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INSTITUTE OF POLICY STUDIES OF SRI LANKAINSTITUTE OF POLICY STUDIES OF SRI LANKAINSTITUTE OF POLICY STUDIES OF SRI LANKAINSTITUTE OF POLICY STUDIES OF SRI LANKAINSTITUTE OF POLICY STUDIES OF SRI LANKA

Working Paper Series

No.

25

TTTTTaxation in Sri Lanka:Current Taxation in Sri Lanka:Current Taxation in Sri Lanka:Current Taxation in Sri Lanka:Current Taxation in Sri Lanka:Current Trends and Perspectivesrends and Perspectivesrends and Perspectivesrends and Perspectivesrends and Perspectives

D. D. M. WAIDYASEKERA

Taxation in Sri Lanka : Current Trends and Perspectives

i

List of Tables iiList of Charts iiAcronyms iiiAcknowledgement vExecutive Summary vi

Introduction 11. Functions of a Tax System 12. Economic Background 2

2.1 International 22.2 National 2

3. Declining Trend of Tax Revenue/GDP Ratio 44. Reasons for the Decline 65. Composition of Tax Revenue – Direct and Indirect 66. Fiscal and Tax Incentives 87. Elasticity and Buoyancy of the Tax System 108. Taxation, Savings and Capital Formation 109. Tax Base and Coverage` 12

9.1 Tax Free Allowances and Treshold 129.2 Deductible Expenses for Assessable Income 12

10. Tax Rates 1310.1 Corporate 1310.2 Personal 1310.3 Professionals 1510.4 Flat Rate 1510.5 Current Changes 1510.6 The Laffer Curve 1610.7 Relevant Reforms 17

11. Provincial and Local Government Revenue 1812. Capital Gains Taxation 1913. Tax Evasion 20

13.1 Tax Avoidance 2113.2 Withholding Taxes 2113.3 Tax Amnesties 22

14. The VAT Debate 2214.1 Threshold 2314.2 Exemptions 2314.3 Zero Rating 2414.4 Rates 2414.5 Financial Services 2514.6 Wholesale and Retail Trade 2514.7 VAT Frauds 2514.8 Administration 26

15. Customs Duties, Excises and Miscellaneous Taxes and Levies 2715.1 Tariffs 2715.2 Excise Duties 2715.3 Miscellaneous Taxes and Levies 2715.4 Simplification 28

16. Revenue Administration 2916.1 Number of Taxpayers and Files 2916.2 Compliance 2916.3 Audits and Investigations 3116.4 Default Taxes 3116.5 Appeals 3116.6 Coordination between Revenue Departments 3316.7 Cost of Administration 3316.8 Measures Taken for Improvement 33

17. Concluding Remarks 34References 35

Table of Contents Taxation in Sri Lanka : Current Trends and Perspectives

i














i














i













Table of Contents

Working Paper No 25.

ii

List of Tables

Table 1. GDP, Per Capita and Revenue Ratio – Selected Years 04

Table 2. Fiscal Operations and Deficits 2006 – 2015 05

Table 3. Composition of Government Revenue 2014 – 2015 07

Table 4. Domestic Savings and Tax Rates 2004 – 2015 11

Table 5. Capital Formation and Tax Rates 2004 – 2014 11

Table 6. Personal Tax Slabs and Rates 2003/04 - 2016/17 14

Table 7. Budget Outturn for Provincial Councils 2012 – 2015 18

Table 8. Results of Tax Amnesties since 1964 22

Table 9. VAT Revenue Performance 2002 – 2015 23

Table 10. VAT Refunds 2005 – 2014 24

Table 11. Tariffs, Excise Duties and Miscellaneous Taxes 2010 – 2015 28

Table 12. Number of Taxpayers and Tax Files as at 31.12.2014 30

Table 13. Tax Return Compliance 2012 – 2014 31

Table 14. Analysis of Default Taxes 2014 32

List of Charts

Chart 1. Composition of Government Revenue 2015 08

Chart 2. The Laffer Curve. 17

2

Working Paper No. 25

2. Economic Background

2.2 National

Finally, the tax system is used toachieve economic growth throughits influence on the allocation ofresources. This includes

(a) Transferring resources fromthe private sector to thegovernment sector to finance thepublic investment programme;

(b) Directing private investmentinto desired channels throughsuch measures as regulation oftax rates and the grant of taxincentives and concessions. This

includes investment incentives toattract foreign direct investment(FDI) into the country;

(c) Influencing relative factorprices for enhanced use of labourand economizing the use ofcapital and foreign exchange.

These objectives however may tosome degree be in conflict. Forinstance, the objective of attaininga more equitable distribution ofincome may conflict with growthobjectives and in practice there are

always bound to be tradeoffs andcompromises.

In analyzing the current trendsand perspectives of taxation inSri Lanka, it is necessarytherefore to examine howadequately and effectively thefiscal and tax system hasperformed these functions andhow effective the policy andadministrative measures havebeen in solving the problems thathave arisen.

2.1 International

The current trends andperspectives in fiscal policy andtaxation in Sri Lanka have to beviewed in the context of theeconomic performance and trendsboth national and international.According to the World EconomicOutlook of the InternationalMonetary Fund (IMF), globaleconomic activity remainedsubdued in 2015 with the declinein growth in emerging market anddeveloping economies amidst themodest recovery in the advancedeconomies. Global growth whichwas 3.4% in 2014 slowed down to3.1% in 2015 due to slowrecovery in the developed worldand slowdown in the Chineseeconomy. China’s growth ratewas 7.4% in 2014, 6.8% in 2015and expected to fall to 6.3% in2016. China is embracing what istermed the “new normal” - slowerbut slightly higher quality growth.

