A new Income Tax code for Sri Lanka

By P. Guruge

[Continued from last week]

It may be appropriate to consider all expenses deductible according to the accepted accounting practices including (IFRS), subject to expenses not incurred in the production of income.

Depreciation allowances may be decided on the basis of economic depreciation. Different calculation steps such as 'statutory income', 'assessable income' and 'taxable income' may be combined and from the gross income the taxable income should be calculated directly. Whatever system is adopted it should be applicable to individuals, companies and all other entities in the same manner.

Sources of income. It may be necessary to delete certain unproductive sources of income such as Net Annual Value (NAV), occupier's income and NGOO receipts.

Exemptions on certain sources of income. All exemptions incorporated into the current Inland Revenue Act may be removed from the new income tax code.It may be necessary to combine the Strategic Development Act and the BOI Law and to entrust the matter of income tax exemptions under such an arrangement. The Inland Revenue Dept. (IRD) should not be burdened with the determining of any income tax exemptions and allow the officers of the IRD to deal with the imposition and the collection of income tax under the new tax code.

The mechanism of granting any tax exemption may be specified in the specific legal provisions to be enacted under the above mentioned new arrangement.

Tax exemption with progression

If any exemption is to be retained under the new income tax code for individuals then the system of 'exemption with progression' may be applied to maintain the progressiveness of the tax system.

Under this method the tax liability will be calculated using progressive tax rates on the combined income including the tax exempt income and tax credit will be given on the exempt income using the lower tax rates.

The Economic Services Charge (ESC) and a system of the 'minimum tax'.

Currently, the ESC is the minimum income tax in relation to trade, business, profession or vocation. It may be used as a method of arriving at the minimum income tax applicable to all sources of income with the necessary changes of the ESC system, which will produce a mechanism to charge 'minimum tax' from every chargeable person.

Business done through the internet. This is a new area which is expanding very quickly. At present, we don’t have a method of taxing such transactions. Under the new tax code this area should also be considered.

Self-assessment system and the tax bonus. Our self-assessment system is over four decades old. But yet the majority of people chargeable with income tax do not comply with this system of payment.

Under the new tax code this operation should be re-considered. Although the quarterly tax liability of a particular year should be settled in four installments as specified by law, it is permitted to make an estimated payment based on the previous year’s liability and pay any balance before September 30, the following year.

It is necessary to fix the payments based on the current year’s income in four installments.The default penalty should be enhanced and effective provisions to take legal action for non-compliance may be included. The current system of allowing 10% credit for early payments (tax bonus) should be abolished, since if creates a revenue loss to the Treasury.

Tax Management Act

It may be appropriate to enact a Tax Management Act (TMA) for the efficient management of taxes administered by the Commissioner General of Inland Revenue (CGIR).

Currently, each statute contains separate provisions for the management of such tax. There are differences in the relevant provisions and very often it becomes unmanageable.

The relevant tax codes may only deal with the imposition of the relevant tax. All management aspects may be included in the TMA for all the taxes administered by the CGIR. This will help to increase the efficiency and productivity in the area of tax collection, recovery of default taxes and the implementation of a comprehensive withholding tax (WHTT) system.

There may be a lot of other areas not discussed here.

This is a very important opportunity for us to improve our main tax system. Therefore, it is necessary that all participants in this process should contribute intelligently with dedication. It should not be a ‘cut and paste’ exercise. The writer is a Tax and Investment Consultant