Sujeewa Rajapakse, Managing Partner, BDO Partners, on the tax system in Sri Lanka: Viewpoint

Taxation is an important economic tool for any government, but in Sri Lanka we have seen that the tax system is not earning the necessary revenue for the country. Ideally, as income increases, the corresponding tax revenues should also increase (though the rate of increase will decline over time). This, however, is not happening in Sri Lanka: for example, per capita income increased from $720 in 1995 to $2136 in 2014, while tax revenue decreased from 20.4% of GDP to 12.2% of GDP during the same period.

Successive governments have depended heavily on indirect taxes for tax revenue instead of working out a reasonable balance between indirect and direct taxation. In other words, a heavier burden of the tax is borne by people with lower income. The key reason for this appears to be that the tax base has not been broadened in line with the increase in income and economic activity. Furthermore, an overly large number of taxes were imposed, which complicates the tax system, as well as a host of exemptions, which leads to tax evasion and manipulation.

Several measures have been introduced over the past couple of years to streamline the declining tax revenue-to-GDP ratio. On the direct tax front, the corporate and personal income tax structure was consolidated by rationalising the tax exemptions and concessions, thereby attempting to improve the tax base. On the indirect tax front, the base of both value-added tax and nation-building tax was broadened. Several measures have been taken to enhance the efficiency of the tax system by simplifying the existing tax structure and strengthening the tax administration of revenue-collecting agencies.

The tax administration has seen a significant improvement with the implementation of the Revenue Administration Management Information System, where a unique identification number is allocated to taxpayers, that links with the Inland Revenue Department (IRD). This computer system will be linked to many other regulatory authorities, which will ensure that there are no leakages of tax revenue.

Sri Lanka Customs also has a 24-hour, fully automated operational system to process export documents and provide an efficient service to exporters. This system also ensures that the relevant tax revenues are being collected, leaving little room for human intervention and manipulation. Introduction of these integrated, automated systems ensures control and accountability for the tax revenues of the country and also could be considered as one of the major milestones in the history of the IRD.

The fiscal policy has also introduced measures to leverage on the skilled and professional human capital of the country. There are several tax concessions given to professionals, including lower tax rates and incentives to corporates to provide training for skilled employment through multiple tax deductions. We have seen an increase in revenue derived from the export of services over the past few years, with significant contributions from the export of IT services and business process outsourcing.

In its 2016 budget, the government also emphasised the need to attract more foreign direct investment (FDI) to Sri Lanka. A new investment act is being proposed as a means to grant tax holidays and tax concessions for investors in Sri Lanka. It was also proposed that the tax on the leasing of land to foreigners be removed, in an attempt to attract more FDI.

Discussions are also under way to abolish the current exchange control laws and implement a more investor-friendly exchange control regime through new legislation. Formulating a long-term tax policy is essential to ensuring that tax revenues mirror economic growth. This can be achieved through effective dialogue between key stakeholders, a commitment to achieving structured goals, integration between the revenue-collecting agencies of the government and the effective use of technological innovation.