. Wealth, Report (1929), Downs Report 4% in 2012 increased to 4.3% in suchand theprogrammes tax structure, as the including Rata Expenditure and Gift Taxes, (1955), Kaldor Report (1960) 2014 and 4.6% in 2015. Average Perataits administrative Programme, mechanism Regaining Sri Theetc. abovelevied andpositive abolished features from and Cox Report (1986) among annual inflation remained in mid- Lankahas been Programme, subject to Mahinda howevertime to time. had alsoSome negative of these others. single digit levels, however it Chintanaexamination and and currently proposals the for aspects.important As commissions stated in the picked up in the fourth quarter of Economicmodification Policy in order Statement to achieve Instituteconsisted of of Policy the Taxation Studies (IPS) All these stressed the 2015 and recorded 2.5% by end (EPS)its basic of theobjectives Prime Ministerin relation 2014Commission State of of the 1955 Economy (Chairman importance of developing a 2015, 4.8% in May 2016 and 6% deliveredto the government’s in Parliament policies on 5th report,K.R.K. “BeyondMenon and the Secretaryimmediate S. rational, consistent, efficient in June 2016. Novemberand objectives 2015. prevalent at the headlineSittampalam), macro-economic Taxation Inquiry and simple tax system in order time. numbers,Commission the ofSri 1968 Lankan (Chairman to achieve its objectives and These policies had both positive The Balance of Payments (BOP) economyA.G. Ranasinha continues and to Secretary show functions. and negative effects. The ending which recorded an overall surplus In this connection a number of skewedA.G. Jegasothy), growth, high Presidential levels of of the thirty year old civil conflict in 2014 of US$ 1,369 million commissions, committees and externalTaxation indebtedness,Commission of modest 1990 in May 2009 and the subsequent registered a deficit of US$ 1,489 export earnings growth and reconstruction and development million in 2015 and consequently, limited private sector appetite to activity, particularly in Sri Lanka’s gross official reserves expand production capacity”. infrastructure including roads, of US$ 8.2 billion in 2014 declined 1.The Functions of a Tax System to US$ 7.3 billion at the end of 1.Theexpressways, Functionsirrigation, ports and ofAccording a Tax to provisional System 2015 equivalent to 3.8 months of airports based on the five hub estimates released by the concept and bolstered by imports of goods and services The functions of a tax system Departmentin similar circumstances, of Census and and (b) cesses), Value Added Tax (VAT) development subsidies, skills and and at March 2016 to US$ 6.3 involve several aspects. First, the Statisticsvertical equity, which i.e.,in July different 2015 and excises. Taxation is also educational development, led to billion or 3 ½ months of imports. primary function of a taxation changedtreatment the of basepersons year with for different used as an instrument of demand economic growth and had a This may be compared to the system is to raise revenue for the nationaltaxable capacity.accounts Thirdly,statistics the from management to eliminate or positive effect. As per the figures foreign reserves of countries like government for its public 2002fiscal whilesystem adopting is also the employed United reduce inflationary or deflationary in the Central Bank Annual Report Malaysia ($ 137 billion), Indonesia expenditure as well as for local Nationsfor social System purposes of Nationalsuch as tendencies in the economy. 2015, GDP at current market ($ 105 billion), Taiwan ($ 420 authorities and similar public Accountsdiscouraging (SNA) certain 2008 activities standard, Taxation reduces the effect of the prices increased from Rs. 1,258 billion) and India ($ 360 billion). bodies. Its efficiency is therefore thewhich economy are considered grew by undesirable.4.8% during multiplier and so can be used to billion in 2000 to Rs. 6,414 billion primarily judged by whether this 2015Excise compared duties on to liquor 4.9% andin 2014. dampen upswings in a trade in 2010, Rs. 8,732 billion in 2012, The overall fiscal deficit of 5.4% function is performed adequately Thistobacco, growth the was Special largely Excises driven on by cycle. Rs. 10,448 billion in 2014 and Rs. of GDP in 2013 increased to 7.4% and satisfactorily. The second anluxury increase and semi-luxuryin consumption items, the 11,183 billion in 2015. The growth in 2015 while total government function is to reduce inequalities demand.Betting and In GamingSri Lanka, Levy levels are of The size of the multiplier in an rate increased from 6% in 2000 to debt increased from 68.7% in through a policy of redistribution consumptionexamples of aresuch associated taxes. with open economy is 8% in 2010, 8.4% in 2011 and 2012 to 76% in 2015. In terms of of income and wealth. The equity over-extended government fiscal 1 9.1% in 2012. The per capita the country’s1 external debt, it principle in taxation implies that positions,The tax system high debt is also levels used and to income grew from Rs. 65,838 increasedS+M+1 from 53.6% in 2014 to taxes should be imposed in currentincrease account the level deficits. of savings and (US$ 869) in 2000 to Rs. 427,559 54.4%where in 2015 and increasing accordance with the ability to pay Investmentcapital formation made apartonly afrom modest (US$ 3,351) in 2012, Rs. 503,032 debtS= marginalservices frompropensity US$ 3,479to save principle. This has two contributionprotecting local and industriesas measured from by millionM= marginal in 2014 propensity to US$ 4,683 to import (US$dimensions: 3,853) in(a) 2014 horizontal and Rs. equity, grossforeign capital competition formation through levies M= marginal propensity to import dimensions: (a) horizontal equity, million in 2015. 533,398 (US$ 3,924) in 2015. such as import duties (including T= marginal rate of taxation i.e., similar treatment of persons deceleratedsuch as import during duties 2015. (including
13 Working Paper No. 25
INSTITUTE OF POLICY STUDIES OF SRI LANKA
Working Paper Series
No. 25 Taxation in Sri Lanka:CurrentAnother Trends and Perspectives result has been rising 3. Poorest 40% receive 13.3% economic policies pursued by
D. inequality.D. M. WAIDYASEKERA According to the of total household income the prevalent respective Department of Census and governments during this period Statistics figures, the percentage 4. Gini Coefficient increased has led to both positive and share of household income from from 0.43 to 0.48 in 2012 for negative results. Perhaps the 1995 to 2012 has shown the households and 0.53 for income most important aspect however, following indicators: receivers. is in the sphere of fiscal sector development in relation to Source: Department of Census and 1. Poorest 20% declined from government revenue, Statistics – Household Income and 5.4% to 4.4% expenditure, budgetary deficits, Expenditure Survey 2012/13. overall management and the 2. Richest 20% increased from results thereof. 50.3% to 53.5% Thus as can be seen from the indicators above, the socio- 3. Declining Trend of Tax Revenue/GDP Ratio
In 1963, Nicholas Kaldor argued development without causing neighbours India (10.4%), that for a country to become inflation. (Zuhair, 1985). In higher Pakistan and Bangladesh (7.6%). “developed”, it needed to collect income countries the ratio is The irony of the situation is that taxes at 25-30% of GDP. The tax about 42% of GDP, middle while overall GDP as well as per ratio is generally regarded as a income countries, about 25-29% capita income in Sri Lanka has sort of “national virility symbol.” It and developing countries around been steadily increasing over the indicates the proportion or share 20%. Sri Lanka’s performance years, government total revenue of national income transferred to compares poorly with countries and tax revenue has been the government sector to meet like Vietnam (21.1%), Thailand steadily decreasing! The Table budgetary requirements so as to (17.7%), Malaysia (16.6%) but below shows the relationship increase the tempo of economic better than its South Asian between the growth of GDP and per capita income and government revenue. Table 1 GDP, Per Capita and Revenue Ratio - Selected Years Year 1990 2000 2006 2010 2012 2013 2014 2015 GDP Rs. Billion (at market prices) 322 1,258 2,939 6,414 8,732 9,592 10,448 11,183 Per Capita Rs. 18,934 65,838 147,776 310,214 427,559 466,110 503,032 533,395
US $ 473 869 1,421 2,744 3,351 3,610 3,853 3,924 Total Revenue Ratio 21.1 16.8 16.3 12.7 12.0 11.9 11.4 13.0 Tax Revenue Ratio 19.0 14.5 14.6 11.3 10.4 10.5 10.1 12.1 Non Tax Revenue 2.1 2.3 1.7 1.4 1.6 1.4 1.3 0.9
Source: Central Bank Annual Report 2015 and various years.
It is seen that total government 11.3% in 2010 and 10.1% in 2014. in 2015 as well as in nominal revenue as a percentage of GDP Even non-tax revenue in the form terms was due to the has steadily declined from 21.1% of dividends and transfers of introduction of one-off taxes on in 1990 to 16.8% in 2000, 12.7% in profits from public institutions has private businesses called the 2010 and 11.4% in 2014. Tax declined from 2.3% in 2000 to Super Gain Tax. The Super Gain revenue ratio has declined from 1.6% in 2012 and 0.9% in 2015. Tax was a levy applicable on any 19.0% in 1990 to 14.5% in 2000, The increase in the relevant ratio company or individual who
4 Taxation In Sri Lanka : Current Trends and Perspectives
earned profits over Rs. 2000 However the 2011 Budget Referring to the measures taken Introductionmillion in the assessment year proposals appear to be largely to address these issues, he 2013/14Introduction at the one-off rate of 25%. based on its recommendations stated “during the last few It generated Rs. 50 billion and and legislated under 15 amending months, we took some efforts to alsoA country’s the imposition taxation of systema “Mansion Actsreports and have in 2013 been when released 21 address(Chairman these H.S. issues Wanasinghe opting for Tax”and onfiscal housing policy as underlying well as it, amendingfrom time Actsto time were since passed 1915 in innovativeand Secretary measures D.D.M. of taxation. increaseis a major in determinantexcise duties of onother Parliament.when Sri Lanka’s Nevertheless, (then the However,Waidyasekera) it is time and to the deviate motormacro-economic vehicles, liquor indices and such decliningCeylon’s) revenue tax system ratio consisted has not fromPresidential temporary Commission solutions buton cigarettesas economic made growth, during public 2015, beenonly ofreversed. Import, Excise and endeavourTaxation of to 2009 create (Chairman a tax regime apartdebt, fromfiscal a deficit number and of inflationother one- Stamp Duties followed by basedProf. W.D. on strongLakshman reforms and to move offas welllevies. as attaining a proper ThisExport situation Duties, has Income been Tax and forward,Secretary implementing P.D.K. Fernando). such pattern of resource allocation, recognizeda whole lot byof theother current taxes such reformsApart from which these, will havea number far of Theincome critical distribution nature of and the situation administrationas Profit Tax, whenExcess the Profits Finance reachingother reports benefits include for thethe country.”Woods andeconomic the vital stability. necessity Hence to reverse MinisterDuty, Estate Hon. Duty,Ravi KarunanayakeCapital (FinanceCommission Minister (1926), in 2016 Huxham Budget theperiodically, declining thetrend fiscal has policybeen inGains his 2016Tax, LandBudget Tax, Speech Wealth, stated SpeechReport (1929),on 20tth DownsNovember Report 2015). recognizedand the tax by structure, the respective including “ItExpenditure is obvious andthat Giftthe Taxes,strength of (1955), Kaldor Report (1960) governments.its administrative In factmechanism it was one anyetc. fiscallevied system and abolished depends from on the Theand revenueCox Report deficiency (1986) amongis so ofhas the been main subject terms toof reference of abilitytime to to time. generate Some a sufficientof these seriousothers. that as the Central Bank theexamination 2009 Presidential and proposals Taxation for amountimportant of revenuecommissions to meet the Report 2015 states “the country’s Commissionmodification inappointed order to byachieve the plannedconsisted and of necessarythe Taxation revenueAll these is stressednot sufficient the even to government.its basic objectives The first in itemrelation in the expenditure.Commission ofUnfortunately 1955 (Chairman it is financeimportance the maintenanceof developing a TORto the goes government’s as follows: policies notK.R.K. the caseMenon in andSri Lanka”Secretary. He S. expenditurerational, consistent, of the government. efficient and objectives prevalent at the continuedSittampalam), “Declining Taxation government Inquiry Henceand simple the government tax system isin forcedorder “2.1Study the country’s tax time. revenueCommission to GDP of 1968 ratio (Chairmanportrays a toto haveachieve recourse its objectives to borrowings and system and make an assessment majorA.G. Ranasinhaeconomic concernand Secretary for the evenfunctions. for its day to day operations”. as to why revenue in relation to In this connection a number of countryA.G. Jegasothy), and this trend Presidential has to be (p. 172). As far as expenditure is GDP has declined over the years commissions, committees and reversedTaxation onCommission a priority basis.of 1990 Sri concerned several measures and make proposals as to how Lanka’s tax revenue was 19% of have been taken to ensure proper tax/GDP ratio that is comparable GDP in 1990 falling drastically to management of public with other emerging economies 10.2% of GDP by 2014. Ironically expenditure to avoid overrun in 1.Thecould be achieved Functions through a ofthe growtha Tax of tax Systemrevenue in recurrent expenditure while buoyant performance in tax absolute terms was just 4.4% in maintaining public expenditure at revenue and that will also prevent 2014 much below the nominal the expected level. These include theThe need functions to make of afrequent tax system growthin similar ratio circumstances, of 7.3%. Thus and tax (b) Nationalcesses), BudgetValue Added circulars Tax and (VAT) the changesinvolve several in taxation.” aspects. First, the revenuevertical equity,has been i.e., unable different to keep establishmentand excises. Taxationof a Budget is also primary function of a taxation pacetreatment with economicof persons expansion with different Implementationused as an instrument and Monitoring of demand The Taxation Commission report system is to raise revenue for the evidencedtaxable capacity. in recent Thirdly, years thewhich Unitmanagement (BIMU). toNevertheless, eliminate or was finalized in October 2010 but government for its public isfiscal a serious system phenomenon.” is also employed recurrentreduce inflationary fiscal deficits or deflationary continue is still not available to the public. expenditure as well as for local for social purposes such as astendencies indicated in in theTable economy. 2 below. authorities and similar public discouraging certain activities Taxation reduces the effect of the bodies.Table 2Its efficiency is therefore which are considered undesirable. multiplier and so can be used to primarilyFiscal judgedOperations by whether and Deficits this 2006-2015Excise duties (Rs. Million) on liquor and dampen upswings in a trade function is performed adequately tobacco, the Special Excises on cycle. Year 2006 2008 2010 2012 2014 2015(Prov) and satisfactorily. The second luxury and semi-luxury items, the functionTotal Revenueis to reduce and inequalitiesGrants 507,901Betting686,482 and Gaming 834,188 Levy are 1,067,532The size 1,204,621 of the multiplier 1,460,892 in an through a policy of redistribution examples of such taxes. open economy is throughExpenditure a policy & ofLending redistribution examples of such taxes. open economy is of income and wealth. The equity of income and wealth. The equity 1 principle(Minus in Repayments) taxation implies that-713,646The tax -996,126 system is-1,280,205 also used to -1,556,499 -1,795,865 -2,290,394 S+M+1 taxesCurrent should Account be imposed in increase the level of savings and where accordance with the ability to pay capital formation apart from Surplus + /Deficit - -70,127 -88,450 -119,815 -79,563S= marginal -127,692 propensity-246,779 to save principle. This has two protecting local industries from M= marginal propensity to import dimensions:Budget Surplus (a) horizontal + /Deficit equity,- -205,745foreign -309,644 competition-446,0 through17 levies -488,967 -591,244 -829,502 such as import duties (including T= marginal rate of taxation i.e.,As similar % of GDP treatment of persons -7.0such as import -7.0 duties (including-7.0 -5.6 -5.7 -7.4 Source: Central Bank Annual Report 2015 and various years.
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Taxation in Sri Lanka:Current Trends and Perspectives The 2016 deficit, with fiscal These deficits have been iii) Decreasing the investments
measuresD. D. M. WAIDYASEKERA to enhance revenue financed by domestic borrowings and reduce expenditure, is both bank and non-bank as well of the private investors; targeted to be brought down to as foreign borrowings. These iv) Decreasing local savings; 5.4% of GDP with the medium fiscal deficits have also a number v) Increasing inflation; term 2020 deficit targeted at of economic effects such as: 3.5%. vi) Decline in international i) Increase in public debt; credibility. ii) Increase in interest rates; 4. Reasons for the Decline
There are many reasons for this 2. Narrow tax base and system both being less declining trend in government tax coverage, the total number than unity; revenue in spite of the overall of taxpayers being about increase in GDP and per capita 3% of the population; 7. The existence of a large income. Some of these include informal economy resulting the following: 3. Increase in allowable in large scale tax evasion expenses under Section 25 and avoidance; 1.Unplanned ad hoc tax of the Inland Revenue Act; incentives in the form of 8. The grant of periodic tax various tax holidays, reliefs 4. Periodic increases in tax amnesties which have and concessions, duty free allowances and ad hoc been largely failures not waivers, etc. which have reductions in rates of tax; producing the expected eroded and narrowed the results; 5. Ad hoc changes to the tax fiscal base. The exact tax 9. A complicated tax system system to meet short-term loss from these and weaknesses in tax cash flow requirements of concessions for each administration and the the government consequent assessment year administrative mechanism. has not been calculated per to lack of consistency in year but has been government fiscal policy, estimated at being close to leading to uncertainty These issues have to be 1% of annual GDP among existing taxpayers; addressed and remedial (Presidential Taxation measures taken in order to check Commission 2010); 6. Lack of elasticity and the tax revenue decline and bring buoyancy in the tax it to a satisfactory level.