Global growth is estimated at3.2% in 2016 and 3.5% in 2017but these projections are subjectto revision according to various

changes in the global economy.It is centred on changing oil andcommodity prices, geo-politicaluncertainties and stagnating andlow inflation in developedcountries.

The volatility of the globaleconomic environment posedseveral challenges to Sri Lankaduring 2015 and are expected topersist in 2016 and 2017. Theglobal economic situation isimportant for a small developingeconomy such as Sri Lankawhere external demand is criticalas an enabler of sustained highgrowth, generating demandabsorbing labour surplus andraising productivity. Globalchanges such as for exampleBritain’s decision to leave the EU(Brexit) tend to haverepercussions on Sri Lanka’seconomy.

From a national point of view, thetaxation system has to be viewedas part and parcel of theprevalent economic anddevelopment strategy which the

country pursues and when thesepolicies change, the fiscal andtaxation policies themselvesbecome altered.Sri Lanka witnessed twocontrasting developmentstrategies within the last fourdecades. The pre-1977 strategywas characterized by anemphasis on the public sector,fixed exchange rates, a controlledeconomy with the accent onwelfare and income redistribution.The concomitant fiscal policiesinvolved high import duties, aredistributive income tax structurewith high marginal rates andrelatively few concessions to theprivate sector.

The post-1977 developmentstrategy was the reverse, theaccent being on an openeconomy with deregulation anddecontrols, flexible exchangerates, stimulation of the privatesector and a market-orientedeconomy. Consequently, fiscaland tax policies underwent achange. Import duties wererelaxed, the maximum effectivelevel of protection was reduced to50%, income tax rates



No.

25




iii

Acronyms

ASYCUDA Automated System for Customs Data

BDV Brussels Definition of Value

BIMU Budget Implementation and Monitoring Unit

BOI Board of Investment

BOP Balance of Payments

BTT Business Turnover Tax

CUSDEC Customs Declaration

DL Defence Levy

D – VAT Digital Value Added Tax

EPS Economic Policy Statement

ESC Economic Service Charge

ESCAP Economic and Social Commission for Asia and the Pacific

FDI Foreign Direct Investment

GDP Gross Domestic Product

GST Goods and Services Tax

IMF International Monetary Fund

IPO Initial Public Offer

IPS Institute of Policy Studies of Sri Lanka

IRD Inland Revenue Department

ISFTA India Sri Lanka Free Trade Agreement

IT Information Technology

ITMIS Integrated Treasury Management Information System

LTU Large Taxpayer Unit

NAV Net Annual Value

NBT Nation Building Tax

NSL National Security Levy

PAL Ports and Airports Development Levy

PAYE Pay As You Earn

PSFTA Pakistan Sri Lanka Free Trade Agreement

1

Taxation In Sri Lanka : Current Trends and Perspectives

IntroductionA country’s taxation systemand fiscal policy underlying it,is a major determinant of othermacro-economic indices suchas economic growth, publicdebt, fiscal deficit and inflationas well as attaining a properpattern of resource allocation,income distribution andeconomic stability. Henceperiodically, the fiscal policyand the tax structure, includingits administrative mechanismhas been subject toexamination and proposals formodification in order to achieveits basic objectives in relationto the government’s policiesand objectives prevalent at thetime.

In this connection a number ofcommissions, committees and

reports have been releasedfrom time to time since 1915when Sri Lanka’s (thenCeylon’s) tax system consistedonly of Import, Excise andStamp Duties followed byExport Duties, Income Tax anda whole lot of other taxes suchas Profit Tax, Excess ProfitsDuty, Estate Duty, CapitalGains Tax, Land Tax, Wealth,Expenditure and Gift Taxes,etc. levied and abolished fromtime to time. Some of theseimportant commissionsconsisted of the TaxationCommission of 1955 (ChairmanK.R.K. Menon and Secretary S.Sittampalam), Taxation InquiryCommission of 1968 (ChairmanA.G. Ranasinha and SecretaryA.G. Jegasothy), PresidentialTaxation Commission of 1990

1.The Functions of a Tax System

(Chairman H.S. Wanasingheand Secretary D.D.M.Waidyasekera) and thePresidential Commission onTaxation of 2009 (ChairmanProf. W.D. Lakshman andSecretary P.D.K. Fernando).Apart from these, a number ofother reports include the WoodsCommission (1926), HuxhamReport (1929), Downs Report(1955), Kaldor Report (1960)and Cox Report (1986) amongothers.

All these stressed theimportance of developing arational, consistent, efficientand simple tax system in orderto achieve its objectives andfunctions.

The functions of a tax systeminvolve several aspects. First, theprimary function of a taxationsystem is to raise revenue for thegovernment for its publicexpenditure as well as for localauthorities and similar publicbodies. Its efficiency is thereforeprimarily judged by whether thisfunction is performed adequatelyand satisfactorily. The secondfunction is to reduce inequalitiesthrough a policy of redistributionof income and wealth. The equityprinciple in taxation implies thattaxes should be imposed inaccordance with the ability to payprinciple. This has twodimensions: (a) horizontal equity,i.e., similar treatment of persons

in similar circumstances, and (b)vertical equity, i.e., differenttreatment of persons with differenttaxable capacity. Thirdly, thefiscal system is also employedfor social purposes such asdiscouraging certain activitieswhich are considered undesirable.Excise duties on liquor andtobacco, the Special Excises onluxury and semi-luxury items, theBetting and Gaming Levy areexamples of such taxes.

