Tax experts urge new Govt:

Practise good governance, not reckless extravagance

by Lalin Fernandopulle

Tax experts said that adherence to principles of good governance will save large amounts of public money which the previous regime spent extravagantly on non-lucrative projects, foreign tours, tamashas and maintaining jumbo cabinets and loss-making State entities.

Senior tax consultant and Partner Gajma and Company, N.R. Gajendran said the new government should soon settle down to work and catch up on time to avert revenue shortfalls and expenditure over-runs.

Democratic principles, mutual trust, respect and recognising the rights of people and communities will boost the goodwill and commitment of people which will trickle down to productive outcomes and generate more revenue to the country.

This is a transitional period where the country is moving from authoritarian rule to consensual governance which respects the freedom of everyone. There is no self-censorship on the media which could act independently and express views freely, Gajendran said.

The 2015 Budget of the Rajapaksa regime was worked out in a different environment where funds were borrowed at high interest rates from friendly countries adding to the debt burden of the country. The mini budget presented this year benefited the tax payers with VAT reduction.

Gajendran said there should be structural reforms to enhance the revenue base and improve the mix of revenue to favour direct taxes rather than indirect taxes which affects the poorer segment of society whom the government pledged to look after.

The government should focus on increasing revenue from income tax. He said there has to be a system where every person has to report his or her income to the Inland Revenue Department. The Government should find more revenue lines within the VAT, NBT, Excise Duty and income tax.

Steps should be taken in the long-term to widen the tax net and enhance revenue to the government coffers.

The proper implementation of the Revenue Administration Management Information System (RAMIS) to improve the efficiency of revenue management of the Inland Revenue Department will help enhance the tax base, Gajendran said.

Tax experts said that measures should be taken to increase the tax to GDP ratio which is currently around 12 percent to around 20 percent in line with many peer countries in the region such as Malaysia, Thailand and Vietnam.

Sri Lanka’s tax to GDP ratio is low compared to the middle income country benchmark of 25 percent and even lower than the low-income country benchmark of 18 percent.

Gajendran said the ratio is low in Sri Lanka because we have rationalised taxes.

Today, we do not have wealth tax, estate duty tax and gift tax. He said financial discipline of State-owned enterprises is crucial to boost government revenue.

There should also be an Inland Expenditure Department to be accountable for the expenditure in the country which will help cut down on unnecessary expenditure that could be used on public services.

Experts said Sri Lanka should take a cue from Singapore which provides S$ 2 in benefits for every dollar of taxes paid, as an incentive to widen the tax net. They said we need to take cognisance of a looming global crisis with the sharp slum in the Chinese stock market which has triggered panic among global investors. Sri Lanka will not be adversely affected due to its negligible exposure to the global market.

Research Economist, Institute of Policy Studies, Anushka Wijesinha said, for years a combination of weaknesses in tax administration such as failure to expand the tax base, a host of ever-expanding exemptions and mis-targeted fiscal incentives, frequently changing and complicated tax structure have contributed to insufficient revenue collection.

He said the Presidential Commission on Taxation proposed comprehensive recommendations on reforms. They were not ‘pie in the sky’ type reforms, but rather, anchored to political and administrative realities. The new government should implement the recommendations which are still relevant or consider reconstituting the Commission and updating the report. Improvements to tax collection by gearing the tax collection authorities to the realities of a new economy will have a long-term positive impact. Second generation tax collection methods are yet being used in a third generation economy.

“Tax collection is difficult in a large service sector than in a manufacturing economy. We have granted generous tax concessions too long without knowing the cost to the exchequer. We need to publish a ‘Statement of Foregone Revenue’, also known as a ‘Tax Expenditure Statement’ to keep track of the tax concessions and exemptions granted. We need to move to new forms of fiscal incentives from the blanket tax holidays of the past,” Wijesinha said.

He said the recent Interim Budget was contentious with the imposition of a range of ‘one-off taxes’ and taxes aimed at particular sectors and types of firms. “We have not embarked on a concerted tax reforms that transcends immediate political and fiscal concerns.”

Wijesinha said Sri Lanka’s tax performance is worrying. The country’s GDP has grown without a concomitant rise in tax collection. The tax system has not kept pace with changes in the economy. It has not evolved with the changes in composition (rising services sector), emerging business models and sources of income and rising informal work.

Unplanned and ad hoc revenue measures and long exemption lists continue to be key features of the tax system that is long overdue for streamlining. A complicated system makes collection harder and makes compliance trickier to enforce.

He said there are approximately half a million income tax payers in the country of which direct tax collection from income and profits is around 25 percent. The rest is from indirect taxes on consumption such as VAT which hurts the poor.

The proportion of direct tax in Malaysia is over 60 percent, in India over 50 percent, Pakistan around 40 percent and Thailand 50 percent. Relying on one-off and ad hoc taxes such as the the recent Super Gains Tax is not the best approach to boost revenue, Wijesinha said.