5. Composition of Tax Revenue - Direct and Indirect
Direct versus indirect taxation is equity effects and ease and cost used for reducing income and an age-old controversy. The of administration. wealth inequalities and thereby arguments for or against direct socially more desirable. They and indirect taxes can be Direct taxes tend to be cause little or no distortions in analyzed in the context of progressive and intimately related resource allocation of the revenue generation, efficiency and to the ability to pay and can be economy and leave taxpayers
6 Taxation In Sri Lanka : Current Trends and Perspectives
better off in welfare terms. It is Another argument in their favour be regressive. Studies have Introductionalso revenue elastic due to the is that their yield is substantial, shown that the increase in the tax factIntroduction that as the income of the individuals are given a choice and burden for the low and middle community rises, so does the they reduce disincentive effects. income groups indicates that the yieldA country’s from direct taxation taxes. system Therereports is havealso beenthe added released attraction rise(Chairman in indirect H.S. taxes Wanasinghe has been and fiscal policy underlying it, thatfrom the time public to time is lesssince conscious 1915 fasterand Secretary than the riseD.D.M. in income of However,is a major they determinant are more of difficult other to ofwhen the Sritax Lanka’sburden as(then the taxes are theseWaidyasekera) groups. Indirect and the taxes have imposemacro-economic in developing indices countries such generallyCeylon’s) hiddentax system in the consisted prices and alsoPresidential a greater Commission adverse effect on on whereas economic the structure growth, of publicthe theironly presenceof Import, is Excise not readily and felt theTaxation allocation of 2009 of resources (Chairman than a economydebt, fiscal is deficitmarkedly and different inflation byStamp the consumer.Duties followed Since by they are directProf. W.D.tax and Lakshman at a macro and level fromas well developed as attaining ones a dueproper to such paidExport piecemeal Duties, Incomewhen the Tax taxpayer and canSecretary cause P.D.K.cost-push Fernando). inflation. conditionspattern of resourceas the existence allocation, of a entersa whole into lot someof other transaction, taxes such it is Apart from these, a number of largeincome informal distribution economy and and convenientas Profit Tax, and Excess less burdensome. Profits Inother developed reports countries,include the direct Woods severeeconomic unemployment. stability. Hence They are Duty, Estate Duty, Capital taxesCommission such as (1926), income Huxham tax alsoperiodically, a drag on the saving fiscal andpolicy IndirectGains Tax, taxes Land are Tax, also Wealth, perhaps constituteReport (1929), a significant Downs Reportportion of investmentand the tax and structure, thus on including economic theExpenditure only means and of Gift reaching Taxes, the total(1955), tax Kaldorrevenue, Report while (1960) indirect efficiencyits administrative and improvement mechanism of vastetc. leviedmajority and of abolishedthe population from taxesand Cox such Report as taxes (1986) on among livinghas been standards. subject to whomtime to the time. tax netSome often of thesefails to internationalothers. trade and on examination and proposals for captureimportant and commissions the informal and hard domestic goods and services, Indirectmodification taxation in order is defined to achieve as toconsisted tax activities. of the TheyTaxation are also playAll thesea less stressed significant the role. In taxationits basic imposed objectives upon in relationother than oftenCommission not affected of 1955 by economic(Chairman contrast,importance in theof developingdeveloping a theto the person government’s who is intended policies to crisesK.R.K. and Menon thus and remain Secretary relatively S. countriesrational, consistent,the opposite efficient is the case bearand objectivesthe final burden prevalent which at the constant.Sittampalam), Administratively, Taxation Inquiry withand thesimple bulk tax of systemgovernment in order ultimatelytime. falls on the consumers indirectCommission taxes ofare 1968 easier (Chairman to revenueto achieve coming its objectives from indirect and of the taxed commodities. They implementA.G. Ranasinha than directand Secretary taxes and taxesfunctions. such as customs duties, areIn this an importantconnection element a number in of sinceA.G. Jegasothy),they are included Presidential in the VAT, sales taxes, excise duties raisingcommissions, quick revenue committees and and priceTaxation of a Commission commodity cannotof 1990 be etc. while direct taxes are of mobilizing resources for public easily evaded, and the lesser importance. investment and social welfare. administrative costs in their Indirect taxes are also a powerful collection is relatively low. In Sri Lanka, income taxes 1.Thetool for guiding Functions resource of a Tax System comprise on average less than 1.Theallocation and Functions discouraging ofHowever, a Tax indirect Systemtaxes are 20% of tax revenue or 2% of demand on undesirable goods heavily criticized for GDP while the indirect taxes andThe activitiesfunctions as of wella tax as system an unnecessarilyin similar circumstances, imposing heavy and (b) comprisecesses), Valuearound Added 80% orTax 8% (VAT) of effectiveinvolve several way to aspects.correct negative First, the burdensvertical equity,on the loweri.e., different and middle GDP.and excises.The composition Taxation ofis alsorevenue externalities.primary function of a taxation incometreatment groups of persons and those with leastdifferent isused illustrated as an instrumentin the Table of and demand system is to raise revenue for the abletaxable to paycapacity. and therefore Thirdly, tendthe to Chartmanagement below. to eliminate or government for its public fiscal system is also employed reduce inflationary or deflationary expenditure as well as for local for social purposes such as tendencies in the economy. authoritiesTable and 3 similar public discouraging certain activities Taxation reduces the effect of the bodies.Composition Its efficiency of isGovernment therefore Revenuewhich are 2014, considered 2015 undesirable. multiplier and so can be used to primarilyYear judged by whether this Excise duties2014 on liquor and dampen 2015upswings in a trade function is performed adequatelyAmount tobacco,Percentage the Special Percentage Excises onAmountcycle.Percentage Percentage and satisfactorily. The second luxury and semi-luxury items, the and satisfactorily.Taxes The secondRs. Million luxury andShare semi-luxury of GDP items,Rs. the Million Share of GDP function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an Income Taxes 198,115 17% 1.9 262,583 18% 2.3 through a policy of redistribution examples of such taxes. open economy is of income and wealth. The equity of incomeVAT and wealth. The equity275,350 23% 2.6 219,700 15%1 2.0 principle in taxation implies that The tax system is also used to Excise Duties 256,691 21% 2.5 497,652S+M+1 34% 4.4 taxes should be imposed in increase the level of savings and where accordanceImport with Duties the ability to pay81,108 capital formation7% apart 0.8from 132,189 9% 1.2 protecting local industries from S= marginal propensity to save principle.Other This Taxes has two 239,099protecting 20% local industries2.3 from 243,655 17% 2.2 M= marginal propensity to import dimensions: (a) horizontal equity, foreign competition through levies Tax Revenue 1,050,362 88% 10.1 1,355,779T= marginal 93% rate of taxation12.1 i.e., similar treatment of persons such as import duties (including
Source: Central Bank Annual Reports 2014 and 2015.
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Taxation in Sri Lanka:Current Trends and Perspectives th Chart 1: Composition of Government Revenue - 2015 5 November 2015. The EPS has
D. D. M. WAIDYASEKERA even set a quantitative target of securing 40% of the tax revenue from income taxes by 2020 as against the historical average of 20% on that account. This requires policies to reduce the share of indirect taxes from the present 80% to 60% over the years and means increasing the income tax by 100%.
Source: Central Bank Annual Report 2015.
It has been realized that this proportion of direct to indirect proportion of direct to indirect taxes than Sri Lanka. It is in this taxes of 20:80 is too unrealistic context that the 2009 Presidential if Sri Lanka is to achieve a Taxation Commission had developed country status from a recommended that the tax ratio of middle income country status. direct to indirect should be Apart from developed countries, progressively changed to 60:40. even countries such as This policy has been reiterated Malaysia (over 60%), India recently in the Economic Policy (over 50%), Pakistan (around Statement (EPS) delivered by the 40%) Thailand (50%) and Kenya Prime Minister Hon. Ranil (above 42%) have a higher Wickremasinghe in Parliament on 6. Fiscal and Tax Incentives
One of the main reasons for the reduce their scope and coverage tax provisions were subsequently decline in government tax from time to time, they are still given largely through the Inland revenue has been the considerably large covering Revenue Act but the BOI appears proliferation of tax incentives in various sectors such as to be granting them as well. the form of tax holidays, agriculture, fishing, exports, exemptions, expanded allowable gems and jewellery, IPO, The rationale for the adoption of expenses in determining taxable healthcare, education, tourism, fiscal incentives is that they income, reliefs, duty waivers and sports and fitness centres, constitute an important, if not a concessions which have eroded creative work including art work major element in determining and narrowed the tax base. They etc. They have been granted investment behaviour. They were originally used from 1951, both through Law 17 of the Board increase the net rates of returns and after 1977 became a major of Investment (BOI), the Inland and thus reduce the need for instrument of development Revenue Act as well as other large capital investment. They policy. Though attempts have relevant legislation. To minimize also reduce risk and tend to been made to prune them and the considerable overlapping, the make otherwise unpromising and
8 Taxation In Sri Lanka : Current Trends and Perspectives
risky ventures more attractive. adopted to evaluate the revenue loss is estimated to be IntroductionTax incentives benefit concerns stimulation generated for close to 1% of GDP (Presidential which are profitable and to that investment by tax incentives, Taxation Commission 2010). extent, they do not involve state “Economic science has not A country’s taxation system reports have been released (Chairman H.S. Wanasinghe government subsidies or public yet attained a level of Nevertheless, Sri Lanka guaranteeand fiscal topolicy loss underlying makers. it, from time to time since 1915 and Secretary D.D.M. sophistication capable of isolating considering the competitive Further,is a major even determinant in cases whereof other when Sri Lanka’s (then Waidyasekera) and the and quantifying the role of the tax international context, e.g., reliefmacro-economic may seem unnecessary,indices such Ceylon’s) tax system consisted Presidential Commission on factors in investment behaviours.” Malaysia, Brazil, Vietnam, well-conceivedas economic growth, incentives public may only of Import, Excise and Taxation of 2009 (Chairman Thailand etc., cannot completely helpdebt, ventures fiscal deficit to build and theirinflation IncentivesStamp Duties by themselvesfollowed by Prof. W.D. Lakshman and do away with tax incentives. reservesas well as and attaining embark a properon apparentlyExport Duties, do not Income play aTax major and Secretary P.D.K. Fernando). However, the tax incentive regime expansion.pattern of resource They are allocation, also rolea whole vis-à-vis lot of other other factors taxes suchsuch Apart from these, a number of valuableincome distributionas an indirect and stimulant asas infrastructureProfit Tax, Excess facilities, Profits cheap mustother bereports designed, include implemented the Woods toeconomic investment stability. because Hence they andDuty, easy Estate credit, Duty, production Capital costs, andCommission monitored (1926), in a more Huxham publicizeperiodically, and the enhance fiscal policythe accessGains Tax,to markets, Land Tax, a Wealth,reliable and methodicalReport (1929), and Downscost effective Report (1955), Kaldor Report (1960) country’sand the tax investment structure, climate.including skilledExpenditure labour and force, Gift labour Taxes, market way,(1955), their Kaldor cost Reportbenefit (1960)ratio its administrative mechanism etc. levied and abolished from and Cox Report (1986) among Theyits administrative have thus been mechanism adopted by flexibility,etc. levied the and regulatory abolished from properlyand Cox examined Report (1986) and beamong has been subject to time to time. Some of these others. mosthas been developing subject countries.to framework,time to time. business Some of these subjected to continuous review so examination and proposals for important commissions environment, and political and that the impact on revenue is Withmodification a GDP growthin order target to achieve of 8% consisted of the Taxation All these stressed the economic stability. Investment minimized and the required orits higher,basic objectivesSri Lanka inwould relation need Commission of 1955 (Chairman importance of developing a responds to a multiplicity of economic objectives realized. toto raisethe government’s its annual investment policies rate K.R.K. Menon and Secretary S. rational, consistent, efficient factors and compared to these, Further, tax holiday businesses fromand objectivesthe current prevalent 30% of GDPat the to Sittampalam), Taxation Inquiry and simple tax system in order and enterprises must be required attime. least 35% or higher. With fiscalCommission incentives of 1968at best (Chairman play only to achieve its objectives and to send their accounts and public investment to be capped aA.G. marginal Ranasinha role. and Secretary functions. balance sheets even during the atIn aroundthis connection 6% of GDP a number this would of A.G. Jegasothy), Presidential needcommissions, to come aboutcommittees entirely and from FiscalTaxation and Commission tax incentives of 1990have tax holiday period and should be private investment within which also been called into question on checked even though exempt. foreign private investment plays other grounds. One is that they Experience has shown that often a crucial role. Foreign Direct distort investors’ decisions and they show big profits during the 1.TheInvestment (FDI) Functions to Sri Lanka has ofthus aproduce Tax a lessSystem than optimum tax holiday period and after the seen a significant increase in allocation of resources. Fiscal exemption is over, they show recent years rising from US$ 234 incentives tend to attract losses or pack up and leave. To The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT) million in 2004 to $ 889 million in investors who are more keen on prevent this, concessionary rates 2008,involve $ several1066 million aspects. in 2011,$ First, the vertical equity, i.e., different and excises. Taxation is also making quick profits rather than may be applied for a short period 1338primary million function in 2012, of a taxationand $ 1616 treatment of persons with different used as an instrument of demand investments of a substantial after the tax holiday is over before millionsystem in is 2014to raise which revenue however for the taxable capacity. Thirdly, the management to eliminate or nature which are crucially required applying the normal rates. declinedgovernment to $for 970 its million public in 2015. fiscal system is also employed reduce inflationary or deflationary Onexpenditure average, asSri wellLanka as attractedfor local forfor developingsocial purposes countries. such asThey tendencies in the economy. anauthorities annual average and similar FDI ofpublic US $ alsodiscouraging tend to attract certain “fly-by-night” activities Taxation reduces the effect of the 500bodies. million Its (aboutefficiency 1.5% is oftherefore GDP) investorswhich are who considered use the undesirable.generous multiplier and so can be used to duringprimarily the judged last decade. by whether this incentivesExcise duties only on to liquorpull out and when dampen upswings in a trade However,function is to performed emulate theadequately East thetobacco, time comesthe Special to be Excisesregular on cycle. Asianand satisfactorily. countries, which The issecond Sri taxpayers.luxury and Theysemi-luxury also provide items, athe The size of the multiplier in an Lanka’sfunction vision,is to reduce it is necessary inequalities to fertileBetting ground and Gaming for tax Levyavoidance are through a policy of redistribution examples of such taxes. open economy is attractthrough FDI a policyin excess of redistribution of US $ andexamples tax evasion of such through taxes. “tax open economy is of income and wealth. The equity 5000of income million and annually, wealth. close The equityto 1 shelters”The tax. system Finally, isthe also tax used foregone to 5%principle of GDP. in taxation implies that The tax system is also used to is a matter of vital concern S+M+1 taxes should be imposed in increase the level of savings and particularly in the current context, where Howeveraccordance the with effectiveness the ability ofto taxpay capital formation apart from asprotecting fiscal incentives local industries are costly from in S= marginal propensity to save incentivesprinciple. Thisin this has respect two is protecting local industries from M= marginal propensity to import dimensions: (a) horizontal equity, revenueforeign competitionterms. It is throughfelt therefore, levies debatable. As Heller & Kauffman T= marginal rate of taxation i.e., similar treatment of persons thatsuch the as costimport of dutiesfiscal incentives(including T= marginal rate of taxation ini.e., concentrating similar treatment upon theof persons outweighs their benefits. The methodology and techniques
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Taxation in Sri Lanka:Current Trends and Perspectives
7.D. D. M. WAIDYASEKERA Elasticity and Buoyancy of the Tax System
One of the main reasons for the tax system also reduces the i) Slow expansion in the tax decline in government tax economic uncertainties base; revenue in Sri Lanka is the associated with frequent inherent lack of elasticity and discretionary changes in taxes, ii) Absolute as well as relative buoyancy in the fiscal system. duties and levies. expansion in certain sectors which are difficult to Elasticity in a tax system reflects An inelastic fiscal system on the tax and gradual reduction in the automatic response or built-in other hand, compels the size of the sectors which responsiveness of tax revenue to government to rely on frequent ad are easy to tax; movements in national income or hoc increases in order to maintain gross domestic product. short-term revenue objectives. iii) Expansion in the tax Buoyancy reflects the total Such practices over time tend to expenditure coverage; response of tax revenue to produce a complex and changes in national income or economically unproductive fiscal iv) Lack of progressivity in tax GDP including the effects of system and lead to adverse rates; discretionary adjustments such economic effects and unintended v) Tax evasion and inefficient as expansion in the tax base, distributional consequences. tax administration. increase in tax rates and other Frequent ad hoc changes in tax changes in fiscal policies. The practices also create In the Sri Lankan fiscal tax system is said to be elastic or uncertainties among taxpayers system the overall elasticity buoyant if the elasticity or and affect investment and has been estimated at 0.7 and buoyancy co-efficients exceed production adversely. the buoyancy at 0.9. unity. An elastic system will (Indraratna, 2003). Both co- Factors affecting the low elasticity automatically raise revenue at the efficients however, are below in the tax system may be same time or at a faster rate than unity and hence overall, the summarized as follows: the growth of GDP and facilitate a tax and fiscal system is sustained increase in necessary inelastic in Sri Lanka. (Tax government outlays. An elastic Commission Report, 1990). 8. Taxation, Savings and Capital Formation
Taxation and fiscal policy consti- savings constitute a relatively nominal terms as well as tute one of the key determinants minor share of both domestic and percentage of GDP from 2010 of savings, capital formation and national savings and in fact, onwards and particularly from investment apart from other statistically denote a negative 2012. Tax rates both corporate factors such as government index. Table 4 below denotes and individual from 2011 were development strategy and the domestic savings divided into drastically reduced from 35% to macro economic environment. private and government, respec- 28% and 12% for the corporate There is a correlation between tively. sector and 24% as maximum development and savings; higher personal tax from that year. the savings, greater the ability to It may be noted that the savings While this may invariably have sustain its growth. ratio to GDP is only 22.6% as compared to other Asian had an effect in increasing private An analysis of savings both countries such as India (31%), savings, it is however difficult to domestic and national savings Thailand (31%), Malaysia (33%) quantify or draw a direct causal indicate that in Sri Lanka, savings and Singapore (53%). effect to this factor alone as come largely from the private or many other factors are household sector. Government Domestic private savings have determinants of savings and indicated a large increase both in investment. 10 Taxation In Sri Lanka : Current Trends and Perspectives
Table 4 IntroductionDomestic Savings and Tax Rates 2004 - 2015 (Rs. Million) Year 2004 2006 2008 2010 2012 2014 2015 A country’s taxation system reports have been released (Chairman H.S. Wanasinghe Domestic Savings 343,580 498,864 611,598 1,481,123 2,374,918 2,504,682 2,531,040 and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M. isPrivate a major determinant 421,785of other 568,992when Sri 700, Lanka’s048 1,600,938(then 2,454,481Waidyasekera) 2,632,374 and the2,777,819 macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on Government -78,205 -70,128 -88,450 -119,815 -79,563 -127,692 -246,779 as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman debt,% to GDPfiscal deficit and inflation16.4% 17.0%Stamp Duties 13.9% followed 23.1% by 27.2%Prof. W.D. 24.0%Lakshman and 22.6% as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). Tax Rates pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of incomeCompany distribution and 30% 35%as Profit Tax, 35% Excess Profits35% 28%other reports 28% include the Woods28% economic stability. Hence Duty, Estate Duty, Capital Commission (1926), Huxham periodically, the fiscal policy Gains Tax, Land Tax, Wealth, 12%Report (1929), 12% Downs Report12% (1955), Kaldor Report (1960) andPersonal the tax Highest structure, Rate including 30% 35%Expenditure 35% and Gift Taxes, 35% 24%(1955), Kaldor 24% Report (1960)24% its administrative mechanism etc. levied and abolished from and Cox Report (1986) among hasSource: been Compiled subject from Central to Bank Annual Report, varioustime to years. time. Some of these others. examination and proposals for important commissions All these stressed the Themodification same trend in order is seen to achievein respect consistedtax rates, ofparticularly the Taxation the ever,All these both stressedsavings andthe capital importance of developing a ofits capitalbasic objectivesformation. Itin isrelation seen that Commissioncorporate rate of from1955 35%(Chairman to 28% formationimportance appear of developing to be sensitive a rational, consistent, efficient overto the 75% government’s of gross domestic policies K.R.K.(and concessionary Menon and Secretary rate 12%) S. in torational, effective consistent, tax incidence. efficient Hence and simple tax system in order capitaland objectives formation prevalent comes fromat the the Sittampalam),2011 would invariably Taxation have Inquiry had itand is logicalsimple totax conclude system thatin order in to achieve its objectives and privatetime. sector while the Commissionan effect in thisof 1968 trend, (Chairman it is orderto achieve to promote its objectives savings and functions. government’s share is around 25%. A.G.difficult Ranasinha to establish and aSecretary direct and capitalfunctions. formation, the reduction in In this connection a number of Again,In this capitalconnection formation a number has shownof A.G.precise Jegasothy), statistical Presidential correlation taxation appears as a necessary, commissions, committees and acommissions, large increase committees from 2010, and2012 Taxationbetween Commissiontax rates and of domestic1990 though not by itself, a sufficient onwards. While the decrease in private capital formation. How- condition.