The tax system is also used toincrease the level of savings andcapital formation apart fromprotecting local industries fromforeign competition through leviessuch as import duties (including

cesses), Value Added Tax (VAT)and excises. Taxation is alsoused as an instrument of demandmanagement to eliminate orreduce inflationary or deflationarytendencies in the economy.Taxation reduces the effect of themultiplier and so can be used todampen upswings in a tradecycle.

The size of the multiplier in an

open economy is

1

S+M+1

whereS= marginal propensity to saveM= marginal propensity to importT= marginal rate of taxation

1













open economy is

1

S+M+1



iv

PSDG Province Specific Development Grant

R & D Research and Development

RAMIS Revenue Administration Management Information System

RIDL Regional Infrastructure Development Levy

RTVAT Real Time Value Added Tax

SAARC South Asian Association for Regional Cooperation

SAFTA South Asian Free Trade Agreement

SCL Special Commodity Levy

SMEs Small and Medium Enterprises

SNA System of National Accounts

SRL Social Responsibility Levy

SVAT Simplified Value Added Tax

SWS Single Window System

TIN Taxpayer Identification Number

TL Telecommunications Levy

TOR Terms of Reference

UN United Nations

VAT Value Added Tax

VLN Value Added Tax Location Number

2



2.2 National









2.1 International










No.

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v

AcknowledgementThe credit for initiating the project of analyzing the current trends and perspectives of taxation and fiscal policy

must first of all go to Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies of Sri Lanka at

whose request the author prepared this report. Thanks are also due to Ayoni Rangala of the Institute for the

assistance in formatting the publication.

1













open economy is

1

S+M+1


1













open economy is

1

S+M+1



vi

A country’s fiscal policy and

taxation system is a major

determinant of macro-economic

policy and sustainable economic

growth particularly in such areas as

government revenue, public debt,

fiscal deficit, inflation as well as

resource allocation, income

distribution and economic stability.

Currently, Sri Lanka’s fiscal and

taxation system is at a crit ical

juncture. With the end of the 30 year

old insurgency, Sr i Lanka has

entered into a new era of growth,

reconciliation and reconstruction.

Development challenges are many

both in the international and national

contexts. In this background, this

study attempts to analyze the

current trends and perspectives of

taxation and fiscal policy in Sri

Lanka.

Commencing with analyzing the

functions of a tax system, it

identifies the declining revenue ratio

to GDP as perhaps the dominant

factor in Sri Lanka’s current fiscal

problems. The study analyses the

reasons for the decline and

measures necessary to reverse this

trend and make the tax system an

effective instrument of economic

growth. In this context, the

composition of tax revenue reveals

the preponderant role indirect taxes

play in the tax system in Sri Lanka

in relation to direct taxes and the

necessity to change the proportion

to a more realistic figure.

One of the main reasons for the

decline in government revenue is

the proliferation of tax incentives

and exemptions. While there are

pros and cons in granting tax

Executive Summaryholidays and other concessions to

attract much needed Foreign Direct

Investment (FDI), these have to be

made more realistic and the

incentive system must be designed

and implemented in a more

methodical and cost effective

manner.

Other issues discussed in this

context is the relatively low

elasticity and buoyancy of the tax

system in Sri Lanka both being

below unity, the role of taxation in

savings and capital formation and

the low tax base and coverage which

affect the growth of tax revenue.

Another factor that has led to this

situation is the unplanned and ad

hoc nature of fiscal policy and tax

changes made in respect of

allowances, slabs and tax rates from

time to time in order to meet revenue

requirements. This lack of

consistency leads to taxpayer

confusion and inconvenience and

problems for the tax administration

as well. The recent changes in

income tax rates, changes to VAT

threshold and rates as well as other

miscellaneous taxes like NBT etc.

can be cited as examples.

All these ad hoc changes also lead

to tax evasion which is rampant in

Sri Lanka and which issue is

discussed in this paper. The

problems relating to Value Added Tax

(VAT) which has attracted much

attention recently, is discussed in

detail, its pros and cons, the

relatively poor performance and

factors such as the threshold,

exemptions, zero rating, rate

changes, refunds, etc. and

measures to remedy these

problems.

The paper also discusses other

revenue issues such as capital

gains taxation, its abolition and the

current attempt to re-introduce it as

well as customs duties, excise

duties and miscellaneous taxes.

Decentralization and provincial

revenue is discussed in detail

including the abolit ion of the

provincial BTT and its implication for

both provincial revenue and

provincial administration. The

resultant complexity of the tax

system due to all these factors and

the need for simplification is also

stressed including the importance of

promulgating a new Tax Act

incorporating all the required

changes.

In the final analysis, it is the level

of efficiency of the revenue

administration which determines the

level of effectiveness of any revenue

system. In the current context of

the necessity to increase

government revenue, the tax

administration, its structures,

systems and procedures need

through examination, its

weaknesses identif ied and

measures taken to rectify them. The

unsatisfactory number of taxpayers

comprising about 3% of the

population, low compliance, high

default taxes, improvement of audit

and investigation and lack of co-

ordination between revenue

departments are discussed at length

as well as recent attempts already

taken (including computerization) to

improve the administrative system.

2



2.2 National









2.1 International










No.

