SME tax reductions will boost growth

By Lalin FERNANDOPULLE

Tax reduction for SMEs and tax exemptions for targeted sectors are most welcome, said Tax Consultant and Partner Gajma and Co, N.R. Gajendran. “Yet it is mind boggling how blanket exemptions can be given for strategic projects for a long period of time - 25 years, which itself, may exceed the life span of some of these projects. This has challenged revenue,” he said.

From a tax policy perspective, we have consciously reduced the rates of tax, focused on SMEs and strategic projects. These decisions do not definitely boost revenue. Nevertheless, tax reductions for small and medium scale businesses and targeted sectors will help boost growth of these sectors.

During the past few months, there was a slack in general trade and business activity. This itself will have an impact on revenue collection. The tax policy has certainly been business-friendly and thlis may have had a negative effect on tax revenue. This does not mean that there has to be a change or reversal in the tax policy.

He said that indirect tax is a consumption tax which contributes significantly towards tax revenue. A greater proportion of the tax revenue comes from indirect tax. A word of caution on indirect tax and revenue is the severity of the impact it could have on the poorer segment of the people and too much focus on it, impedes their purchasing power and consequently their standard of living and quality of life. The State should not be hell-bent to boost its revenue from indirect tax, as macro economic stability with social justice could only be achieved, if greater proportion of the tax revenue comes from direct tax.

In the first half of the year, there seemed to be a drop in revenue and non-attainment of targeted goals from indirect tax. This has thrown a huge challenge to the revenue administration and to the State. Here again, there are reasons we have to reconcile with. The indirect tax rate had been brought down and one analysis is that with the tax rate going down, indirect tax revenue should have grown.

This may not be so, particularly because indirect tax is a reflection on the cost of living. The cost of living has increased particularly for the people living in the city and urban areas.

The strategy in the short term should not be to enhance indirect tax but allow businesses to function and muddle through the difficult times and the State should focus its attention on management of expenditure. Consumer psychology will also play a huge role as they are affected by the rupee depreciation. Consequently, the tax administration should not chase after business entities to collect taxes, particularly indirect tax.

Regarding tax evasion, he said that it is not a new problem. It may even be older than human civilization. Evasion arises for more than one reason. The lower segment of the society evades taxes purely on the question of affordability and human need. The higher segment of the society evades taxes which are exorbitant and unreasonable. There is another segment which evades tax as it has become a convenient practice.

The saddest part of tax evasion is where politicians openly evade taxes and where because of excessive harassment, retroactive actions, unfair, unjust and unreasonable decisions by revenue administration, people are pushed out of the tax net either fully or partially.

Even the tax evaders will go through a cost benefit and a risk analysis in evading taxes.

The benefit of course is obvious. The cost of tax evasion is the financial handouts that will have to be incurred. Risk analysis will deal with two issues, one being the extent of probability of being detected and the other, severity of punishment, if detected. If these two factors are manageable, then tax evasion will be rampant, which may be the case in Sri Lanka.

No consorted effort is being made to rope in tax evaders and make them compliant. This is not plausible in Sri Lanka in the contemporary environment as the big and mighty of the country's personalities may be the biggest offenders. Frankly, the evaders seem to be amused as it is beyond their logic to pay taxes and they poke fun at the compliant taxpayers who continuously go through rigorous query and or harassment at the hands of the tax administration.

It is the responsibility of the tax administration to evolve a taxpayer-friendly administration whereby they systematically and professionally rope in the non-compliant taxpayers and consciously ease the burden of the compliant taxpayers.