1.TheTable 5 Functions of a Tax System Capital Formation and Tax Rates 2004- 2014 (Rs. Million)
TheYear functions of a tax2004 system 2006in similar 2008 circumstances, 2010 and 2012 (b) cesses), 2013 Value 2014 Added Tax (VAT) involveGross several Domestic aspects. First, the vertical equity, i.e., different and excises. Taxation is also primaryFixed functionCapital of a taxation treatment of persons with different used as an instrument of demand system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or governmentFormation for its 473,323public 730,910fiscal 1,115,310 system 1,452,002 is also employed 2,189,805 2,536,648reduce inflationary 2,752,263 or deflationary expenditure as well as for local for social purposes such as tendencies in the economy. expenditurePrivate as well 422,060as for local 624,972 for852,708 social purposes1,128,151 such 1,695,184 as 1,946,925tendencies 2,11 in 9,243the economy. authorities and similar public discouraging certain activities Taxation reduces the effect of the bodies.Government Its efficiency 51,262 is therefore 105,938which 262,602 are considered 323,851 undesirable. 494,621 589,723multiplier and 633,020 so can be used to primarily judged by whether this Excise duties on liquor and dampen upswings in a trade primarily% of GDP judged by whether 22.6% this 24.8Excise 25.2 duties on 25.4%liquor and 25.0%dampen 26.4% upswings 26.3% in a trade function is performed adequately tobacco, the Special Excises on cycle. andTax satisfactorily. Rates The second luxury and semi-luxury items, the function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an Company 30% 35% 35% 35% 28% 28% 28% through a policy of redistribution examples of such taxes. open economy is of income and wealth. The equity of income and wealth. The equity 12% 12%1 12% principle in taxation implies that The tax system is also used to Personal S+M+1 taxes should be imposed in increase the level of savings and where accordanceHighest Rate with the ability 30% to pay 35%capital 35% formation apart 35% from 24% 24% 24% S= marginal propensity to save principle. This has two protecting local industries from Source: Compiled from Central Bank Annual Report, various years. M= marginal propensity to import dimensions: (a) horizontal equity, foreign competition through levies T= marginal rate of taxation i.e., similar treatment of persons such as import duties (including
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Taxation in Sri Lanka:Current Trends and Perspectives
9.D. D. M. WAIDYASEKERA Tax Base and Coverage
One of the important elements in quarter in 2009, Rs. 3 million per In this context, the 2016 Budget securing a satisfactory level of quarter in 2013 and Rs. 3.75 has proposed a threshold limit of tax revenue is the base and million per quarter or Rs. 15 Rs. 2.4 million for individuals and coverage of the taxes. While million per annum in 2015 and in a flat rate thereafter which certain steps to broaden the tax May 2016 to Rs. 3 million per however, due to its drastic base and coverage have been quarter. The Nation Building Tax implications for revenue as well taken such as the inclusion to (NBT) was Rs. 500,000 per as equitable considerations has income tax of public servants quarter in 2011, Rs. 3 million in been suspended or put on hold. hitherto exempt, and widening the 2013 and in 2015 Rs. 3.75 million The basic threshold for 2015/16 of base of the VAT and NBT by per quarter, and in May 2016 Rs. Rs. 500,000 has therefore adding the wholesale and retail 3 million per quarter. The remained for the year of sectors, the base and coverage Economic Service Charge (ESC) assessment 2016/17 as well. still need to be enlarged. was Rs. 50 million per quarter in 2015, an increase from the earlier 9.2 Deductible One of the reasons for the Rs. 25 million in 2011. All these Expenses for declining tax revenue ratio has mean that persons below these been the narrowing of the tax thresholds do not pay any tax Assessable Income base resulting from ad hoc thus reducing the coverage of increases in tax free allowances, taxpayers and reduction of tax Another area which has affected liberalizing a whole range of revenue. the base is the calculation of allowable deductions under assessable and taxable income in Section 25 of the Inland Revenue There is no hard and fast rule relation to allowable expenses Act, adjustments to qualifying regarding the appropriate level of under Section 25 of the Inland payments under Section 34, basic tax free allowance for Revenue Act. Section 25(1) among others individuals. One factor is the allows the deduction of “all adequacy to relieve the minimum outgoings and expenses incurred 9.1 Tax Free subsistence need of an average by such persons in the Allowances and family from taxation. Other production” of such profits and factors include the per capita income. Though this concept is Threshold income, equity consideration and narrower than the U.K. concept of ease of administration. Some “wholly and exclusively incurred Tax free allowances for countries use the per capita for the purpose of the trade,” the individuals have been periodically income multiple (maximum up to various amendments made to increased from Rs. 144,000 in five times) as the basis but expand deductible expenses to 2001/02 to Rs. 240,000 in 2002/ others do not. In the be in line with commercial profits 03, to Rs. 300,000 in 2004/05 and circumstances, it may be as well as to give various in 2011/12 to Rs. 500,000. For appropriate to consider a suitable concessions to trades and employees or those with measurement basis in the context businesses, have in practice employment income, an extra of Sri Lanka’s current tended to narrow the net income allowance in excess of Rs. circumstances and taxation on which the tax rates are 500,000 ranging from Rs. 100,000 policy. The current practice applied. to Rs. 250,000 has been granted recently introduced of tax free in the form of a qualifying allowance to non-resident Sri Recent tax legislation has payment. The tax free allowance Lankan citizens should also be liberalized a whole lot of has been extended to non- reconsidered, limiting it to expenses as well as allowable resident Sri Lankan citizens as resident individuals and charitable deductions in computing adjusted well. The original tax free institutions as in the original Tax taxable profits and income. threshold for VAT in 2002 of Rs. Act. These include enhanced 500,000 per quarter was depreciation allowances, 75% increased to Rs. 650,000 per deduction of advertisement
12 Taxation In Sri Lanka : Current Trends and Perspectives
expenses originally limited to advertisement expenses etc., enormous profits being made Introduction50%, foreign travelling expenses, need re-examination and through information technology, foreignIntroduction training expenses, pre- limitation. For instance, very all of which are exempt under commencement expenses, 300% often businesses tend to mix Section 13(ddd). All these have deductionA country’s for taxation Research system & businessreports have promotion been released expenses led(Chairman to an artificial H.S. Wanasinghe lowering of Developmentand fiscal policy (R&D), underlying maintenance it, whichfrom timeare allowableto time since with 1915 taxableand Secretary income D.D.M.of trades and andis a managementmajor determinant expenses of other advertisement,when Sri Lanka’s hence (then the businessesWaidyasekera) and anda major the cause of amongmacro-economic others. indices such necessityCeylon’s) totax limit system the latter.consisted decliningPresidential tax Commissionrevenue. on as economic growth, public Anotheronly of Import,section Excisethat appears and to ItTaxation is necessary of 2009 therefore, (Chairman to re- Alldebt, these fiscal have deficit led toand a narrowinginflation needStamp re-examination Duties followed is Sectionby examineProf. W.D. the Lakshman validity of and these ofas thewell taxable as attaining base anda proper reduction 13(ddd)Export Duties,of the ActIncome which Tax exempts and enhancedSecretary deductionsP.D.K. Fernando). and base it ofpattern the adjusted of resource taxable allocation, profits and servicesa whole renderedlot of other to taxespersons such onApart accepted from these, principles a number and of incomeincome ofdistribution trades and and businesses outsideas Profit Sri Tax, Lanka. Excess While Profits the accountingother reports standards include thesubject Woods to foreconomic tax purposes. stability. In Hencethe absence originalDuty, Estate intention Duty, was Capital the revenueCommission considerations. (1926), Huxham Whatever ofperiodically, proper auditing the fiscal and monitoringpolicy promotionGains Tax, of Land local Tax, professional Wealth, systemReport is(1929), adopted Downs it should Report be ofand these the taxexpenses structure, by taxincluding services,Expenditure it has and now Gift been Taxes, applicable(1955), Kaldor to individuals, Report (1960) officials,its administrative the enhanced mechanism allowable misusedetc. levied for and foreign abolished business, from companiesand Cox Report and all (1986) other among entities expenditurehas been subject such asto triple foreigntime to contracts,time. Some etc. of with these inothers. the same manner. expensesexamination for andR & proposalsD, 75% for important commissions modification in order to achieve consisted of the Taxation All these stressed the its basic objectives in relation Commission of 1955 (Chairman importance of developing a to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient 10.and objectives Tax prevalent Rates at the Sittampalam), Taxation Inquiry and simple tax system in order time. Commission of 1968 (Chairman to achieve its objectives and A.G. Ranasinha and Secretary functions. income less than Rs. 5 million is companies from the 10.1In this connection Corporate a number of A.G. Jegasothy), Presidential a concession for small and concessionary rate. The main commissions, committees and Taxation Commission of 1990 Tax rates in Sri Lanka have had a medium enterprises (SMEs) to argument against small company chequered history with at one encourage their growth. There is relief however, is the time in 1978 the corporate rate however no definition of a small administrative difficulty of drawing going up to 60% and in 1964 the company in the Inland Revenue the boundary line between “large” 1.Thepersonal rate atFunctions 80%. With ofAct anda Taxtaxable incomeSystem of Rs. 5 and “small”; it necessarily changing economic strategies million is not the sole criterion of involves arbitrary choices and they have steadily decreased to The functions of a tax system anin similarSME. Further,circumstances, a company and (b) addscesses), to theValue complexity Added Tax of the(VAT) tax 45% in 1992/93, 40% in 1993/94, involve several aspects. First, the mayvertical be smallequity, but i.e., the different owners structure.and excises. Taxation is also 35% in 1994/95, 30% in 2003/04 primary function of a taxation needtreatment not necessarilyof persons bewith persons different used as an instrument of demand and subsequently the standard system is to raise revenue for the withtaxable low capacity.incomes andThirdly, vice theversa. management to eliminate or rate 28% in 2011. There are 10.2 Personal government for its public Affluentfiscal system investors is also often employed invest in reduce inflationary or deflationary however a multiplicity of expenditure as well as for local smallfor social venture purposes companies, such as Thetendencies reduction in inthe the economy. rate structure corporate rates with 28% for authorities and similar public whereasdiscouraging shareholders certain activitiesof modest alsoTaxation applies reduces to personal the effect income of the companies with taxable income bodies. Its efficiency is therefore meanswhich areoften considered have their undesirable. share taxmultiplier of individuals and so can(including be used to over Rs. 5 million, 12% where the primarily judged by whether this investments,Excise duties if on any, liquor in large and professionals)dampen upswings in relation in a trade to both taxable income is less than Rs. 5 function is performed adequately companiestobacco, the of Speciala less riskyExcises nature. on “slabs”cycle. and rates. Currently, there million (including venture capital and satisfactorily. The second Moreover,luxury and the semi-luxury existence items,of a the is a progressive tax structure with companies) while a higher rate of function is to reduce inequalities lowerBetting rate and invites Gaming the Levy artificial are specialThe size lower of the rates multiplier and higher in an 40% is applied for liquor, tobacco, through a policy of redistribution splittingexamples up ofof suchcorporate taxes. ratesopen foreconomy specific is activities and bettingof income and and gaming. wealth. The equity enterprises into several tax sources of income. The slabs of income and wealth. The equity 1 principle in taxation implies that motivatedThe tax system small companiesis also used which to have been enlarged with the rates The multiplicity of rates however, S+M+1 taxes should be imposed in would,increase in thereality, level continue of savings to and ranging from 4% and going up to has its drawbacks in that it where accordance with the ability to pay operatecapital formationas parts ofapart the largerfrom 8%, 12%, 16%, 20% and 24% unnecessarily complicates and S= marginal propensity to save principle. This has two enterprises.protecting local In order industries to prevent from (maximum). The maximum rate inhibits the smooth functioning of M= marginal propensity to import dimensions: (a) horizontal equity, this,foreign the competitionAct excludes through holding levies of tax for employees including the company tax system. The T= marginal rate of taxation i.e., similar treatment of persons companies,such as import subsidiary duties (includingor professionals however is limited lower rate of 12% for taxable associate of any group of to 16%.
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incomeD. D. M. WAIDYASEKERA tax structure apart from consecutively at single digit rate of tax at a relatively low level resulting in lowered tax revenue, figures and there is no of taxable income (above Rs. 3.5 have also raised a number of justification to widen the slabs million per annum or Rs. 300,000 contentious issues. Adjustments and reduce the rates, especially per month). to “slabs” and rates are generally when the tax free personal done periodically to counter what allowances have been increased. The table below gives the periodic is known as the “bracket creep” in Further, the “slabs” in the current changes to the slabs and rates time of rampant inflation. rate structure discourage the from year of assessment 2003/04 However, inflation which was at earning of higher income, since to 2016/17.
Table 6 Personal Tax Slabs and Rates 2003/04 - 2016/17
Y/A 2003/04 Tax Free Allowance Y/A 2004/05 Tax Free Allowance Rs. 240,000 Rs. 300,000 Slabs Rs. Rate% SlabsRs. Rate% First 180,000 10% First 240,000 10% Next 180,000 20% Next 240,000 20% Balance 30% Balance 30% Income at which highest rate Income at which highest rate is is reached – Rs. 600,000 reached – Rs. 780,000
Y/A 2006/07 -2008/09 Y/A 2005/-06Tax Free Allowance Tax Free Allowance Rs. 300,000 Rs. 300,000 Slabs Rs. Rate% Slabs Rs. Rate% First 300,000 5% First 300,000 5% Next 200,000 10% Next 200,000 10% Next 200,000 15% Next 200,000 15% Next 200,000 20% Next 200,000 20% Next 200,000 25% Next 200,000 25% Next 500,000 30% Balance 30% Balance 35% Income at which highest rate is reached Income at which highest rate is reached Rs. 1,400,000 Rs. 1,900,000
Y/A 2009/10 & 2010/2011 Tax Free Allowance Rs. 300,000 Y/A 2011/2012 – 2016/17 Slabs Rs. Rate% Tax Free Allowance Rs. 500,000 First 400,000 5% Slabs Rs. Rate% Next 400,000 10% First 500,000 4% Next 400,000 15% Next 500,000 8% Next 500,000 20% Next 500,000 12% Next 500,000 25% Next 500,000 16% Next 500,000 30% Next 1,000,000 20% Balance 35% Balance 24% Income at which highest rate is reached Income at which highest rate is reached Rs. 3,000,000 Rs. 3,500,000 Source: Compiled from Inland Revenue Acts and Amendments.