25




vii

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open economy is

1

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1













open economy is

1

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viii

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vt;thW vd;gJ njhlu;gpYk; ftdk;

nrYj;jpAs;sJ. ,jd; mbg;gilapy;>

tup tUkhdj;jpd; mlf;ff;$Wfs; vd;gJ

Neub tu pfSld ; xg ; g pLifa py ;

ngUthupahd kiwKf tup mwtPLfis

,yq ;ifa pd ; tu pf ; fl ; likg ; g py ;

nfhz;Ls;sjhf fz;lwpe;Js;sJld;>

,e ;j cs ;slf ;fj ;ij ngUksT

eilKiwr;rhj;jpakhd ngWkjpahf

khw ; w paikf ;f Ntz ;ba Njit

vOe;Js;sJ.

murhq ;f tUkhdj ;j py ; t P o ; r ; r p

Vw;gLtjw;fhd gpujhd fhuzpfspy;

xd;whf> kiwKf tup mwtPLfs; kw;Wk;

tpyf;fopg;Gfs; fhzg;gLfpd;wJ. tup

tpyf;fopg;Gfis toq;Ftjpy; gy rhjf

ghjf fUj;Jf;fs; kw;Wk; ntspehl;L

Neub KjyPLfis ftu;tjw;F ngUksT

rYiffs; toq;fg;gLfpd;w NghjpYk;>

,it eilKiwr;rhj;jpakhditahf

mike;jpUf;f Ntz;Lk;. mj;Jld;>

rYif Kiw vd ; gJ >

fl ;Lf ;Nfhg ;ghdjhfTk ; nrytPdk ;

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eilKiwg;gLj;jg;gl Ntz;Lk;.

,e;j Ma;tpy; ftdk; nrYj;jg;gl;Ls;s

Vida tplaq;fspy;> Fiwe;jkl;l

k Ps ; j p wd ; kw ;Wk ; ,yq ;ifa py ;

tupf ;fl ;likg;gpd ; kpjit jd;ik

Nghd ; wd mlq ;f pAs ;sd . ,it

xUikg ; g hL Fd ; w pa e piya py ;

fhzg;gLtJld;> tup mwtPl;L Kiw

vd ; gJ Nrk pg ; G kw ;Wk ; %yjd

Nru;khdj;jpy; gq;fspg;G nrYj;JtJ

kw;Wk; Fiwe;jsT tup nrYj;Jk; ,Ug;G

kw;Wk; tiyaikg;G Mfpad tup

tUkhd tsu ; r ; r pa py ; g hj p g ;ig

Vw ;gLj ;Jfpd ;wd. ,e ;j e piyf ;F

fhuzkhf kw ;WnkhU tplakhf>

j p l ; lk p lg ; gl hj > vOkhw ; w hd

e pj pf ; nfhs ;if kw ;Wk ; Nkyj pf

nfhLg;gdTfs;> ntt;NtW fl;lq;fs;

Nghd;wtw;wpy; tup khw;wq;fs; kw;Wk;

tUkhd Njitfis eptu;j;jp nra;J

nfhs;tjw;F tup tPjq;fis khw;Wjy;

vd;gJ mike;Js;sJ. njhlu;r;rpaw;w

jd;ik fhuzkhf> tup nrYj;Jgtu;fs;

mj pfsT Fog ; gkiltJld ; >

mnrsfu;aj;ijAk; vjpu;nfhs;fpd;wdu;.

,J tup epu;thfj;jpYk; gpur;rpidfis

Vw;gLj;JfpwJ. tUkhd tup tPjq;fspy;

mz ;ika py ; Nkw ; nf hs ;sg ; gl ; l

khw;wq;fs;> VAT (ngWkjp Nru;f;fg;gl;l

tup) tup tPjj;jpy; Nkw;nfhs;sg;gl;l

khw;wq;fs; kw;Wk; ,ju tupfshd NBT

(Njrj ;ijf ; fl ;bnaOg ;Gk ; tu p )

Nghd;wtw;iw cjhuzkhf Fwpg;gplyhk;.

,e;j midj;J vOkhw;whd khw;wq;fSk;

tup va;g;Gf;F fhuzkhf mike;Js;sd.

,yq;ifia nghWj;jkl;by; ,J fl;lw;w

e piyahf mike ;Js ;sJ . ,J

njhlu;ghd gpur;rpidfs; ,e;j Ma;tpy;

ftdk; nrYj;jg;gl;Ls;sJ. mz;ikapy;

mjpfsT ftdj;ij <u;j;jpUe;j ngWkjp

Nru;f;fg;gl;l tup njhlu;ghd gpur;rpidfs;

tptukhf Muhag;gl;Ls;sJld;> mjpy;

fhzg;gLk; rhjf ghjf epiyfs;>

xg;gPl;lstpy; Nkhrkhd nraw;jpwd;fs;

kw;Wk; njhlf;fepiy> tpyf;fopg;Gfs;>

g+r;rpa jug;gLj;jy;> fl;lz khw;wq;fs;>

kPsspg;Gfs; Nghd;w fhuzpfs; gw;wpAk;

ftdk; nrYj;jg;gl;Ls;sJ. ,tw;iw rPu;

nra ;af ;$ba Kiwfs ; gw ;w pAk ;

Muhag;gl;Ls;sJ.