14 Taxation In Sri Lanka : Current Trends and Perspectives
10.3 Professionals 10.4 Flat Rate (b) Liquor, tobacco, lottery, Introduction betting and gaming – 40%; AnotherIntroduction contentious issue is the A contentious issue is the concessionary rate granted to a proposal in the 2016 Budget to (c) All other activities including A country’s taxation system reports have been released (Chairman H.S. Wanasinghe classA country’s of professionals taxation system under increasereports have the taxbeen free released threshold manufacturing and services and fiscal policy underlying it, fromfrom timeRs. 600,000to time sinceto Rs. 1915 2.4 and Secretary D.D.M. Sectionand fiscal 40C policy of the underlying Inland it, from time to time since 1915 – 17.5%; Revenueis a major Act determinant under Amendment of other whenmillion Sri per Lanka’s annum (then and charge Waidyasekera) and the macro-economic indices such Ceylon’s)only a flat taxrate system of 15% consisted on all Presidential Commission on No.macro-economic 8 of 2014. A “professional” indices such Ceylon’s) tax system consisted (d) Other sources such as as economic growth, public onlyincome of Import,above thisExcise amount, and Taxation of 2009 (Chairman underas economic Section growth,40C(2) haspublic been only of Import, Excise and interest, royalty, dividends debt, fiscal deficit and inflation Stampirrespective Duties of followedthe amount by of Prof. W.D. Lakshman and defineddebt, fiscal and deficit if such and professional inflation Stamp Duties followed by etc., to continue on the as well as attaining a proper Exportincome. Duties, This is Income a radical Tax change and Secretary P.D.K. Fernando). isas employed well as attaining with effect a proper from Export Duties, Income Tax and existing applicable rate pattern of resource allocation, afrom whole a progressivelot of other taxtaxes system such Apart from these, a number of 1.4.2014,pattern of is resource taxed subject allocation, to a a whole lot of other taxes such depending on the source of income distribution and aswhich Profit has Tax, existed Excess in SriProfits Lanka other reports include the Woods maximumincome distribution rate of 16% and (whereas as Profit Tax, Excess Profits income. theeconomic normal stability.maximum Hence rate is Duty,since Estatethe introduction Duty, Capital of income Commission (1926), Huxham periodically, the fiscal policy Gainstax in Tax,1932 Land to a Tax,regressive Wealth, one. Report (1929), Downs Report 24%).periodically, Further, the under fiscal Section policy 59F Gains Tax, Land Tax, Wealth, Personal Income Tax theand professionalthe tax structure, services including of these ExpenditureApart from suchand Gifttax Taxes,havens like (1955), Kaldor Report (1960) its administrative mechanism etc.the Caymanlevied and Islands, abolished Isle fromof Man, and Cox Report (1986) among professionalsits administrative are taxedmechanism at etc. levied and abolished from i) Current rate structure, tax has been subject to timeBahamas to time. etc. Somewhere of there these is no others. differenthas been “slabs” subject with to the time to time. Some of these free allowance, rates etc. examination and proposals for importantincome tax, commissions most countries in the maximumexamination rate and of proposalstax being 16%.for important commissions 2016/17 to continue – modification in order to achieve consistedworld have of athe progressive Taxation income All these stressed the modification in order to achieve consisted of the Taxation maximum 24%; Theits basic tax for objectives professionals in relation can be Commissiontax system withof 1955 relatively (Chairman few importance of developing a summarizedto the government’s as follows: policies K.R.K.exceptions Menon which and have Secretary a flat S.rate rational, consistent, efficient to the government’s policies K.R.K. Menon and Secretary S. ii) Employment income at and objectives prevalent at the Sittampalam),system. This isTaxation a controversial Inquiry and simple tax system in order and objectives prevalent at the Sittampalam), Taxation Inquiry current slabs and rate for time. Commissionissue and has of been1968 suspended(Chairman to achieve its objectives and Incometime. from Maximum Commission of 1968 (Chairman employees with the A.G.with noRanasinha amending and legislation Secretary as functions. Profession Rate of Tax A.G. Ranasinha and Secretary maximum rate of 16% to In this connection a number of A.G.yet, andJegasothy), the threshold Presidential and rate Does not exceed A.G. Jegasothy), Presidential continue; commissions, committees and Taxationstructure Commissionfor 2016/17 hasof 1990 Rs. 25 million 12% Taxation Commission of 1990 remained on the 2015/2016 basis, iii) Income from any activity subject to the changes Exceeds Rs. 25 (other than financial, trading, announced from 1.4.2016. million but does not liquor, tobacco, lottery, 1.Theexceed Rs. 35 Functions million 14% of a Tax System betting and gaming) – 10.5 Current Changes maximum rate 17.5%; Exceeds Rs. 35 million 16% The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT) Due to these factors, the basis of iv) Profits from financial or involve several aspects. First, the vertical equity, i.e., different and excises. Taxation is also These concessions are available giving concessional rates to small trading activity – maximum primary function of a taxation treatment of persons with different used as an instrument of demand only to those classified as and medium enterprises (SMEs) 24%; system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or “professionals” under the relevant on the basis of taxable income government for its public fiscal system is also employed reduce inflationary or deflationary section and includes registered (less than Rs.5 million) alone, has v) Profits from liquor, tobacco, expenditure as well as for local for social purposes such as tendencies in the economy. lawyers, doctors, chartered apparently undergone a change to lottery, betting and gaming authorities and similar public discouraging certain activities Taxation reduces the effect of the engineers, chartered take into account the nature of activity limited to 40%; bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can be used to accountants, software engineers, their activity rather than the primarily judged by whether this Excise duties on liquor and dampen upswings in a trade licensed pilots, navigation taxable profit they make. From 1 vi) Income from Net Annual function is performed adequately tobacco, the Special Excises on cycle. officers, researcher and senior April 2016 the rates are to be Value (NAV) etc. – maximum and satisfactorily. The second luxury and semi-luxury items, the academic recognized as an based both for corporate and rate 24%. function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an accredited professional. Other personal income tax taking into through a policy of redistribution examples of such taxes. open economy is professionals have been excluded consideration their nature and All these above changes would of of income and wealth. The equity 1 from these concessions as well type of activity as well. course, have1 to be legislated and principle in taxation implies that The tax system is also used to as other individuals earning passed forS+M+1 them to be legally taxes should be imposed in increaseCorporate the Income level of Taxsavings and similar income. effective.where accordance with the ability to pay capital formation apart from S= marginal propensity to save principle. This has two protecting(a) Banking local and industries financial from M= marginal propensity to import dimensions: (a) horizontal equity, foreignservices, competition insurance through industry levies T= marginal rate of taxation i.e., similar treatment of persons suchand as tradingimport dutiesactivities (including – 28%;
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No. 25 Taxation in Sri Lanka:CurrentThe Trends andabove Perspectives changes would involve merely on their taxable income or 3. Whether having two separate
aD. D. M. WAIDYASEKERA number of complications: tax. rates for the corporate sector and individuals who have the 1) The small companies whose Concessions for SMEs for benefit of a high tax free income is less than Rs. 5 manufacturers and service threshold, with a lower million would now have to pay providers have been given on the maximum rate for the latter at 17.5% from the current basis of turnover under Section who include traders, concessionary rate of 12%. 59B of Amendment Act No. 8 of businessmen, professionals This would increase the tax 2014 as follows: often earning very lucrative burden of small and medium income, is again justifiable. enterprises and a disincentive Year Turnover Rate Differentiation of maximum for SMEs; 2011/12 – 13 < Rs. 300 million 10% marginal rates of tax for individuals and companies can 2) The overall income tax rate on 2013/14 < Rs. 500 million 10% lead to unforeseen most big businesses other distortions of economic than those activities (finance, behaviour. Earlier the tax insurance, trading etc.) would 2014/15 < Rs. 750 million 12% system had one rate of 35% now decline from 28% to for all with a reasonable 17.5%. The corporate rate in Considering these factors in threshold for individuals. India is 34% and in relation to the rate structure, the Malaysia 24%. This would following issues need These are some of the issues lead to a decline in corporate examination: that need examination and income tax by a considerable remedial action in the present amount, which would be 1. Whether the reduction in the context. known only at the end of the tax rate from 35% prevailing assessment year 2016/17; earlier is justifiable considering the low tax/GDP ratio and the 10.6 The Laffer Curve 3) For personal taxation, having needto raise tax revenue and different rates based on nature increase the direct tax ratio. The basic theory and principle and activity and income would In this connection, it may be that underlies the advocacy of a involve complication in relevant to mention that in the low tax regime and low rates of calculation of tax payable by 1990 Presidential Taxation tax is based on supply side individuals; Commission it was decided economics. While the Keynsian not to lower the income tax policy of demand management is 4) For businesses it would rate below 35% and it was the based on the proposition that the involve keeping separate IMF through its representative level of aggregate demand accounting records on the and advisor that was determines the level of national nature of activities carried vehemently opposed to any income i.e., that demand creates on by a business, while for further reduction in the rate; supply, the supply side the tax administration it would economics on the other hand, involve complicated auditing 2. Whether to have one standard emphasizes the conditions and monitoring processes. for the corporate sector governing supply such as the (except perhaps liquor, availability, cost and quality of Considering all these tobacco and gambling) instead resources which are considered circumstances, there is a view of multiple rates which the long-term determinants of that it would be less complicated complicate the system, leads national income and prices. and more effective to have a to reduction in revenue, uniform rate of corporate tax encourages tax avoidance and A proposition that characterizes rather than taxing them on size complicates the administrative supply side economics is that the and form or the nature of their system. Any concessions for rates of direct taxation have a activity, except in exceptional desirable institutions and major influence upon aggregate cases. Relief for SMEs could be sectors should be given supply through their effects upon given in other forms rather than through other tax provisions the incentive to work. According and other means;
16 Taxation In Sri Lanka : Current Trends and Perspectives
to supply side economists like Arthur Laffer, Jude Wanniski and Chart 02 : The Laffer Curve Introductionothers, high taxation acts as a disincentive to work because if marginalA country’s tax taxationrates are system high, the reports have been released (Chairman H.S. Wanasinghe individualand fiscal ispolicy likely underlyingto either forego it, from time to time since 1915 and Secretary D.D.M. opportunitiesis a major determinant to increase of incomeother when Sri Lanka’s (then Waidyasekera) and the throughmacro-economic additional indiceseffort or such resort Ceylon’s) tax system consisted Presidential Commission on toas theeconomic informal growth, sector public(the “black only of Import, Excise and Taxation of 2009 (Chairman economy”)debt, fiscal todeficit avoid and paying inflation taxes. Stamp Duties followed by Prof. W.D. Lakshman and as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). Thepattern Laffer of resourceCurve indicates allocation, the a whole lot of other taxes such Apart from these, a number of effectincome of distributiontax rates on and government as Profit Tax, Excess Profits other reports include the Woods revenue.economic Briefly,stability. the Hence proposition Duty, Estate Duty, Capital Commission (1926), Huxham ofperiodically, the Laffer theCurve fiscal as itspolicy starting Gains Tax, Land Tax, Wealth, Report (1929), Downs Report pointand theis thetax simplestructure, notion including that tax Expenditure and Gift Taxes, (1955), Kaldor Report (1960) revenueits administrative is zero if themechanism tax rate is etc. levied and abolished from and Cox Report (1986) among eitherhas been zero subjector 100%, to with a time to time. Some of these others. smoothexamination relationship and proposals between for the important commissions ratesmodification and tax in revenues order to achieve consisted of the Taxation All these stressed the connectingits basic objectives these two in polarrelation Commission of 1955 (Chairman importance of developing a points.to the government’s The existence policies of such a K.R.K. Menon and Secretary S. rational, consistent, efficient relationshipand objectives suggests prevalent that at if thetax Sittampalam), Taxation Inquiry and simple tax system in order and objectives prevalent at the StudiesSittampalam), of selected Taxation countries Inquiry also ratestime. are sufficiently high, the Commission of 1968 (Chairman 10.7to achieve Relevant its objectives Reforms and time. seemedCommission to indicate of 1968 that (Chairman those “prohibitive range”, then a A.G. Ranasinha and Secretary functions. that imposed a lower effective Considering all the factors reductionIn this connection in tax rates a number could lead of A.G. Jegasothy), Presidential average tax burden achieved discussed above in respect of tocommissions, an increase committeesin tax revenues. and Taxation Commission of 1990 substantially higher rates of measures to reverse the declining The Laffer Curve analysis leads to growth in GDP than did their more tax revenue/GDP ratio including the followin conclusions: highly taxed counterparts. measures relating to tax incentives, broadening the tax 1.The• High rates Functions of taxation act as a ofThe aLaffer Tax Curve, System however, has base and coverage, revising the disincentive to work and thus had its critics like Paul W. allowable expenses in computing reduce output and McCraken, Paul Krugman, Robert adjusted assessable and taxable The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT) employment; Lekachman and John Kenneth involve several aspects. First, the vertical equity, i.e., different profit,and excises. qualifying Taxation payments, is also tax involve several aspects. First, the Galbraith.vertical equity, They i.e.,have different questioned and excises. Taxation is also primary function of a taxation treatment of persons with different freeused allowances as an instrument and tax of rates, demand it primary• An increasefunction inof taxa taxation rates does thetreatment assumptions of persons and theorywith different used as an instrument of demand system is to raise revenue for the taxable capacity. Thirdly, the appearsmanagement necessary to eliminate to create or a systemnot isalways to raise necessarily revenue forlead the to behindtaxable the capacity. Laffer Curve Thirdly, and the management to eliminate or government for its public fiscal system is also employed newreduce income inflationary tax code or todeflationary generate governmentincreased for revenue. its public There is a provedfiscal system that it isis notalso as employed scientific reduce inflationary or deflationary expenditure as well as for local for social purposes such as adequatetendencies income in the taxeconomy. revenue. In expenditurecrucial point as well (point as Efor in local chart) asfor itsocial appears. purposes The supplysuch as side tendencies in the economy. authorities and similar public discouraging certain activities thisTaxation connection, reduces the the latest effect IMF of the authoritiesbeyond andwhich similar an increase public in cutsdiscouraging of the 1980s certain do notactivities appear Taxation reduces the effect of the bodies. Its efficiency is therefore which are considered undesirable. Missionmultiplier in and 2016 so led can by be Todd used to bodies.tax rates Its efficiency leads to is decreasing therefore towhich have are raised considered work efforts undesirable. or multiplier and so can be used to primarily judged by whether this Excise duties on liquor and Schneiderdampen upswings has made in ana trade in-depth primarilyrevenue judged and bynational whether income. this savingExcise andduties they on unquestionablyliquor and dampen upswings in a trade function is performed adequately tobacco, the Special Excises on analysiscycle. of the entire situation function is performed adequately increasedtobacco, thethe Specialdeficit. ExcisesEmpirical on cycle. and satisfactorily. The second luxury and semi-luxury items, the including the increasingly difficult and• Theresatisfactorily. are always The two second rates studiesluxury andcarried semi-luxury out in two items, the function is to reduce inequalities Betting and Gaming Levy are externalThe size environment,of the multiplier the inimpact an functionavailable is to (Areduce and B)inequalities which can countriesBetting and (Jamaica Gaming and Levy India) are through a policy of redistribution examples of such taxes. ofopen domestic economy policies is including throughproduce a policy the sameof redistribution total tax whereexamples tax changesof such taxes.relevant to the open economy is of income and wealth. The equity fiscal deficits, public debt, and of incomerevenue, and one wealth. a higher The and equity 1 LafferThe tax Curve system had isbeen also used to balance of payment position, real principleanother, in taxation a lower impliesrate. that The tax system is also used to implementedincrease the havelevel ofalso savings concluded and GDP growth,S+M+1 inflation and taxesGovernment, should be imposedtherefore in need increase the level of savings and thatcapital the formationassertion apartthat taxfrom revenuewhere administration and has accordancenot necessarily with the choose ability toa highpay capital formation apart from reductionprotecting would local leadindustries to revenue from madeS= marginal some far propensity reaching to save principle.rate to This achieve has thetwo required protecting local industries from increasesforeign competition should at bestthrough be levies recommendationsM= marginal propensity to improve to import the dimensions:quantum (a)of revenue.horizontal equity, foreign competition through levies treated with caution (Ebrill, 1987). situation.T= marginal rate of taxation i.e., similar treatment of persons such as import duties (including
171 Working Paper No. 25
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No. 25 Taxation in Sri Lanka:CurrentKey Trends andobjectives Perspectives underlying its It has also recommended the 5) Inland Revenue Act No. 38 of
reformD. D. M. WAIDYASEKERA agenda include: introduction of a new Inland 2000 which had 6 mendments; Revenue Act. The introduction of and i) Improving revenue Income Tax was made under the 6) Inland Revenue Act No. 10 of administration and tax policy; Income Tax Ordinance No. 2 of 2006 which up to now had 8 1932 which was amended 17 amendments and one more ii) Strengthening public financial times between 1932 and 1949. pending on the 2016 Budget management; Succeeding legislation include: proposals.
iii) State enterprise reforms; 1) Act No. 1 of 1949 which was As Todd Schneider amended 6 times; iv) Standard reforms to enable a recommended, it is time to 2) Act No. 3 of 1956; more outward-looking introduce a new Inland Revenue 3) The Inland Revenue Act No. 4 economy, deeper foreign Act incorporating the necessary of 1963 which has 12 exchange markets and revisions and changes needed to amendments; strengthen financial sector improve tax collection and tax 4) Inland Revenue Act No. 28 of supervision. revenue in the context of current 1979 which was amended 19 fiscal and economic policy. times; 11. Provincial and Local Government Revenue
Recent tax and fiscal changes of List I of the Ninth Schedule. the Central Government consist- have had an impact not only on They account for only 4% of the ing basically of three types, Block national but also on provincial and country’s total revenue and less Grants, Criteria Based Grants and local taxation as well. The than 3% of tax revenue or 0.6% Province Specific Development revenue sources devolved on of GDP. Expenditure however is Grants (PSDG) apart from grants Provincial Councils under the around 11% of Central Govern- for special projects. Thirteenth Amendment are ment expenditure or 2.6% of GDP. contained in items 36.1 to 36.20 The deficit is met by grants from
Table 7 Budget Outturn for Provincial Councils 2012 - 2015, Rs. Million Item 2012 2013 2014 2015 Total Revenue 49,235 49,648 59,133 66,082 Tax Revenue 41,657 42,569 52,569 59,482 Non Tax Revenue 7,578 7,079 6,564 6,600 Total Expenditure 161,341 185,241 216,824 267,696 Recurrent Expenditure 139,121 156,066 172,131 215,836 o/w Personal Emoluments 108,246 117,806 131,162 168,760 Capital Expenditure 22,220 29,175 44,693 52,310 Central Government Transfer 112,106 135,593 157,691 201,614 Block Grants 91,892 108,801 126,144 167,551 Criteria Based Grants 2,861 2,264 3,392 3,753 Province Specific Development Grants 5,901 6,429 8,343 13,345 Foreign Grants for Special Projects 11,452 18,100 19,812 16,965
Source: Central Bank Annual Report 2015.
18 Taxation In Sri Lanka : Current Trends and Perspectives
Of the revenue sources, the most This abolition has led to a number Appendix in the Salgado Report important was the provincial of problems. The turnover tax of on “Financial Devolution to the Introductionturnover tax on wholesale and the Provincial Councils had Provinces”. retail sales which produced legally no threshold for its Aaround country’s 55% taxationof provincial system revenue implementationreports have been while released the In(Chairman respect ofH.S. local Wanasinghe government, and wasfiscal the policy mainstay underlying of the it, coveragefrom time ofto thetime NBT since (1/3 1915 of theand recent Secretary fiscal D.D.M. and tax changes isprovincial a major revenuedeterminant system. of other This whichwhen isSri now Lanka’s transferred (then to the haveWaidyasekera) however had and little the impact on macro-economicwas abolished from indices 1 January such ProvincialCeylon’s) Councils)tax system is consistedRs. 3.75 localPresidential government Commission revenue. on The as2011 economic by Fiscal growth, Policy publicCircular No. milliononly of per Import, quarter. Excise This and has also localTaxation government of 2009 (Chairmansystem debt,01/2010 fiscal resulting deficit in and a drastic inflation hadStamp an Dutiesadverse followed administrative by constitutesProf. W.D. Lakshman335 institutions and asreduction well as of attaining provincial a properrevenue. It effectExport on Duties, the provincial Income Taxrevenue and consistingSecretary ofP.D.K. 23 MunicipalFernando). patternwas replaced of resource by a systemallocation, of manpowera whole lot where of other over taxes 400 aresuch Councils,Apart from 41 these, Urban a Councils number ofand incometransfers distribution from the centreand employedas Profit Tax,in the Excess revenue Profits 271other Pradesheeya reports include Sabhas. the Woods economicconsisting stability.of 100% HenceStamp Duty departmentsDuty, Estate withDuty, their Capital work OverallCommission 60% of(1926), their revenueHuxham is periodically,collection, 70% the offiscal motor policy vehicle drasticallyGains Tax, diminished Land Tax, Wealth,and a loss self-generatedReport (1929), sourcesDowns Reportconsisting andregistration the tax feesstructure, and 33 including 1/3% of ofExpenditure morale all andround. Gift Taxes, mainly(1955), of Kaldor such Reportitems as(1960) property itsthe administrativeNation Building mechanism Tax (NBT). etc. levied and abolished from tax,and acreageCox Report tax, (1986)rents, amongtrade and hasThe beenabolition subject of the to turnover tax Anothertime to time.issue Someis the legalityof these of its businessothers. licences, refund of examinationhas narrowed and the proposalsbase and for abolitionimportant as commissions well as the transfer of stamp duty and court fees from modificationcoverage of inthe order provincial to achieve otherconsisted revenue of the to theTaxation provinces. It ProvincialAll these Councilsstressed theand fees for itssystem. basic Thisobjectives is enhanced in relation by the hasCommission been abolished of 1955 by (Chairman a Fiscal services.importance Recent of developing fiscal changes a tofact the that government’s under Section policies 4.3 of the PolicyK.R.K. Circular Menon (No.and 01/2010)Secretary by S. haverational, had consistent,little impact efficienton local andNinth objectives Schedule, prevalent the stamp at dutiesthe theSittampalam), Treasury while Taxation any changesInquiry to revenueand simple though tax systemtheir revenue in order time.on immovable property levied provisionsCommission in ofthe 1968 Thirteenth (Chairman systemto achieve may its undergo objectives changes and under Section 36.5 of the AmendmentA.G. Ranasinha is a andconstitutional Secretary withfunctions. the implementation of the InProvincial this connection List as wella number as court of processA.G. Jegasothy), involving Presidentialparliamentary Grama Rajjaya concept involving commissions,fees, have legally committees to be and approvalTaxation (byCommission probably aof 2/3 1990 the creation of 2500 new units at transferred to the local majority). This issue has been grass roots level now being government authorities and hence examined in the Attorney planned and considered by the not a revenue resource for the General’s Ruling dated 08 August government. 1.TheProvincial Council. Functions of1989 a as Taxappearing System in the
The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT) 12.involve severalCapital aspects. First,Gains the vertical Taxation equity, i.e., different and excises. Taxation is also primary function of a taxation treatment of persons with different used as an instrument of demand system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or Taxationgovernment of for capital its public gains was 1979fiscal insystem addition is also included employed such capitalreduce gainsinflationary should or be deflationary treated introducedexpenditure inas Sriwell Lankaas for localin 1959 transactionsfor social purposes as the suchsurrender as or differentlytendencies from in the other economy. forms of givingauthorities effect and to a similartax reform public proposal relinquishmentdiscouraging certain of any activitiesright in any income.Taxation Theyreduces generally the effect accrue of the to ofbodies. Prof. NicholasIts efficiency Kaldor, is thereforebut since propertywhich are and considered the redemption undesirable. of any themultiplier property and owning so can class be used in to thenprimarily has undergonejudged by severalwhether changes this shares,Excise duties debentures on liquor andor other societydampen and upswings is concentrated in a trade withfunction capital is performedgains on death adequately or on gift obligationstobacco, the as Specialgiving riseExcises to capital on largelycycle. in higher income brackets. beingand satisfactorily. abolished in The 1977. second Capital gains.luxury and semi-luxury items, the Capital gains taxation also tends gainsfunction by is definition to reduce arise inequalities upon the Betting and Gaming Levy are toThe minimize size of the multiplieropportunities in an for sale,through exchange a policy or of other redistribution disposition Theexamples rationale of suchunderlying taxes. the taxopen avoidance. economy is of aincome capital and asset wealth. for more The thanequity its imposition of capital gains tax is of income and wealth. The equity 1 purchaseprinciple in taxationprice orimplies value that on thatThe realizedtax system gains is arealso equivalent used to Capital gains can be taxed either S+M+1 acquisition,taxes should beless imposed any costsin of toincrease income the and level provide of savings the and on an accrual basis or on a where buyingaccordance and sellingwith the and ability of improving to pay recipientcapital formation with just apartas much from realization basis. They are S= marginal propensity to save suchprinciple. asset. This Capital has two assets include economicprotecting power local industriesover goods from and normally taxed on the latter basis. M= marginal propensity to import landdimensions: and buildings, (a) horizontal machinery equity, and servicesforeign competitionas any other through form oflevies In Sri Lanka capital gains have T= marginal rate of taxation equipmenti.e., similar andtreatment stocks ofand persons shares. income.such as importUnder thisduties perspective, (including been taxed upon their realization The Inland Revenue Act No. 28 of there is no compelling reason why as from 1 April 1977. In respect of
191 Working Paper No. 25
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No. 25 Taxation in Sri Lanka:Currentimmovable Trends and Perspectives property acquired personal or company rate. Where Inland Revenue Department for
beforeD. D. M. WAIDYASEKERA that date, the value for the property was held for more valuation, valuation problems purposes of capital gains taxation than 2 years, the rates varied both in respect of capital gains was deemed to be the value as at from 25% to 5%, with properties and stamp duty are referred to the 31 March 1977. Section 14 of the over 25 years being nil. The Valuation Department for a Inland Revenue Act No. 28 of differential rate structure was realistic valuation. The Valuation 1979 also provided exemptions on intended to distinguish between Department however was not fully capital gains arising from certain short-term gains and long-term equipped to meet these transactions of which the most nominal gains due to inflation. requirements speedily especially important related to the sale of at regional level outside Colombo, residential houses. With regard to There are however a number of leading to both revenue and share transactions, capital gains problems in relation to capital administrative problems. were exempted from November gains taxation. Issues such as Improvements have been made in 1979 for a period of 7 years with “bunching”, lock-in effect, part the Valuation Department since the intention of broad-basing disposal, etc. can arise in capital but further improvements are companies. gains taxation apart from needed if capital gains taxation is distortions caused by inflation. to be reinstated. In these Capital losses were deductible Capital gains should be circumstances, taxation of capital only against capital gains with formulated in such a way that it gains was abolished in 2002 provisions for allowing any would have a minimal impact on under Section 3 of the unabsorbed losses to be carried investment and business. Amendment Act No. 10 of 2002 forward for set off against future However, the main issue is and there has been no capital gains. administrative arising in respect gains taxation since. However, of valuation such as over- the government has in June 2016 The rates of tax on capital gains valuation at time of purchase and again decided to re-introduce varied with the period of under-valuation at time of sale, capital gains tax at 10% and ownership of property. Where the leading to the increase in the legislation in this respect is property was held for not more number of tax appeals. Since expected to be introduced shortly. than 2 years the gains was there is no separate unit in the subject to tax at the normal
13. Tax Evasion
There is no doubt that the large declaration or under-declaration of no legal definition of “tax evasion” incidence of tax evasion in Sri income and assets, over- in any tax statute. While Section Lanka is a cause of great statement of expenditure or 163 of the Inland Revenue Act No. concern. While the most exemptions, fictitious expenses, 10 of 2006 permits the Assessor immediate concern is the loss of transfer pricing, concealment of to make assessments or revenue, in the long run such sales, stocks and debtors, additional assessments on evasion tends to reduce the built- fictitious creditors, etc. Other grounds of fraud, evasion or wilful in elasticity of the tax system methods resorted to include the neglect, the Interpretation Section and to the extent that the evaded formation of private companies, 217 does not define any of these income is spent on goods and fictitious partnerships, formation concepts. Recourse to judicial services, generates inflationary of private trusts and family trusts, dicta do not provide an pressure and raises the prices of leading to non-declaration or acceptable definition either. real property. It also distorts the limited declaration of dividends, fundamental objectives of a fair over-stated cash in hand, bank Tax evasion is not confined to and equitable tax system. overdrafts and bank loans, fraud alone, it also includes Wilful drawings, etc. Default as well as Wilful Tax evasion can take diverse Negligence. However, a forms. These include non- All these involve a number of distinction has to be made issues. In the first place, there is
20 Taxation In Sri Lanka : Current Trends and Perspectives between a Fraudulent Return and In this connection, a number of 13.2 Withholding Introductionan Incorrect Return where tax measures have been taken to evasionIntroduction as such is attributable curb or reduce the incidence of Taxes only to the former. Mere omission tax evasion. Statutorily a number The Withholding Tax system in A country’s taxation system reports have been released (Chairman H.S. Wanasinghe dueA country’s to oversight taxation or construing system a ofreports provisions have havebeen beenreleased particular is an effective and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M. taxand statute fiscal policyin a particular underlying way it, is incorporatedfrom time to intime the since tax Acts1915 such administrative method of helping is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the notis a an major offence. determinant It must ofbe other aswhen provisions Sri Lanka’s relating (then to transfer to minimize tax evasion and is a macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on deliberatelymacro-economic made indicesto avoid such tax or pricingCeylon’s) and tax thin system capitalization, consisted path to effective tax as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman misleadas economic a tax growth,officer. public improvingonly of Import, filing andExcise reporting and administration. It is especially debt, fiscal deficit and inflation Stamp Duties followed by Prof. W.D. Lakshman and debt, fiscal deficit and inflation compliance,Stamp Duties extension followed ofby the effective in areas where it is as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). 13.1as well asTax attaining Avoidance a proper WithholdingExport Duties, Tax Income System, Tax more and difficult or uneconomic to detect pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of pattern of resource allocation, extensivea whole lot auditing, of other particularly taxes such of evasion if payments were not income distribution and as Profit Tax, Excess Profits other reports include the Woods Taxincome Evasion distribution has also and to be largeas Profit taxpayers, Tax, Excess and information Profits taxed at source. economic stability. Hence Duty, Estate Duty, Capital Commission (1926), Huxham distinguishedeconomic stability. from Tax Hence Avoidance. reportingDuty, Estate among Duty, other Capital provisions. periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report Taxperiodically, avoidance the has fiscal been policy defined However,Gains Tax, while Land combating Tax, Wealth, tax Withholding tax on dividends and and the tax structure, including Expenditure and Gift Taxes, (1955), Kaldor Report (1960) asand the the “art tax of structure, dodging withoutincluding evasionExpenditure provisions and Gift like Taxes, transfer on certain payments to persons its administrative mechanism etc. levied and abolished from and Cox Report (1986) among actuallyits administrative breaking the mechanism law”. The pricing,etc. levied thin and capitalization, abolished from etc., outside Sri Lanka on interest, has been subject to time to time. Some of these others. legalhas beendefinition subject between to the two havetime tobeen time. incorporated Some of thesein the rent, ground rent, royalty or examination and proposals for important commissions hasexamination been enumerated and proposals in the for taxingimportant statute, commissions actual effective annuity existed in the tax statute modification in order to achieve consisted of the Taxation All these stressed the classicmodification tax case in order of the to Dukeachieve of implementationconsisted of the of Taxation these from early times. These were its basic objectives in relation Commission of 1955 (Chairman importance of developing a Westminsterits basic objectives v CIR 19 in TCrelation 490, provisionsCommission seems of 1955 wanting. (Chairman subsequently expanded to to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient whereto the Lordgovernment’s Tomlins in policies his K.R.K. Menon and Secretary S. deduction under the PAYE and objectives prevalent at the Further,Sittampalam), there hasTaxation to be Inquirya more and simple tax system in order judgementand objectives made prevalent the celebrated at the Sittampalam), Taxation Inquiry scheme, interest on deposits time. steppedCommission up effort of 1968 to deter (Chairman tax to achieve its objectives and dictumtime. “Every man is entitled if Commission of 1968 (Chairman paid by banks and financial evasionA.G. Ranasinha such as andincreasing Secretary the functions. he can to order his affairs so that A.G. Ranasinha and Secretary institutions, payments to foreign In this connection a number of auditA.G. frequencyJegasothy), and Presidential audit the tax attaching under the A.G. Jegasothy), Presidential entertainers and artistes, profits commissions, committees and thoroughnessTaxation Commission for upper of tax 1990 appropriate Acts is less than it Taxation Commission of 1990 on sale of gems, payments as bracket taxpayers to ensure that otherwise would be”. However, with rewards or share of fines to most of the tax evaders incur ingenious tax avoidance informants, lottery prizes and some risk of being discovered. It proliferating, distinctions were winnings from gambling and also includes implementing an 1.Thesubsequently Functionsmade between (a) of a Tax System betting. effective programme to detect Evasion; (b) Abusive or Blatant new taxpayers with the focus on Tax Avoidance; (c) Tax Avoidance; A further important provision was The functions of a tax system areasin similar where circumstances, there is reason and to (b) cesses), Value Added Tax (VAT) and (d) Mitigation. the application of withholding tax involve several aspects. First, the believevertical thatequity, significant i.e., different net onand “specified excises. fees”Taxation paid is by also primary function of a taxation treatment of persons with different used as an instrument of demand It is difficult to estimate the revenues could be gained. This “specified persons” under Chapter system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or extent of tax evasion or black involves a more effective system XVII of the Inland Revenue Act government for its public fiscal system is also employed reduce inflationary or deflationary money in Sri Lanka. In 1970 the of securing and analyzing No. 10 of 2006. “Specified fees” expenditure as well as for local for social purposes such as tendencies in the economy. Wanchoo Committee estimated it information from various sources, were defined under Section 153 authorities and similar public discouraging certain activities Taxation reduces the effect of the at 16.3% of GDP while in 1987 sharing of such information with as amounts over Rs. 50,000 per bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can be used to the National Institute of Public the relevant units and branches month or Rs. 500,000 per annum primarily judged by whether this Excise duties on liquor and dampen upswings in a trade Finance and Policy estimated the within the IRD as well as co- and included any commission, function is performed adequately tobacco, the Special Excises on cycle. figure of Black Money at Rs. ordination with other revenue brokerage or other sums of like and satisfactorily. The second luxury and semi-luxury items, the 367,785 crore or 21% of GDP. In departments. nature paid in the course of any function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an 1995 Dr. H.N.S. Karunatilake a business, profession or vocation, through a policy of redistribution examplesAll these processesof such taxes. appear to be open economy is former Governor of the Central fees paid on construction work or of income and wealth. The equity inadequate in the current set-up. Bank estimated it at around 10% articles on 1a contract basis principle in taxation implies that Further,The tax theresystem should is also also used be ato of GNP. There is a great variance through tenderS+M+1 or quotation. It taxes should be imposed in moreincrease vigorous the level application of savings of and between estimates and there are also included rent, lease rent or capital formation apart from where accordance with the ability to pay pecuniary penalties combined other payment for the use or no verifiable data bases to S= marginal propensity to save principle. This has two withprotecting prosecutions local industries in a given from provide a reliable estimate. occupation of any specified land foreign competition through levies M= marginal propensity to import dimensions: (a) horizontal equity, number of cases each year in or building. However, there is no doubt that T= marginal rate of taxation i.e., similar treatment of persons viewsuch ofas their import deterrent duties effect.(including tax evasion and black money is rampant in the country.