%yjd Mjha tup> mJ ,y;yhky;

nra;ag;gl;lik kw;Wk; jw;NghJ mij

kPs mwpKfk; nra;a Kw;gLfpd;wik

kw;Wk; Rq;fj;jPu;it> ,iw tup kw;Wk;

,ju tu p fs ; Ng hd ; w ,ju

tUkhdkPl;lf;$ba gpur;rpidfs; gw;wpAk;

,e;j Ma;T ftdk; nrYj;jpAs;sJ.

g utyhf ;Fjy ; kw ;Wk ; k hf hz

tUkhdkPl ;ly ; vd;gJk; tptukhf

Muhag;gl;Ls;sJld;> ,jpy; khfhz

Kiwikia ,y;yhky; nra;jy; BTT

kw;Wk; mjd; %ykhf khfhz tUkhdk;

kw;Wk; khfhz epu;thfk; Nghd;wtw;Wf;F

Vw;glf;$ba tpisTfs; Nghd;wdTk;

Muhag;gl;Ls;sd. ,e;j rfy tplaq;fs;

fhuzkhf tupf;fl;likg;gpy; fhzg;gLk;

r p f ; fy ; e piyfs ; kw ;Wk ;

vspikg;gLj;jg;gl Ntz;ba Njit

vd;gJk; ftdk; nrYj;jg;gl;Ls;sJld;>

,jpy;> mtrpakhd rfy khw;wq;fisAk;

Nkw;nfhz;L Gjpa tup rl;l%ynkhd;iw

eilKiwg ; gLj ; j Ntz ;bajd ;

Kf;fpaj;JtKk; Muhag;gl;Ls;sJ.

,Wjpahf Ma;tpy;> tup epu;thf Kiwapd;

tpidj;jpwd; kl;lk; vd;gJ ve;jnthU

tUkhd fl;likg;gpd; nraw;jpwd;

kl;lj;ij epu;zapg;gjhf mike;jpUf;Fk;.

murhq ;f tUkhdj;ij mjpfupf ;f

Ntz;ba Njit fhzg;gLk; jw;Nghija

#o;epiyapy;> tup epu;thfk;> mjd;

fl;likg;Gfs;> kw;Wk; nrad;Kiwfs;

njhlu ;g py ; Mokhd kjpg ;g PLfis

Nkw;nfhs;s Ntz;bAs;sJ> mjpy;

fhzg;gLk; gytPdq;fs; ,dq;fhzg;gl;L>

mtw ;iw r P u ; nra ;tjw ; f hf

Nkw ;nfhs;sf ;$ba eltbf;iffs;

gw;wpAk; ftdk; nrYj;jg;gl;Ls;sJ.

nkhj;j rdj;njhifapy; 3 rjtPjkhNdhu;

j pUg ; j paw ; w e piya py ; tu p

nrYj;Jdu;fshf fhzg;gLfpd;wdu;.

Fiwe;j kl;l xOf;fk;> cau; tup

nrYj;jhik> fzf;FkPsha;Tfis

Nkkk;gLj;jy; kw;Wk; tprhuizfis

Nkw ; nf hs ;sy ; kw ;Wk ; tUkhd

jpizf;fsq;fs; kj;jpapy; NghjpasT

njhlu ;Gfs; ,d;ik Nghd;wdTk;

Mokhf Muhag ; gl ; Ls ;sJld ; >

mz;ikapy; epu ;thf fl;likg;ig

Nkk;gLj;Jtjw;F Nkw;nfhs;sg;gl;Ls;s

eltbf;iffs; (fzpdp kag;gLj;jy;

mlq;fyhf)Fwpj;Jk; Muhag;gl;Ls;sJ.

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progressively reduced and a wideranging framework of taxincentives and concessions wereincorporated in the tax system inthe form of tax holidays,exemptions and reliefs.

The changes in governmentssince 1994 onwards had littleimpact on the broad lines offundamental policies exceptchanges in emphasis dependingon the socio-economicphilosophies of successivegovernments. These includedsuch programmes as the RataPerata Programme, Regaining SriLanka Programme, MahindaChintana and currently theEconomic Policy Statement(EPS) of the Prime Ministerdelivered in Parliament on 5th

November 2015.

These policies had both positiveand negative effects. The endingof the thirty year old civil conflictin May 2009 and the subsequentreconstruction and developmentactivity, particularly ininfrastructure including roads,expressways, irrigation, ports andairports based on the five hubconcept and bolstered bydevelopment subsidies, skills andeducational development, led toeconomic growth and had apositive effect. As per the figuresin the Central Bank Annual Report2015, GDP at current marketprices increased from Rs. 1,258billion in 2000 to Rs. 6,414 billionin 2010, Rs. 8,732 billion in 2012,Rs. 10,448 billion in 2014 and Rs.11,183 billion in 2015. The growthrate increased from 6% in 2000 to8% in 2010, 8.4% in 2011 and9.1% in 2012. The per capitaincome grew from Rs. 65,838(US$ 869) in 2000 to Rs. 427,559(US$ 3,351) in 2012, Rs. 503,032(US$ 3,853) in 2014 and Rs.533,398 (US$ 3,924) in 2015.

National savings increased from21.5% of GDP in 2000 to 33.3%in 2012; investment increasedfrom 28% of GDP in 2000 to39.1% in 2012; unemployment asa percentage of the labour forcein 2012, was 4% and 4.3% in2014; and inflation of 7.6% in 2012was reduced to 3.3% in 2014,while the head count poverty wasdown to less than 7%. Theoverall budget deficit which was9.5% of GDP in 2000 wasreduced to 7% in 2010, 5.6% in2012 and 5.7% in 2014.