211 Working Paper No. 25
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No. 25 Taxation in Sri Lanka:CurrentAdministratively, Trends and Perspectives these provisions effectiveness of tax from 1964 to 2002. However, all
constitutedD. D. M. WAIDYASEKERA a very effective administration and should be re- these amnesties have not method wide in scope in detecting incorporated in the new Tax Act. produced the expected results. tax evaders, increasing the The following Table gives the coverage of taxpayers and tax 13.3 Tax Amnesties results of the tax amnesties from revenue, and combating tax 1964 to 2002. Another policy response that has evasion. However, from 1 April been used in reducing tax 2011 these provisions were Apart from the above tax evasion and black money is the removed thereby diluting the amnesties there was the grant of tax and foreign exchange administrative means and demonetization exercise of 1970. amnesties. In Sri Lanka, 11 such Even this was a relative failure tax amnesties have been granted where although an additional tax Table 8 collection of Rs. 100 million was Results of Tax Amnesties since 1964 expected, the actual collection was only Rs. 13 million. (ESCAP, Year No. of Declarants Amount Recovered 1983). (Rs. Million) 1964 78 21 1965 595 38 1978 160 30 1989 9 4 1990 n-a 0.96 1992 n-a n-a 1993 n-a n-a 1997 100 285 1998 7 223 2002 592 n-a
Source: Compiled from Minister of Finance K.N. Choksy’s statement in Parliament, Hansard 19 February 2003, and keynote address to the International Fiscal Association (Sri Lanka Branch), 29 May 2003. 14. The VAT Debate
In the early days, consumption under the NSL Act No. 52 of 1991 transparent, thereby enabling the taxes in Sri Lanka consisted which was a turnover tax levied tax content of a price to be mainly of customs duties and on gross sales. These two levies known. Above all, a VAT system excises. In 1963 the Business were amalgamated in August eliminates the cascading effects Turnover Tax (BTT) was 2002 and termed a VAT under the of a turnover tax and through its introduced by the Finance Act No. VAT Act No. 14 of 2002. in-built, self-enforcing and cross- 11 of 1963 and implemented from checking mechanism is more 1.1.1964. In 1981 the BTT was There is no doubt that in principle, suitable for administrative revised by the Turnover Tax Act a VAT system is superior to other purposes. For these reasons, No. 69 of 1981 which was virtually forms of sales taxation. It over 160 countries have a VAT a partial VAT. The GST Act No. 34 achieves neutrality between system in some form or other. of 1996 introduced a more fuller methods of production and value added system but was between propensities to save and In spite of these advantages implemented only from 1.4.1998 consume. It permits lower and however, the VAT has also along with another tax called the few rates, minimizes distortion in several weaknesses and defects. National Security Levy (NSL), resource allocation and is Some of these are inherent in the
22 Taxation In Sri Lanka : Current Trends and Perspectives
VAT system itself, such as its of its estimates, the only was Rs. 500,000 per quarter or design, base, coverage and rates. exception being in 2010 where the Rs. 1.8 million per annum. This IntroductionOthers are associated with collection was Rs. 219 billion in has increased from 1.1.2009 to practical and administrative relation to the estimate of Rs. 206 Rs. 650,000 per quarter or Rs. 2.5 problems,A country’s and taxation still others system with the billion.reports In have 2014 been the estimatereleased was million(Chairman per annum.H.S. Wanasinghe From 1.1.2013 it contextand fiscal in whichpolicy VATunderlying was it, Rs.from 303 time billion to time while since the 1915actual wasand increasedSecretary toD.D.M. Rs. 3 million per implemented,is a major determinant its timing ofand other collectionwhen Sri wasLanka’s Rs. (then275 billion, and quarterWaidyasekera) or Rs. 12 and million the per effectivenessmacro-economic and indicesits relationship such inCeylon’s) 2015 the tax estimate system was consisted Rs. 296 annum,Presidential and wasCommission further increased on withas economic budgetary growth, goals andpublic medium billiononly of and Import, the actual Excise collection and fromTaxation 1.1.2016 of 2009 under (Chairman the VAT termdebt, strategyfiscal deficit of governments. and inflation onlyStamp Rs. Duties 219 billion. followed by AmendmentProf. W.D. Lakshman Act No. 11 and of 2015 to as well as attaining a proper Export Duties, Income Tax and Rs.Secretary 3.75 million P.D.K. per Fernando). quarter or Rs. In terms of revenue productivity Inpattern terms of of resource revenue, allocation,the VAT has a whole lot of other taxes such 15Apart million from per these, year. aFrom number 2 May of where the standard rate is 1 notincome shown distribution much improvement and as Profit Tax, Excess Profits 2016other it reportswas revised include to theRs. Woods3 (perfect productivity) i.e., what economic stability. Hence Duty, Estate Duty, Capital millionCommission per quarter. (1926), This Huxham regular Tableperiodically, 9 the fiscal policy Gains Tax, Land Tax, Wealth, increaseReport (1929), of the Downsthreshold Report has VATand Revenuethe tax structure, Performance including 2002 - 2015Expenditure and Gift Taxes, reduced(1955), Kaldorthe coverage Report and(1960) number its administrative mechanism etc. levied and abolished from ofand taxpayers Cox Report resulting (1986) in amonga decline Year Estimate Rs. Actual Rs. Shortfall Rs. has been subject to time to time. Some of these inothers. revenue. examination and proposalsBillion for Bimportantillion commissions Billion modification2002 in order87 to achieve 66consisted of the Taxation-21 All these stressed the its basic objectives in relation Commission of 1955 (Chairman 14.2importance Exemptions of developing a its2003 basic objectives 120 in relation 97Commission of 1955 -23(Chairman importance of developing a to the government’s policies K.R.K. Menon and Secretary S. Unlikerational, in countriesconsistent, like efficient New 2004 124 120 -4 and objectives prevalent at the Sittampalam), Taxation Inquiry Zealand,and simple Singapore, tax system Canada in order etc. time.2005 142 138Commission of 1968 (Chairman-4 whereto achieve the base its objectives of the tax andis very 2006 174 164A.G. Ranasinha and -10Secretary broadfunctions. with few exemptions, in Sri In this connection a number of In2007 this connection 202 a number of 187A.G. Jegasothy), Presidential-15 Lanka under the First Schedule of commissions, committees and Taxation Commission of 1990 the VAT Act, a large number of 2008 248 203 -45 goods and commodities as well 2009 185 171 -14 as services have been exempted 2010 206 219 +13 from the tax. These include items 1.The2011 Functions238 of215 a Tax System-23 of mass consumption as well as 2012 264 229 -35 services and items considered as incentives for several socio- The2013 functions of 283 a tax system 250in similar circumstances,-33 and (b) cesses), Value Added Tax (VAT) The functions of a tax system in similar circumstances, and (b) economiccesses), Value sectors. Added This Tax has (VAT) involve several aspects. First, the vertical equity, i.e., different and excises. Taxation is also involve2014 several 303aspects. First, the 275vertical equity, i.e., different-28 considerablyand excises. narrowed Taxation theis also base primary function of a taxation treatment of persons with different used as an instrument of demand primary2015 function 296of a taxation 219treatment of persons -77with different andused scope as an of instrument VAT, retained of demand the system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or Source : Central Bank Annual Reports 2015 and various years. cascading effect on such goods government for its public fiscal system is also employed reduce inflationary or deflationary government for its public fiscal system is also employed andreduce led inflationaryto the necessity or deflationary to expenditure as well as for local for social purposes such as tendencies in the economy. overexpenditure the Turnover as well Tax as or for GST. local The everyfor social 1% raisepurposes of VAT such rate as in imposetendencies higher in therates. economy. authorities and similar public discouraging certain activities Taxation reduces the effect of the turnoverauthorities tax and has similar been apublic regular termsdiscouraging of VAT revenuecertain activitiesor GDP, Sri Taxation reduces the effect of the bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can be used to andbodies. reliable Its efficiencysource of isincome therefore Lanka’swhich are Productivity considered Rate undesirable. is Further,multiplier ad and hoc so changes can be usedhave to primarily judged by whether this Excise duties on liquor and dampen upswings in a trade withoutprimarily much judged complexity by whether or needthis 0.315.Excise Thisduties may on beliquor compared and beendampen made upswings in respect in a of trade function is performed adequately tobacco, the Special Excises on cycle. forfunction manipulation. is performed The VATadequately has not withtobacco, countries the Special such as Excises Vietnam on exemptedcycle. items and services and satisfactorily. The second luxury and semi-luxury items, the shownand satisfactorily. such regularity The and second has (0.562),luxury and Nepal semi-luxury (0.398), Indonesiaitems, the from time to time. For instance, function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an beenfunction characterized is to reduce by inequalities volatility (0.353)Betting andand SingaporeGaming Levy are under Amendment Act No. 11 of through a policy of redistribution examples of such taxes. open economy is andthrough the aneed policy for ofcomplex redistribution (0.415).Thereexamples of suchare a taxes.number of 2015,open VATeconomy liability is on certain of income and wealth. The equity manipulationof income and to wealth. prevent The revenue equity reasons for the low performance motor vehicles1 imported and principle in taxation implies that The tax system is also used to erosion in the form of input credit of the VAT in Sri Lanka. locally manufacturedS+M+1 was taxes should be imposed in increase the level of savings and S+M+1 andtaxes refunds. should beAn imposedanalysis inof the removed from October 25, 2014, capital formation apart from where accordance with the ability to pay capital formation apart from cigarettes and liquor from October VAT performance from its S= marginal propensity to save principle. This has two protecting local industries from S= marginal propensity to save inceptionprinciple. inThis 2002 has to two2015 from the 14.1 Threshold 25, 2014 and ethyl alcohol from 1 foreign competition through levies M= marginal propensity to import dimensions: (a) horizontal equity, foreign competition through levies January 2015. These however Central Bank Annual Reports, T= marginal rate of taxation i.e., similar treatment of persons Thesuch threshold as import for duties registration (including of a T= marginal rate of taxation showsi.e., similar that everytreatment year of the persons actual again changed in June 2016 when person liable to VAT from 1.8.2002 revenue collected has fallen short certain exempted sectors have
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No. 25 Taxation in Sri Lanka:Currentbeen Trends and Perspectivesmade liable to VAT such as of services consumed outside Sri It will be seen that in the early
theD. D. M. WAIDYASEKERA telecommunication sector, Lanka. Further, it has years, refunds averaged around health care services (with some incorporated a key clause called 6% of gross VAT collection and in exemptions), etc. Such ad hoc “international transportation the manufacturing sector about changes and lack of consistency (including trans-shipment) of 1/3 of gross manufacturing lead to confusion among goods and passengers” whose receipts went out as refunds. taxpayers and the general public interpretation is in fact very wide. Steps have been taken to apart from variations in tax All these zero rated items have minimize these refunds through revenue. led to a large refund element stricter administrative monitoring which has adversely affected net and controls such as by the 14.3 Zero Rating revenue collection. implementation of the Deferment Scheme and in 2011 by the Zero rating is a mechanism Of the gross receipts, a Simplified VAT scheme (SVAT). adopted in a VAT system to considerable element goes out as This scheme minimizes VAT relieve certain goods and refunds especially in sectors refunds for VAT registered services from the incidence of such as leasing, construction, persons who are engaged in VAT. Unlike exemptions however, exports, garments, manufacturing exports and special projects by zero rating enables a supplier of and the hotel sector. Table 10 the system of issuing credit zero rated goods to reclaim all the gives the amount of refunds in vouchers. Refunds both overall input taxes he paid on his relation to gross collection and and in manufacturing have since purchases. Section 7 of the VAT manufacturing for a selected been reduced from 2011 onwards Act includes not only exports number of years. as the figures above indicate. which are normally so in a destination principled VAT However, refunds under a VAT system, but also includes a host system cannot be entirely eliminated and the tax administration has to manage it in a proper and effective manner. Table 10 Moreover, refunds have to be paid VAT Refunds 2005 - 2014 (Rs. Million) within one month and interest at Year VAT Collection Refunds % 1% every month is due thereafter. Zero rating and refunds have 2005 Gross 154,199 12,321 8% therefore to be controlled carefully Manufacturing 31,504 12,279 40% to prevent fraudulent requests for 2006 Gross 175,247 11,176 6% refunds. Manufacturing 33,389 11,171 33% 2009 Gross 179,518 8,400 5% 2010 Gross 228,432 8,869 4% 14.4 Rates Manufacturing 39,282 7,577 19% When the VAT system was first introduced in 1998 in the form of a 2011 Gross 221,768 6,348 3% GST, it was characterized by a Manufacturing 37,423 4,598 12% single uniform rate of 12.5%. A 2012 Gross 207,805 3,149 1.5% single rate is best both from a compliance and administrative Manufacturing 39,789 1,302 3% point of view. Multiple rates 2013 Gross 218,146 459 0.2% distort both producer and 2014 Gross 239,028 1,112 0.4% consumer choices and complicates the system. Manufacturing 46,174 732 1.6%
Source: Compiled from IRD Performance Reports, various years. In Sri Lanka, VAT rates have been subject to ad hoc changes from time to time. While the VAT Act No. 14 of 2002 had originally two
24 Taxation In Sri Lanka : Current Trends and Perspectives
positive rates of 10% and 20%, it leading to cost of credit and context of the crucial need to Introductionwas soon unified into a single rate affecting investment. enhance tax revenue and reverse Introductionof 15% from January 2004. There the declining tax/GDP ratio. was again a modification of rates 14.6 Wholesale and However, reducing the threshold A country’s taxation system reports have been released (Chairman H.S. Wanasinghe whereby from 19.11.2004 there Retail Trade of small and medium wholesale and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M. was a basic rate of 5%, a luxury and retail traders creates many israte a majorof 18% determinant and a standard of other rate of when Sri Lanka’s (then Waidyasekera) and the practical problems for taxpayers macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on 15% which were in 2005 Under Section 3 of the VAT Act in keeping and maintaining as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman subsequently changed to 5%, No. 14 of 2002, VAT was not records of sales and purchases in debt,20% andfiscal 15%, deficit respectively. and inflation In Stamp Duties followed by Prof. W.D. Lakshman and charged on the wholesale and terms of VAT liable and exempt as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). 2009 the system was again retail trading sector (unless they goods, zero rated goods etc. It pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of changed to a single rate system were manufacturers or importers also creates problems of incomeof 12% whichdistribution in 2015 and was as Profit Tax, Excess Profits other reports include the Woods of such goods) and they were monitoring, inspections, auditing economic stability. Hence Duty, Estate Duty, Capital Commission (1926), Huxham reduced to 11% and from 2 May liable only to Business Turnover etc. for the tax administration as periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report 2016 increased to 15%. However, Tax (BTT) to the Provincial well. In this context, it may have andaccording the tax to structure, IMF estimates, including in Expenditure and Gift Taxes, (1955), Kaldor Report (1960) Councils under Section 36.1 of been more practical to have its administrative mechanism etc. levied and abolished from and Cox Report (1986) among order to be revenue neutral, the the Ninth Schedule of the increased the tax rates while has been subject to time to time. Some of these others. VAT rate in Sri Lanka should be Thirteenth Amendment and keeping the threshold intact examinationaround 17%. and proposals for important commissions subsequently in 2011 to the NBT. without reducing it to too low modification in order to achieve consisted of the Taxation All these stressed the levels. In fact, even as early as its basic objectives in relation Commission of 1955 (Chairman importance of developing a 14.5 Financial With the abolition of the provincial 1985, the IMF Mission headed by to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient turnover tax in 2011, wholesale Carlos A. Aguirre when Servicesand objectives prevalent at the Sittampalam), Taxation Inquiry and simple tax system in order and retail trade was made liable considering the introduction of time. toCommission VAT under ofVAT 1968 Amendment (Chairman Act to achieve its objectives and Due to the difficulty of computing VAT to Sri Lanka, recommended No.A.G. 17 Ranasinha of 2013. The and quarterly Secretary functions. value added in the case of that “Small retail traders who In this connection a number of turnoverA.G. Jegasothy), applicable Presidential to VAT on financial services such as usually keep inadequate or no commissions, committees and wholesaleTaxation Commission and retail trade of 1990 banking and insurance, most records of their activities could be originally in 2013 was Rs. 500 countries exclude financial excluded from the tax net” (IMF million and in the process of services from VAT. Such Report October 25, 1985, p. 15). enlarging the VAT base and problems include disentangling It is on this basis that Section 3 coverage, was reduced to Rs. 250 1.Thethe costs of intermediation,Functions the of a Tax System of the VAT Act No. 14 of 2002 million in 2014 and Rs. 100 million sensitivity of the sector to fine excluded wholesale and retail per quarter in 2015. On 2 May Themargins, functions the likelihoodof a tax systemof in similar circumstances, and (b) tradecesses), (other Value than Added those Tax of (VAT) The functions of a tax system 2016in similar the threshold circumstances, was and (b) cesses), Value Added Tax (VAT) involveencouraging several offshore aspects. provision First, theof vertical equity, i.e., different manufacturersand excises. Taxationand importers) is also involve several aspects. First, the administrativelyvertical equity, i.e.,reduced different to Rs. 3 and excises. Taxation is also primaryfinancial function services of and a taxation the treatment of persons with different fromused VAT.as an instrument of demand primary function of a taxation milliontreatment per ofquarter persons or Rs.with 1 differentmillion used as an instrument of demand systemimportant is torole raise finance revenue plays for in the taxable capacity. Thirdly, the management to eliminate or system is to raise revenue for the pertaxable month capacity. which meant Thirdly, that the VAT management to eliminate or governmentthe economy. for In its 2014 public leasing of fiscal system is also employed reduce inflationary or deflationary government for its public wasfiscal payable system on is liablealso employedgoods and 14.7reduce VATinflationary Frauds or deflationary expendituremovable properties as well asafter for local for social purposes such as tendencies in the economy. expenditure as well as for local servicesfor social on purposes turnover suchover asRs. VATtendencies is a tax in that the iseconomy. susceptible to authorities25.10.2014 andwas similarincluded public as discouraging certain activities Taxation reduces the effect of the authorities and similar public 33,000discouraging per day. certain Such activitiesfrequent ad fraudTaxation and reduces is common the ineffect many of the bodies.financial Itsservices efficiency subject is therefore to VAT. which are considered undesirable. multiplier and so can be used to bodies. Its efficiency is therefore hocwhich changes are considered to the threshold undesirable. as VATmultiplier countries. and so For can instance, be used in to primarily judged by whether this Excise duties on liquor and dampen upswings in a trade In Sri Lanka, financial services well as rates, lead to problems 2005 in Germany the “VAT function is performed adequately tobacco, the Special Excises on cycle. were exempted till 31.12.2002 but both to the taxpayers as well as carousel fraud” or “missing trader and satisfactorily. The second luxury and semi-luxury items, the from 1.1.2003 were included the tax administration. The latest intra-community fraud” amounted function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an under Chapter 111 A of the VAT proposal is to revise the threshold to 17.6 million Euros or 11% of through a policy of redistribution examples of such taxes. open economy is Act. However, the method of from Rs. 12 million to Rs. 50 Germany’s annual VAT revenue. of income and wealth. The equity computing was not the normal million per annum i.e., from Rs. In 2006 the1 VAT fraud across principle in taxation implies that The tax system is also used to Output minus Input used in other 33,000 a day to Rs. 138,000 a Europe wasS+M+1 estimated at a taxes should be imposed in increase the level of savings and sectors but the additive method day. Enlarging the coverage of massivewhere Euro 23 billion. Frauds accordance with the ability to pay capital formation apart from where accordance with the ability to pay taxpayers including VAT payers of Net Profit plus Wages, under haveS= marginalalso been propensity reported tofrom save principle. This has two protecting local industries from which method there is no and the base of the tax including Poland,M= marginal Canada, propensity Italy, New to import dimensions: (a) horizontal equity, foreign competition through levies M= marginal propensity to import dimensions: (a) horizontal equity, VAT is a necessary ingredient in deduction for input taxes paid. Zealand,T= marginal UK rateetc. Fromof taxation goods it i.e., similar treatment of persons such as import duties (including Hence, most banks tend to pass creating a more effective tax has recently moved into services on the VAT to their borrowers system, particularly in the as well.
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No. 25 Taxation in Sri Lanka:CurrentThere Trends and Perspectives are three leading the problems connected with the practice, been found to be
D.technology D. M. WAIDYASEKERA based solutions to tax administration. VAT types of wanting. Various attempts have this problem. (1) the Real Time taxes are not easy to administer since been made to rectify the VAT (RT VAT); (2) the VAT and the much vaunted self- shortcomings, improve the Location Number (VLN) system; checking and self-policing feature system and streamline the VAT and (3) the Digital VAT (D-VAT). of the VAT has been found to be administration. These include: The RT VAT focuses on securing wanting in the Sri Lankan the tax, the VLN focuses on experience. • The provision of adequate securely tracing the supply and resources; the D-VAT certifies that the Some of the basic requirements • Development of skills and correct tax is charged, collected for the successful administration training; and remitted. of the VAT include: An extended computerization In Sri Lanka, the massive VAT • • A simple VAT return and a and EDP system; fraud during the years 2002 to taxpayer identification 2004 amounted to around Rs. 4 number (TIN); • Advance Tax scheme and billion making it one of the VAT deferment scheme; biggest in South Asia. It was • An effective taxpayer based on fraudulent invoices of assistance programme; • Optional VAT; companies some of which were • Simplified VAT system non-existent. There are many • A reliable computerized (SVAT); reasons for VAT being easily system providing accurate and timely information; susceptible to fraud in Sri Lanka. • Mechanism to cross-check The refund due to overpaid input input credit; • An effective system of audit, tax, zero rating, eligiblility to full supervision, monitoring and refunds, the relatively large sector • Streamlining regulations control; being put in the zero rated list are relating to refunds such as the establishment of a VAT some legal provisions in the Act. • A coordinated information Others are administrative such as system for cross-checking Refund Fund and the system weak administration, lack of a information, invoices, of releasing funds based on fool proof audit system and vouchers etc. in the VAT a Bank Guarantee from the verification of invoices, lack of return with information from exporter; co-ordination of information within other sources to detect • Streamlining appeal as well as between revenue under-reporting or fraud; procedures and arrears departments, and corrupt officials collection. are other main reasons. • A sound and effective penalty system.