The above positive featureshowever had also negativeaspects. As stated in theInstitute of Policy Studies (IPS)2014 State of the Economyreport, “Beyond the immediateheadline macro-economicnumbers, the Sri Lankaneconomy continues to showskewed growth, high levels ofexternal indebtedness, modestexport earnings growth andlimited private sector appetite toexpand production capacity”.

According to provisionalestimates released by theDepartment of Census andStatistics which in July 2015changed the base year fornational accounts statistics from2002 while adopting the UnitedNations System of NationalAccounts (SNA) 2008 standard,the economy grew by 4.8% during2015 compared to 4.9% in 2014.This growth was largely driven byan increase in consumptiondemand. In Sri Lanka, levels ofconsumption are associated withover-extended government fiscalpositions, high debt levels andcurrent account deficits.Investment made only a modestcontribution and as measured bygross capital formation

decelerated during 2015.

According to the statistics of theCentral Bank Annual Report 2015,domestic savings declined from27.2% of GDP in 2012 to 24% in2014 and 22.6% in 2015 whilenational savings declined from33.3% of GDP in 2012 to 27.8% in2015. The growth in the industrysector which was 9% in 2012went down steadily to 4.1% in2013, 3.5% in 2014 and 3% in2015 reducing the share ofindustry in GDP to 26.2%. Theunemployment rate which was4% in 2012 increased to 4.3% in2014 and 4.6% in 2015. Averageannual inflation remained in mid-single digit levels, however itpicked up in the fourth quarter of2015 and recorded 2.5% by end2015, 4.8% in May 2016 and 6%in June 2016.

The Balance of Payments (BOP)which recorded an overall surplusin 2014 of US$ 1,369 millionregistered a deficit of US$ 1,489million in 2015 and consequently,Sri Lanka’s gross official reservesof US$ 8.2 billion in 2014 declinedto US$ 7.3 billion at the end of2015 equivalent to 3.8 months ofimports of goods and servicesand at March 2016 to US$ 6.3billion or 3 ½ months of imports.This may be compared to theforeign reserves of countries likeMalaysia ($ 137 billion), Indonesia($ 105 billion), Taiwan ($ 420billion) and India ($ 360 billion).

The overall fiscal deficit of 5.4%of GDP in 2013 increased to 7.4%in 2015 while total governmentdebt increased from 68.7% in2012 to 76% in 2015. In terms ofthe country’s external debt, itincreased from 53.6% in 2014 to54.4% in 2015 and increasingdebt services from US$ 3,479million in 2014 to US$ 4,683million in 2015.

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3. Declining Trend of Tax Revenue/GDP RatioIn 1963, Nicholas Kaldor arguedthat for a country to become“developed”, it needed to collecttaxes at 25-30% of GDP. The taxratio is generally regarded as asort of “national virility symbol.” Itindicates the proportion or shareof national income transferred tothe government sector to meetbudgetary requirements so as toincrease the tempo of economic

development without causinginflation. (Zuhair, 1985). In higherincome countries the ratio isabout 42% of GDP, middleincome countries, about 25-29%and developing countries around20%. Sri Lanka’s performancecompares poorly with countrieslike Vietnam (21.1%), Thailand(17.7%), Malaysia (16.6%) butbetter than its South Asian

neighbours India (10.4%),Pakistan and Bangladesh (7.6%).The irony of the situation is thatwhile overall GDP as well as percapita income in Sri Lanka hasbeen steadily increasing over theyears, government total revenueand tax revenue has beensteadily decreasing! The Tablebelow shows the relationshipbetween the growth of GDP andper capita income andgovernment revenue.

It is seen that total governmentrevenue as a percentage of GDPhas steadily declined from 21.1%in 1990 to 16.8% in 2000, 12.7% in2010 and 11.4% in 2014. Taxrevenue ratio has declined from19.0% in 1990 to 14.5% in 2000,

11.3% in 2010 and 10.1% in 2014.Even non-tax revenue in the formof dividends and transfers ofprofits from public institutions hasdeclined from 2.3% in 2000 to1.6% in 2012 and 0.9% in 2015.The increase in the relevant ratio

in 2015 as well as in nominalterms was due to theintroduction of one-off taxes onprivate businesses called theSuper Gain Tax. The Super GainTax was a levy applicable on anycompany or individual who

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

Table 1GDP, Per Capita and Revenue Ratio - Selected Years

Source: Central Bank Annual Report 2015 and various years.

Another result has been risinginequality. According to theDepartment of Census andStatistics figures, the percentageshare of household income from1995 to 2012 has shown thefollowing indicators:

1. Poorest 20% declined from5.4% to 4.4%

2. Richest 20% increased from50.3% to 53.5%

3. Poorest 40% receive 13.3%of total household income

4. Gini Coefficient increasedfrom 0.43 to 0.48 in 2012 forhouseholds and 0.53 for incomereceivers.

Source: Department of Census and

Statistics – Household Income and

Expenditure Survey 2012/13.

Thus as can be seen from theindicators above, the socio-

economic policies pursued bythe prevalent respectivegovernments during this periodhas led to both positive andnegative results. Perhaps themost important aspect however,is in the sphere of fiscal sectordevelopment in relation togovernment revenue,expenditure, budgetary deficits,overall management and theresults thereof.