14.8 Administration In most of these issues, the experience of Sri Lanka’s VAT One of the most important factors administrative system has, in in the inadequate performance of the VAT system in Sri Lanka, are
26 Taxation In Sri Lanka : Current Trends and Perspectives
Introduction15. Customs Duties, Excises and Miscellaneous
TaxesA country’s taxationand system Levies reports have been released (Chairman H.S. Wanasinghe and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M. is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the Agreement (PSFTA), apart from of revenue, Excise duty produced 15.1macro-economic Tarrifs indices such Ceylon’s) tax system consisted Presidential Commission on multilateral trade agreements like 34% of tax revenue in 2015. as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman The Mission statement of the Sri SAFTA as well as the WTO. From debt, fiscal deficit and inflation Stamp Duties followed by Prof. W.D. Lakshman and Lanka Customs is “to enforce the January 2005 there were 5 bands Excise duties if properly as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). customs laws and revenue and which were subsequently reduced administered could therefore be pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of social protection laws while to 4 bands, zero, 7.5%, 15% and utilized to further expand income distribution and as Profit Tax, Excess Profits other reports include the Woods facilitating trade and industry with 25% and in 2015 were simplified government tax revenues without economic stability. Hence Duty, Estate Duty, Capital Commission (1926), Huxham the objective of contributing to the to a three band structure of zero, affecting incentives for savings, periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report national effort and in due 15% and 30%. investment and production. and the tax structure, including Expenditure and Gift Taxes, (1955), Kaldor Report (1960) recognitionand the tax thereof”structure,. including Expenditure and Gift Taxes, However, its ultimate its administrative mechanism etc. levied and abolished from and Cox Report (1986) among its administrative mechanism Frometc. levied a revenue and abolishedpoint of view, from the effectiveness would depend on has been subject to time to time. Some of these others. Inhas respect been subjectof tariffs, to export duties importtime to duties time. brought Some ofin theseRs. 81 several factors like the examination and proposals for important commissions haveexamination been abolished and proposals since 1993for billionimportant or 0.8% commissions of GDP in 2014 identification of excisable items, modification in order to achieve consisted of the Taxation All these stressed the (exceptmodification on scrap in order iron toand achieve a few andconsisted Rs. 132 of billionthe Taxation or 1.2% of an appropriate rate structure, a its basic objectives in relation Commission of 1955 (Chairman importance of developing a otherits basic items) objectives and import in relation duties GDPCommission in 2015 ofwhich 1955 was (Chairman 9% share rational system of classification to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient underto the thegovernment’s current fiscal policies system ofK.R.K. revenue. Menon and Secretary S. and valuation, and last but not and objectives prevalent at the Sittampalam), Taxation Inquiry and simple tax system in order areand used objectives not so prevalent much for atrevenue the Sittampalam), Taxation Inquiry least, a properly organized time. Commission of 1968 (Chairman to achieve its objectives and astime. for protective purposes. They 15.2Commission Excise of 1968 Duties (Chairman effective administrative network. are based on the Harmonized A.G. Ranasinha and Secretary functions. SystemIn this connection of goods classificationa number of A.G. Jegasothy), Presidential Excise Duty is an old levy having andcommissions, the valuation committees is based onand the Taxation Commission of 1990 15.3 Miscellaneous been introduced by the Excise “Brussels Definition of Value” Ordinance No. 8 of 1912 and Taxes and Levies (BDV). recently broadened by the Excise Apart from the taxes and levies (Special Provisions) Act No. 13 of A number of steps have been discussed above in the national, 1.The Functions of1989. a TheyTax are basedSystem partly on a taken to simplify and harmonize provincial and local level, are a specific basis and partly on an ad customs procedure and practices number of other miscellaneous valorem basis. Excise duties suchThe functionsas the widespread of a tax system use of in similar circumstances, and (b) taxescesses), and Value levies Added that constituteTax (VAT) have a large potential for Informationinvolve several Technology aspects. (IT), First, the the vertical equity, i.e., different Sriand Lanka’s excises. taxation Taxation system. is also increased revenue due to the Harmonizedprimary function Commodity of a taxation treatment of persons with different Theyused includeas an instrument such taxes of asdemand the increase of demand for items like Descriptionsystem is to and raise coding revenue system, for the taxable capacity. Thirdly, the Nationmanagement Building to Tax eliminate (NBT), or liquor and cigarettes which is Uniformgovernment Customs for its Declaration public fiscal system is also employed Economicreduce inflationary Service Chargeor deflationary (ESC), generally inelastic and hence (CUSDEC)expenditure and as wellthe ASYCUDAas for local ++ for social purposes such as Bettingtendencies and inGaming the economy. Levy, Share have been subject to frequent automatedauthorities dataand similarprocessing public discouraging certain activities TransactionTaxation reduces Levy, theCellular effect Mobile of the rate increases to generate system.bodies. TheIts efficiency Tariff Commission is therefore which are considered undesirable. Telephonemultiplier and Subscribers so can be Levy, used to government revenue. There is asprimarily early asjudged 1985 byrecommended whether this Excise duties on liquor and Specialdampen Commodityupswings in Levy, a trade Port also considerable scope for simplifyingfunction is andperformed rationalizing adequately the tobacco, the Special Excises on andcycle. Airport Levy (PAL), Stamp enlarging the Special Excises rateand structuresatisfactorily. by reducing The second the luxury and semi-luxury items, the Duty, Telecommunication Levy which are levied on the sale of The size of the multiplier in an numberfunction ofis dutyto reduce bands, inequalities based on Betting and Gaming Levy are andThe Cesssize ofLevy the (SCL).multiplier They in an certain luxury and semi-luxury reducingthrough aintended policy of levels redistribution of examples of such taxes. broughtopen economy in a considerable is amount of income and wealth. The equity items on an ad valorem basis and effectiveof income protection. and wealth. The equity of revenue in1 2014 at Rs. 239 toThe increase tax system the rateis also of dutyused as to principle in taxation implies that The tax system is also used to billion or 2.3% of GDP and in well.increase the level of savings and S+M+1 Thetaxes rationalization should be imposed of the tariffin increase the level of savings and 2015 Rs. 243 billion or 2.2% of capital formation apart from where structureaccordance is howeverwith the abilitycomplicated to pay capital formation apart from GDP. These other taxes Inprotecting 2014 Excise local dutiesindustries brought from in S= marginal propensity to save dueprinciple. to international This has twoagreements protecting local industries from constituted 17% as share of Rs.foreign 256 competition billion or 2.5% through of GDP levies M= marginal propensity to import likedimensions: the Indo-Sri (a) Lankahorizontal Free equity, Trade foreign competition through levies revenue for 2015 as shown in whilesuch asin 2015import it broughtduties (including in Rs. 497 T= marginal rate of taxation Agreementi.e., similar (ISFTA)treatment and of thepersons such as import duties (including Chart 1. billion or 4.4% of GDP. As a share Pakistan-Sri Lanka Free Trade
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Taxation in Sri Lanka:Current Trends and Perspectives
D. D. M. WAIDYASEKERA Table 11 Tariffs, Excise Duties and Miscellaneous Taxes 2010 -2015 (Rs. Million)
Year 2010 2011 2012 2013 2014 2015 Import Duties 64,163 79,811 80,155 83,123 81,108 132,189 Excise Duties 129,864 204,822 223,960 250,700 256,691 497,652 Liquor 36,654 55,286 60,086 66,008 69,100 105,264 Tobacco/Cigarettes 40,675 49,623 53,563 58,567 57,240 80,015 Petroleum 28,038 22,470 28,466 27,131 28,732 45,092 Motor vehicles & others 24,497 77,444 81,845 98,994 101,618 267,282 Miscellaneous Levies PAL/RIDL/SCL/other 66,585 82,260 104,479 108,692 117,375 112,042 License Fees 5,512 6,078 4,254 5,449 6,983 6,929 Stamp Duty/Cess Levy SRL/NBT DL/TL 92,165 85,326 93,898 101,508 114,742 124,683
Note: PAL - Ports and Airports Development Levy RIDL- Regional Infrastructure Development Levy SCL - Special Commodity Levy SRL - Social Responsibility Levy NBT - Nation Building Tax DL - Defence Levy TL - Telecommunications Levy
Source: Central Bank Annual Report 2015.
15.4 Simplification
Such a complex system creates process of this complex system, Simplification however does not difficulties for the revenue a number of taxes were abolished depend on legislative measures administration and leads to such as Debits Tax, Social alone but also on administrative confusion both among investors Responsibility Levy, Regional procedures and regulations. and taxpayers. The simplification Infrastructure Development Levy, While various procedural of this complex system is an Construction Industry Guarantee guidelines have been issued to urgent necessity. At one time, Fund Levy and the BTT at clarify and simplify matters, it has there were 22 taxes and levies at provincial level. However the not been as effective as national level (apart from the one- number is still large and the expected. off taxes in 2015), 20 at provincial system needs further level and 5 at local government simplification. level. As part of the simplification
28 Taxation In Sri Lanka : Current Trends and Perspectives
Introduction16. Revenue Administration
In the final analysis, it is the level iv) Attitude of tax Unregistered taxpayers, stopfiling A country’s taxation system reports have been released (Chairman H.S. Wanasinghe of efficiency of the revenue administrators towards taxpayers, tax evaders and and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M. administration which determines taxpayers and insufficient delinquent taxpayers are however is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the the effectiveness of any revenue public education; the key factors in judging the macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on system. In the current context, effectiveness of a tax as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman with the declining tax ratio and the v) Inadequate coordination administration. debt, fiscal deficit and inflation Stamp Duties followed by Prof. W.D. Lakshman and urgent need to increase between different tax as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). government revenue, the administering departments pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of effectiveness of the tax such as between Inland 16.2 Compliance income distribution and as Profit Tax, Excess Profits other reports include the Woods administration, its structures, Revenue, Customs, Excise economic stability. Hence Duty, Estate Duty, Capital VoluntaryCommission compliance (1926), Huxhamis the goal systems and processes need and other revenue periodically, the fiscal policy Gains Tax, Land Tax, Wealth, andReport cornerstone (1929), Downs of a tax Report thorough examination, its authorities including and the tax structure, including Expenditure and Gift Taxes, administration(1955), Kaldor andReport the (1960)most weaknesses identified and provincial and local its administrative mechanism etc. levied and abolished from economicaland Cox Report way of(1986) collecting among tax. measures taken to rectify these authorities; has been subject to time to time. Some of these Itothers. is more so under a system of weaknesses and make the tax examination and proposals for important commissions self-assessment. It may be said administrative system an efficient vi) Shortcomings in the modification in order to achieve consisted of the Taxation thatAll thesethe main stressed tasks theof tax and effective instrument of tax operation of tax its basic objectives in relation Commission of 1955 (Chairman administrationimportance of aredeveloping facilitating a collection. administration including to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient audits, inspections, default compliance, monitoring and objectives prevalent at the Sittampalam), Taxation Inquiry and simple tax system in order The problems and gaps in taxes, combating tax compliance and dealing with non- time. Commission of 1968 (Chairman to achieve its objectives and revenue administration relate both evasion, etc. compliance. The IRD has taken a A.G. Ranasinha and Secretary functions. to the level of policy formulation number of measures to improve In this connection a number of A.G. Jegasothy), Presidential as well as at the implementation compliance such as providing commissions, committees and 16.1Taxation Number Commission of of 1990 level. At the policy formulation benefits to individual taxpayers in level, the gaps relate to (i) lack of Taxpayers and Files the form of awarding Privilege effective institutional structures; Cards (Gold and Silver), grant of According to the Inland Revenue tax concessions on importation of (ii) absence of adequate and Department Performance Report 1.Theeffective processes Functions for public of a Tax System motor vehicles, discounts on 2014, the total number of early tax payments among others. participation in policy formulation; taxpayers as at 31.12.2014 was (iii) inadequacy of monitoring and However, the return compliance The functions of a tax system 625,376in similar comprising circumstances, 3% of and the (b) cesses), Value Added Tax (VAT) evaluation of policy for income tax on due date involve several aspects. First, the population.vertical equity, The i.e., total different number of and excises. Taxation is also implementation; (iv) lack of appears inadequate as shown in primary function of a taxation corporatetreatment filesof persons was 39,535 with differentthough used as an instrument of demand sufficiently trained personnel for Table 13 below. system is to raise revenue for the thetaxable number capacity. of functioning Thirdly, the management to eliminate or tax policy analysis and research; government for its public companiesfiscal system under is also the employedCompanies Nevertheless,reduce inflationary it should or deflationary also be and (v) unification of collection expenditure as well as for local Actfor socialNo. 7 ofpurposes 2007 was such at asOctober notedtendencies that the in thereturn economy. forms are techniques. At the implementation authorities and similar public 2011,discouraging 48,658 includingcertain activities listed complicatedTaxation reduces running the into effect several of the level, the weaknesses include: bodies. Its efficiency is therefore companieswhich are considered in the Stock undesirable. pages.multiplier Taxpayers and so can find be it useddifficult to primarily judged by whether this ExchangeExcise duties 296. on liquor and dampen upswings in a trade i) The relatively low number of to complete them and often have function is performed adequately tobacco, the Special Excises on cycle. taxpayers and level of to take recourse to accountants and satisfactorily. The second Theluxury total and number semi-luxury of income items, the compliance; or tax practitioners thereby The size of the multiplier in an function is to reduce inequalities taxpayersBetting and was Gaming 559,360 Levy are increasing costs and leading to through a policy of redistribution comprisingexamples of of such 148,720 taxes. individuals open economy is ii) Improvement of work personalopen economy complications. is Tax of income and wealth. The equity and PAYE employees 354,758. systems and methods; returns should1 be re-designed and principle in taxation implies that VATThe registeredtax system persons is also usedamounted to made simplerS+M+1 and preferably increase the level of savings and S+M+1 taxes should be imposed in to 15,530, NBT 22,381, limited to a single sheet. iii) Insufficiently trainedpersonnel where accordance with the ability to pay Employerscapital formation registered apart under from the and modernizing of tax S= marginal propensity to save principle. This has two PAYEprotecting scheme local 12,104 industries and from administration; M= marginal propensity to import dimensions: (a) horizontal equity, Economicforeign competition Service Charge through 3515. levies T= marginal rate of taxation i.e., similar treatment of persons Thesuch total as importnumber duties of Betting (including and Gaming files was only 1072.
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D. D. M. WAIDYASEKERATable 12 Number of Taxpayers and Tax Files as at 31.12. 2014
Income Tax
Corporate
Resident Companies 38,502
Non Resident Companies 969
State Corporations, Statutory Boards and State Owned Institutions 64 39,535
Non Corporate
Individuals 148,720
Partnerships 14,515
Bodies of persons etc. 1,832
Employees paying income tax under Pay-As-You-Earn (PAYE) Scheme
(as at 31.03.2014)* 354,758 519,825
Total Income Taxpayers 559,360
Other Taxpayers
Persons and Partnerships registered for Economic Service Charge (ESC) 3,515
Persons registered for Value Added Tax (VAT) 15,330
Persons registered for Value Added Tax on Financial Services 176
Persons registered for Optional VAT 74
Persons registered for Nation Building Tax (NBT) 22,381
Persons registered for Nation Building Tax on Financial Services 175
Betting Levy Files 1067
Gaming Levy Files 5
Total Other Taxpayers 42,723
Employers registered under PAYE Scheme 12,104
Withholding Tax on Interest (withholding Agents) 2,628
Withholding Tax on Specified fees (Regular Monthly Schedules Senders) 84
Construction Industry Guarantee Fund Levy 304
Stamp Duty (Regular Monthly Schedules Senders) 8,173 23,293
Total Number of Tax Files/Taxpayers as at 31.12.2014 625,376
*Include 45,778 Government employees but does not include employees in the incomplete declarations furnished by employers.
Source: IRD Performance Report 2014.