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earned profits over Rs. 2000million in the assessment year2013/14 at the one-off rate of 25%.It generated Rs. 50 billion andalso the imposition of a “MansionTax” on housing as well asincrease in excise duties onmotor vehicles, liquor andcigarettes made during 2015,apart from a number of other one-off levies.

The critical nature of the situationand the vital necessity to reversethe declining trend has beenrecognized by the respectivegovernments. In fact it was oneof the main terms of reference ofthe 2009 Presidential TaxationCommission appointed by thegovernment. The first item in theTOR goes as follows:

“2.1Study the country’s taxsystem and make an assessmentas to why revenue in relation toGDP has declined over the yearsand make proposals as to howtax/GDP ratio that is comparablewith other emerging economiescould be achieved through abuoyant performance in taxrevenue and that will also preventthe need to make frequentchanges in taxation.”

The Taxation Commission reportwas finalized in October 2010 butis still not available to the public.

However the 2011 Budgetproposals appear to be largelybased on its recommendationsand legislated under 15 amendingActs and in 2013 when 21amending Acts were passed inParliament. Nevertheless, thedeclining revenue ratio has notbeen reversed.

This situation has beenrecognized by the currentadministration when the FinanceMinister Hon. Ravi Karunanayakein his 2016 Budget Speech stated“It is obvious that the strength ofany fiscal system depends on theability to generate a sufficientamount of revenue to meet theplanned and necessaryexpenditure. Unfortunately it isnot the case in Sri Lanka”. Hecontinued “Declining governmentrevenue to GDP ratio portrays amajor economic concern for thecountry and this trend has to bereversed on a priority basis. SriLanka’s tax revenue was 19% ofGDP in 1990 falling drastically to10.2% of GDP by 2014. Ironicallythe growth of tax revenue inabsolute terms was just 4.4% in2014 much below the nominalgrowth ratio of 7.3%. Thus taxrevenue has been unable to keeppace with economic expansionevidenced in recent years whichis a serious phenomenon.”

Referring to the measures takento address these issues, hestated “during the last fewmonths, we took some efforts toaddress these issues opting forinnovative measures of taxation.However, it is time to deviatefrom temporary solutions butendeavour to create a tax regimebased on strong reforms to moveforward, implementing suchreforms which will have farreaching benefits for the country.”(Finance Minister in 2016 BudgetSpeech on 20tth November 2015).

The revenue deficiency is soserious that as the Central BankReport 2015 states “the country’srevenue is not sufficient even tofinance the maintenanceexpenditure of the government.Hence the government is forcedto have recourse to borrowingseven for its day to day operations”.(p. 172). As far as expenditure isconcerned several measureshave been taken to ensure propermanagement of publicexpenditure to avoid overrun inrecurrent expenditure whilemaintaining public expenditure atthe expected level. These includeNational Budget circulars and theestablishment of a BudgetImplementation and MonitoringUnit (BIMU). Nevertheless,recurrent fiscal deficits continueas indicated in Table 2 below.

Year 2006 2008 2010 2012 2014 2015(Prov)

Total Revenue and Grants 507,901 686,482 834,188 1,067,532 1,204,621 1,460,892

Expenditure & Lending

(Minus Repayments) -713,646 -996,126 -1,280,205 -1,556,499 -1,795,865 -2,290,394

Current Account

Surplus + /Deficit - -70,127 -88,450 -119,815 -79,563 -127,692 -246,779

Budget Surplus + /Deficit - -205,745 -309,644 -446,017 -488,967 -591,244 -829,502

As % of GDP -7.0 -7.0 -7.0 -5.6 -5.7 -7.4

Table 2Fiscal Operations and Deficits 2006-2015 (Rs. Million)

Source: Central Bank Annual Report 2015 and various years.

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The 2016 deficit, with fiscalmeasures to enhance revenueand reduce expenditure, istargeted to be brought down to5.4% of GDP with the mediumterm 2020 deficit targeted at3.5%.

These deficits have beenfinanced by domestic borrowingsboth bank and non-bank as wellas foreign borrowings. Thesefiscal deficits have also a numberof economic effects such as:

i) Increase in public debt;

ii) Increase in interest rates;

iii) Decreasing the investments

of the private investors;

iv) Decreasing local savings;

v) Increasing inflation;

vi) Decline in international

credibility.

4. Reasons for the DeclineThere are many reasons for thisdeclining trend in government taxrevenue in spite of the overallincrease in GDP and per capitaincome. Some of these includethe following:

1.Unplanned ad hoc taxincentives in the form ofvarious tax holidays, reliefsand concessions, dutywaivers, etc. which haveeroded and narrowed thefiscal base. The exact taxloss from theseconcessions for eachassessment yearhas not been calculated peryear but has beenestimated at being close to1% of annual GDP(Presidential TaxationCommission 2010);

2. Narrow tax base andcoverage, the total numberof taxpayers being about3% of the population;

3. Increase in allowableexpenses under Section 25of the Inland Revenue Act;

4. Periodic increases in taxfree allowances and ad hocreductions in rates of tax;

5. Ad hoc changes to the taxsystem to meet short-termcash flow requirements ofthe government consequentto lack of consistency ingovernment fiscal policy,leading to uncertaintyamong existing taxpayers;

6. Lack of elasticity andbuoyancy in the tax

system both being lessthan unity;

7. The existence of a largeinformal economy resultingin large scale tax evasionand avoidance;

8. The grant of periodic taxamnesties which havebeen largely failures notproducing the expectedresults;

9. A complicated tax systemand weaknesses in taxadministration and theadministrative mechanism.

5. Composition of Tax Revenue - Direct andIndirectDirect versus indirect taxation isan age-old controversy. Thearguments for or against directand indirect taxes can beanalyzed in the context ofrevenue generation, efficiency and

equity effects and ease and costof administration.