30 Taxation In Sri Lanka : Current Trends and Perspectives
16.4 Default Taxes IntroductionTable 13 Tax Return Compliance 2012 to 2014 Total taxes in default as at 31.12.2014 stood at Rs. 128 A country’sTax taxation system Yearreports Sectorhave been Compliance released on (Chairman H.S. Wanasinghe A country’s taxation system reports have been released billion,(Chairman which H.S. is relativelyWanasinghe high. and fiscal policy underlying it, from time to time sinceDue Date1915 % and Secretary D.D.M. and fiscal policy underlying it, from time to time since 1915 Thisand includesSecretary some D.D.M. taxes which is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the is a majorIncome determinant Tax of 201 other2/2013 whenCorporate Sri Lanka’s (then 56% haveWaidyasekera) been repealed, and theabolished or macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on Non-Corporate 41% uncollectible like Debit Tax, as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman as economic growth, public only of Import, Excise and TurnoverTaxation Tax,of 2009 GST, (Chairman Wealth Tax, debt, fiscal deficit and inflation2013/2014 StampCorporate Duties followed 53% by Prof. W.D. Lakshman and debt, fiscal deficit and inflation Stamp Duties followed by GiftProf. Tax W.D. etc. Lakshman Steps should and be as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando). as well as attaining a proper Non-CorporateExport Duties, Income 42% Tax and takenSecretary to write P.D.K. off Fernando).these obsolete pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of PAYE 2011/12 52% taxes from the books and income distribution and as Profit Tax, Excess Profits other reports include the Woods income distribution and as Profit Tax, Excess Profits effectiveother reports steps include taken tothe collect Woods economic stability. Hence2012/13 Duty, Estate Duty, Capital53% Commission (1926), Huxham economic stability. Hence Duty, Estate Duty, Capital theCommission balance in (1926), a planned Huxham and periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report periodically, the fiscal policy2013/14 Gains Tax, Land Tax,55% Wealth, speedyReport manner,(1929), Downs as provided Report in and the tax structure, including Expenditure and Gift Taxes, (1955), Kaldor Report (1960) and the taxVAT structure, including2012 Expenditure and Gift89% Taxes, the Default Taxes (Special its administrative mechanism etc. levied and abolished from and Cox Report (1986) among its administrative mechanism etc. levied and abolished from Provisions)and Cox Report Act No. (1986) 16 of among 2010 has been subject to 2013 time to time. Some 78%of these others. has been subject to time to time. Some of these whichothers. stipulates that arrears examination and proposals for important commissions examination and proposals for2014 important commissions49% should be maintained at less than modification in order to achieve consisted of the Taxation All these stressed the modificationESC in order to achieve2012 consisted of the Taxation80% 3%All ofthese taxes stressed levied inthe the its basic objectives in relation Commission of 1955 (Chairman importance of developing a 2013 93% immediately preceding year. to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient and objectives prevalent at the2014 Sittampalam), Taxation71% Inquiry and simple tax system in order time. NBT 2012 Commission of 196879% (Chairman 16.5to achieve Appeals its objectives and A.G. Ranasinha and Secretary functions. 2013 77% The speedy and effective In this connection a number of A.G. Jegasothy), Presidential A.G. Jegasothy), Presidential settlement of appeals is an commissions, committees and2014 Taxation Commission84% of 1990 Taxation Commission of 1990 important element in improving Source: Inland Revenue Department, Performance Report 2014. the administrative system. There are a number of problems in 16.3 Audits and Investigations appellate procedure which is 1.The Functions of a Tax System lopsided and heavily weighted against the taxpayer, largely due Under the existing self- However, considering the extent to the absence of a vociferous assessmentThe functions system of a tax prevalent, system ofin under-reportingsimilar circumstances, of profits and and (b) cesses), Value Added Tax (VAT) taxpaying public. The failure to 96%involve of taxseveral collection aspects. is through First, the income,vertical equity,particularly i.e., bydifferent large and excises. Taxation is also follow proper procedure has often self-assessmentprimary function andof a onlytaxation 4% by companies,treatment of traders persons and with different used as an instrument of demand led to protracted delay in the waysystem of officialis to raise assessment. revenue for the businesses,taxable capacity. professionals Thirdly, theand management to eliminate or settlement of appeals. In this Nevertheless,government for auditing its public and others,fiscal system whether is thealso extent employed and reduce inflationary or deflationary respect, the earlier Board of examinationexpenditure asof returnswell as andfor local scopefor social of auditing,purposes investigation such as tendencies in the economy. Review has been replaced by the accountsauthorities is andan integralsimilar publicpart of anddiscouraging additional certaintax collected activities is Taxation reduces the effect of the independent Tax Appeals assessmentbodies. Its efficiencyprocedure. is Thetherefore audit sufficientwhich are is considered debatable. undesirable. For multiplier and so can be used to Commission through the Tax functionprimarily shouldjudged be by evaluatedwhether this in instance,Excise duties as at on October liquor and2011 the dampen upswings in a trade Appeals Commission Act No. 23 termsfunction of isthe performed quantity andadequately quality totaltobacco, number the ofSpecial functioning Excises on cycle. of 2011 which covers Customs ofand audits satisfactorily. carried out The and second the companiesluxury and wassemi-luxury 48,658 whileitems, the the appeals as well. However, there revenuefunction “voluntarily”is to reduce paid.inequalities Audits numberBetting andof resident Gaming company Levy are files The size of the multiplier in an are a number of issues which has havethrough been a policyundertaken of redistribution on asexamples at 31.12.2014 of such was taxes. 38,502. In open economy is cropped up including the taxpayersof income particularlyand wealth. in The the equityLarge 2014 the total additional income 1 necessity to1 make a 25% deposit Taxpayerprinciple inUnit taxation (LTU) inimplies terms that of taxThe assessed tax system and is agreed also used in the to of the amountS+M+1 of tax and penalty businesstaxes should activity, be imposed entity type in and Corporateincrease the Large level Taxpayer of savings Unit and inwhere dispute in order to validate an businessaccordance size. with It thehas ability been tofound pay (LTU)capital after formation audit was apart Rs. from 10 billion appeal,S= marginal a provision propensity which to has save thatprinciple. the most This productive has two use of orprotecting about 8% local of totalindustries additional from tax drawnM= marginal severe propensity criticism. to import investigationdimensions: (a)resources horizontal has equity, paid assessedforeign competition and agreed through for the leviesyear. T= marginal rate of taxation dividendsi.e., similar in treatmentrespect of of the persons largest such as import duties (including taxpayers.
311 Working Paper No. 25
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D. D. M. WAIDYASEKERA ------6,939 02,797,960 Collectible - - - 167,349,807 - - - - - ,597 9,758,633,360 (Rs)(Rs) Penalty 63,418 7 246,716 2,388,383 1,194,190 9,732,724 3,773,302 12,7 ,278,517 - - to Tax Collectible 1,204 38,614 147,171 473,924 ,591,210 1,1 6,561,055 5,718,169 592,8 97,671 34,274,169 42,931,386 627,1 11 268,245,948 1,271,691,854 lty Related 25,770,072,800 4,780,640,721 4,032,310,998 - - 45 71,338,247,212 17 2,409 851,542 1,068,311 1,864,758 404,387,151 48,386,379,832 33,389,149,188 8,513,105,637 3,864,619,005 Defaulted Taxes Ex- Taxes Defaulted Pena cluding Penalty (Rs) (Rs) Taxes Disputed - 2,215,581,368 1,204 154,110 473,924 6,561,055 22,443,029 3,773,302 283,067,976 ,253,768,193 3,141,589,723 4,335,790,517 2,210,143,380 2,781,838,.097 931,446,343 1,271,691,854 2,61 - ax in(Rs) Penalty 2,409 851,542 2,111,474 1,068,311 9,732,724 22,443,029 406,775,534 269,440,138 945,024,420 1,038,025,892 945,024,420 1,038,025,892 Default (Rs) Gross T Gross 1,390,837,523 635,829,057 1,356,563,354 2,727,620,407 1,920,389,170 1,614,856,989 1,217 2,61 8,593,768,538 4,842,592,562 8,550,240,806 4,830,389,132 43,527,732 12,203,430 2,215,581,368 1,538,591,036 627,138,614 1,538,591,036 44,497,939,944 29,802,383,798 39,717,299,223 56,899,485,469 37 128,979,462,342 81,096,880,572 111,700,944,7 IRD Performance Report 2014. Table 14 Table 2014 Taxes of Default Analysis Source: Type Tax of Income Tax interest) on (WHT Tax Income Tax Added Value Surcharge on Income Tax on Income Surcharge Stamp Duty Social Responsibility Levy Value Added Tax Added Value (Financial Services) Economic Service ChargeNation Building Tax 117,628,614 7, Total Debit Tax Turnover Tax Goods & Services Tax Goods & Services National Security Levy Save the Nation Contribution Wealth Tax Compounding Penalty Compounding Gift Tax
32 Taxation In Sri Lanka : Current Trends and Perspectives
16.6 Coordination 16.7 Cost of vehicle running charts, pay Introduction sheets, annual board of survey Introductionbetween Revenue Admninistration reports and bank reconciliation Departments apart from other actions such as A country’s taxation system Asreports per thehave Performance been released Report of recovering(Chairman amountsH.S. Wanasinghe due to and fiscal policy underlying it, thefrom IRD time for to 2014, time thesince total 1915 dishonouredand Secretary Cheques,, D.D.M. refunds One of the principal defects of the is a major determinant of other expenditurewhen Sri Lanka’s of the (thenDepartment andWaidyasekera) checking imprest and the accounts. tax administration system in Sri macro-economic indices such wasCeylon’s) Rs. 3,087 tax systemmillion (includesconsisted Presidential Commission on Lanka is the lack of coordination as economic growth, public capitalonly of expenditureImport, Excise for RAMIS)and TheTaxation Economic of 2009 Research (Chairman and between the revenue debt, fiscal deficit and inflation andStamp the Dutiesrevenue followed collected by was PlanningProf. W.D. Unit Lakshman carries andout different departments, and on the policy as well as attaining a proper Rs.Export 514 Duties,billion. InIncome 2013 theTax and typesSecretary of researches P.D.K. Fernando). by analyzing side the present fractured and pattern of resource allocation, expenditurea whole lot wasof other Rs. taxes1,876 suchmillion. dataApart received from these, from a variousnumber of isolated character of the activity income distribution and Theas Profit productivity Tax, Excess ratio isProfits 166:1 i.e., sourcesother reports such includeas the Centralthe Woods of policy formulation. As regards economic stability. Hence theDuty, cost Estate of collection Duty, Capital for Rs. 100 Bank,Commission Census (1926), and Statistics Huxham these, the previous Tax periodically, the fiscal policy wasGains 60 Tax, cents Land or 0.6%Tax, Wealth,which DepartmentReport (1929), etc. Downs The Training Report Commissions have recommended and the tax structure, including couldExpenditure be considered and Gift asTaxes, Branch(1955), Kaldorvital for Report training (1960) of tax the constitution of a Board of its administrative mechanism reasonable.etc. levied and abolished from officersand Cox to Report perform (1986) their amongduties Revenue or Revenue Authority has been subject to time to time. Some of these effectively,others. while organizing and the creation of a permanent examination and proposals for important commissions awareness programs for National Taxation Commission as 16.8 Measures Taken modification in order to achieve consisted of the Taxation taxpayers,All these stressed also provided the a remedy. its basic objectives in relation forCommission Improvement of 1955 (Chairman overseasimportance training of developing for tax officers,a to the government’s policies K.R.K. Menon and Secretary S. participationrational, consistent, in overseas efficient In respect of the former, the lack and objectives prevalent at the Sittampalam), Taxation Inquiry seminarsand simple and tax workshops system in toorder learn of coordination between the time. ConsideringCommission theof 1968weaknesses (Chairman in theto achieve best practices its objectives in other and Inland Revenue, Customs, Excise revenueA.G. Ranasinha administration and Secretary and the countriesfunctions. in order to maintain a and provincial and local revenue In this connection a number of necessityA.G. Jegasothy), to remedy Presidential these high level of professionalism as authorities as well as the Fiscal commissions, committees and weaknessesTaxation Commission and improve of 1990 the tax administrators. Locally, it Policy Division at the Treasury, efficiency of revenue conducted several programs to affects policy formulation, administration, a number of provide specialized knowledge on information exchange, and the measures have been taken at all application of tax statutes and monitoring of the implementation revenue departments including other relevant technical areas 1.Theof taxes. They Functions all tend to operate of a Tax System Inland Revenue, Customs and apart from in-house training, in isolation. In order to remedy Excise. particularly in taxation and this, the establishment of a Board The functions of a tax system in similar circumstances, and (b) cesses),accountancy. Value Added Tax (VAT) of Revenue or Revenue Authority involve several aspects. First, the Invertical Inland equity, Revenue, i.e., the different Tax and excises. Taxation is also vested with the overall authority primary function of a taxation Servicetreatment Unit of establishedpersons with different usedIn 2011 as aan Committee instrument for of demand for revenue administration has system is to raise revenue for the facilitatedtaxable capacity. taxpayers Thirdly, and the the managementInterpretation toof eliminateTax Laws orwas been recommended in order to government for its public publicfiscal systemto access is alsothe employed reduceappointed inflationary which is orresponsible deflationary for coordinate and improve the expenditure as well as for local Department’sfor social purposes service such as tendenciesthe issuance in ofthe interpretations, economy. overall tax administration system authorities and similar public conveniently.discouraging Incertain 2014 activitiesthe Unit Taxationclarifications, reduces guidelines the effect etc. of on the of the country. Such a Revenue bodies. Its efficiency is therefore issuedwhich are6,054 considered TIN certificates undesirable. and multiplierthe provisions and so of canthe bevarious used Actsto Authority is not expected to be a primarily judged by whether this 7908Excise temporary duties on VAT liquor applications and dampenadministered upswings by the in Department.a trade tax collector but to reorganize the function is performed adequately fortobacco, opening the of Special new files Excises as well on cycle.The objective of this is to ensure administration of the three and satisfactorily. The second asluxury 321 andclearance semi-luxury certificates items, for the uniformity with regard to departments, eliminate The size of the multiplier in an function is to reduce inequalities non-taxpayers.Betting and Gaming Consultancy Levy are Theinterpretations size of the and multiplier procedures in an in overlapping functions and effect through a policy of redistribution servicesexamples were of suchmade taxes. to the public opentax legislation economy andis administration. coordinationof income and where wealth. it is Thepossible, equity of income and wealth. The equity through the “One Stop Service A total of 731 interpretations have so as to cater for less The tax system is also used to principle in taxation implies that Centre”The tax while system 14 awarenessis also used to been given in 2014. bureaucracy, expedition and S+M+1 taxes should be imposed in programsincrease thewere level organized of savings during and increased collection of legitimate where accordance with the ability to pay thecapital year. formation apart from Internationally, in order to revenue. S= marginal propensity to save principle. This has two protecting local industries from eliminate or mitigate the M= marginal propensity to import dimensions: (a) horizontal equity, Theforeign Internal competition Audit Branch through levies incidence of juridical double T= marginal rate of taxation i.e., similar treatment of persons examinessuch as import all payments, duties (including daily taxation and fiscal evasion in
331 Working Paper No. 25
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No. 25 Taxation in Sri Lanka:Currentinternational Trends and Perspectives transactions, Sri At Inland Revenue, the However, it may also be stated
LankaD. D. M. WAIDYASEKERA has entered into a number automation process involves the that in many instances the of double taxation agreements. implementation of the Revenue expectation of greater The avoidance of double taxation Administration and Management effectiveness from is important for attracting foreign Information System (RAMIS) computerization has not investments, obtaining expertise, aimed at further simplifying the materialized. Computerization is modern technology, employment tax administration and tax for a necessary but not a sufficient opportunities etc. Sri Lanka taxpayers. RAMIS is also condition to improve the currently has 42 such Double Tax envisioned to support in effectiveness of tax Treaties and one multilateral increasing the revenue collection administration. Whilst computer treaty (SAARC). by enabling IRD to reach out to technology helps perform routine taxpayers in a more efficient and tasks more rapidly, there is no Finally, the ongoing effective way. It is expected to guarantee that it would improvements in tax compliance meet the requirement of automatically increase revenue administration include the infrastructure facilities such as collections substantially. automation of revenue agencies, end user hardware, computers, Computer technology facilitates introducing the Single Window printers and scanners that are and improves tax administration System (SWS) at Sri Lanka necessary to perform the but unless accompanied by Customs linking all stakeholders activities of the Department. effective enforcement activities, and incorporating into the may help in increasing revenue ASYCUDA World system, RAMIS is expected to widen the only marginally. Successful automating of the activities of the tax net and improve compliance, computerization must be Ministry of Finance under the enhancing the efficiency of the accompanied by a fundamental Integrated Treasury Management revenue collection process, reorganization of both systems System (ITMIS), introducing the increasing the quality of the work and procedures and cannot be zero based budgeting system by environment to generate higher used by itself to side-step much the Finance Ministry and setting productivity and provide better needed reform. up of Budget Implementation and service to taxpayers with a view Monitoring Unit (BIMU) to ensure to increasing voluntary close monitoring of expenditure compliance. It is expected to be programmes. completed by end 2016.
17. Concluding Remarks
Sri Lanka’s fiscal and taxation decline and measures necessary administration, its weaknesses system is at a critical juncture. to reverse the trend and make the and measures necessary to With the end of the 30 year old tax system into an effective strengthen the administration in insurgency, Sri Lanka has entered instrument of economic growth. order to make it an effective a new era of growth, reconciliation Relevant issues discussed mechanism of collecting much and reconstruction. Development include the direct and indirect needed revenue. challenges are many both in the taxes, the pros and cons of the international and national Value Added Tax system and its contexts. problems, tax evasion, capital gains taxation, elasticity and The current taxation and fiscal buoyancy of the fiscal system, policy issues discussed are of the tariff structure, simplification crucial importance especially the of the tax system and last but not recent declining growth in tax least, the problems of the tax revenue ratio, the reasons for the
34 Taxation In Sri Lanka : Current Trends and Perspectives
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•• Sri Sri Lanka: Lanka: State State of of the the Economy Economy 1998 1998 (October (October 1998) 1998) •• A A Strategy Strategy for for Nature Nature Tourism Tourism Management ManagementIPS in in PublicationsSri Sri Lanka Lanka (November (November 1998) 1998) •• Effective Effective Local Local Governance Governance - -The The Foundation Foundation for for a a Functioning Functioning Democracy Democracy in in Sri Sri Lanka Lanka (May (May 1999) 1999) • Sri Lanka:•• Labour Labour State LegislationofLegislation the Economy and and Female Female1998 (October Employment Employment 1998) in in Sri Sri Lanka’s Lanka’s Manufacturing Manufacturing Sector Sector (July (July 1999) 1999) • A Strategy•• Monitoring Monitoring for Nature the the Tourism 20/20 20/20 Compact Compact Management on on Budget Budget in Sri and and Lanka Aid Aid Restructuring(November Restructuring 1998) in in Sri Sri Lanka Lanka (August (August 1999) 1999) • Effective•• The TheLocal Impact Impact Governance of of Credit Credit - The on on FoundationSmall Small & & Medium Medium for a Functioning - -Scale Scale Industries Industries Democracy (SMIs) (SMIs) in Sri in in SriLanka Sri Lankas Lankas (May (September (September1999) 1999) 1999) • Labour•• SriLegislation Sri Lanka: Lanka: Stateand State Female of of the the EmploymentEconomy Economy 1999 1999 in Sri(October (October Lanka’s 1999) 1999)Manufacturing Sector (July 1999) • Monitoring•• How How the Successful Successful20/20 Compact is is Samurdhi’s Samurdhi’s on Budget Savings andSavings Aid and Restructuringand Credit Credit Programme Programme in Sri Lanka in in (August Reaching Reaching 1999) the the Poor Poor in in Sri Sri Lanka? Lanka? (November (November 1999) 1999) • The •Impact• The The Integratedof Integrated Credit on Rural Rural Small Development Development & Medium - Programme ScaleProgramme Industries in in Sri Sri (SMIs) Lanka: Lanka: in Lessons LessonsSri Lankas of of Experience Experience(September for for1999) Poverty Poverty Reduction Reduction (December (December • Sri Lanka:1999)1999) State of the Economy 1999 (October 1999) • How• •Successful The The Economic Economic is Samurdhi’s Cost Cost of of the Savingsthe War War in andin Sri Sri Credit Lanka Lanka Programme (January (January 2000) 2000) in Reaching the Poor in Sri Lanka? 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