Direct taxes tend to beprogressive and intimately relatedto the ability to pay and can be

used for reducing income andwealth inequalities and therebysocially more desirable. Theycause little or no distortions inresource allocation of theeconomy and leave taxpayers

These issues have to beaddressed and remedialmeasures taken in order to checkthe tax revenue decline and bringit to a satisfactory level.



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better off in welfare terms. It isalso revenue elastic due to thefact that as the income of thecommunity rises, so does theyield from direct taxes.

However, they are more difficult toimpose in developing countrieswhere the structure of theeconomy is markedly differentfrom developed ones due to suchconditions as the existence of alarge informal economy andsevere unemployment. They arealso a drag on saving andinvestment and thus on economicefficiency and improvement ofliving standards.

Indirect taxation is defined astaxation imposed upon other thanthe person who is intended tobear the final burden whichultimately falls on the consumersof the taxed commodities. Theyare an important element inraising quick revenue andmobilizing resources for publicinvestment and social welfare.Indirect taxes are also a powerfultool for guiding resourceallocation and discouragingdemand on undesirable goodsand activities as well as aneffective way to correct negativeexternalities.

Another argument in their favouris that their yield is substantial,individuals are given a choice andthey reduce disincentive effects.There is also the added attractionthat the public is less consciousof the tax burden as the taxes aregenerally hidden in the prices andtheir presence is not readily feltby the consumer. Since they arepaid piecemeal when the taxpayerenters into some transaction, it isconvenient and less burdensome.

Indirect taxes are also perhapsthe only means of reaching thevast majority of the populationwhom the tax net often fails tocapture and the informal and hardto tax activities. They are alsooften not affected by economiccrises and thus remain relativelyconstant. Administratively,indirect taxes are easier toimplement than direct taxes andsince they are included in theprice of a commodity cannot beeasily evaded, and theadministrative costs in theircollection is relatively low.

However, indirect taxes areheavily criticized forunnecessarily imposing heavyburdens on the lower and middleincome groups and those leastable to pay and therefore tend to

be regressive. Studies haveshown that the increase in the taxburden for the low and middleincome groups indicates that therise in indirect taxes has beenfaster than the rise in income ofthese groups. Indirect taxes havealso a greater adverse effect onthe allocation of resources than adirect tax and at a macro levelcan cause cost-push inflation.

In developed countries, directtaxes such as income taxconstitute a significant portion oftotal tax revenue, while indirecttaxes such as taxes oninternational trade and ondomestic goods and services,play a less significant role. Incontrast, in the developingcountries the opposite is the casewith the bulk of governmentrevenue coming from indirecttaxes such as customs duties,VAT, sales taxes, excise dutiesetc. while direct taxes are oflesser importance.

In Sri Lanka, income taxescomprise on average less than20% of tax revenue or 2% ofGDP while the indirect taxescomprise around 80% or 8% ofGDP. The composition of revenueis illustrated in the Table andChart below.

Year 2014 2015

Amount Percentage Percentage Amount Percentage Percentage

Taxes Rs. Million Share of GDP Rs. Million Share of GDP

Income Taxes 198,115 17% 1.9 262,583 18% 2.3

VAT 275,350 23% 2.6 219,700 15% 2.0

Excise Duties 256,691 21% 2.5 497,652 34% 4.4

Import Duties 81,108 7% 0.8 132,189 9% 1.2

Other Taxes 239,099 20% 2.3 243,655 17% 2.2

Tax Revenue 1,050,362 88% 10.1 1,355,779 93% 12.1

Table 3Composition of Government Revenue 2014, 2015

Source: Central Bank Annual Reports 2014 and 2015.

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It has been realized that thisproportion of direct to indirecttaxes of 20:80 is too unrealisticif Sri Lanka is to achieve adeveloped country status from amiddle income country status.Apart from developed countries,even countries such asMalaysia (over 60%), India(over 50%), Pakistan (around40%) Thailand (50%) and Kenya(above 42%) have a higher

proportion of direct to indirecttaxes than Sri Lanka. It is in thiscontext that the 2009 PresidentialTaxation Commission hadrecommended that the tax ratio ofdirect to indirect should beprogressively changed to 60:40.This policy has been reiteratedrecently in the Economic PolicyStatement (EPS) delivered by thePrime Minister Hon. RanilWickremasinghe in Parliament on

5th November 2015. The EPS haseven set a quantitative target ofsecuring 40% of the tax revenuefrom income taxes by 2020 asagainst the historical average of20% on that account. Thisrequires policies to reduce theshare of indirect taxes from thepresent 80% to 60% over theyears and means increasing theincome tax by 100%.

6. Fiscal and Tax IncentivesOne of the main reasons for thedecline in government taxrevenue has been theproliferation of tax incentives inthe form of tax holidays,exemptions, expanded allowableexpenses in determining taxableincome, reliefs, duty waivers andconcessions which have erodedand narrowed the tax base. Theywere originally used from 1951,and after 1977 became a majorinstrument of developmentpolicy. Though attempts havebeen made to prune them and

reduce their scope and coveragefrom time to time, they are stillconsiderably large coveringvarious sectors such asagriculture, fishing, exports,gems and jewellery, IPO,healthcare, education, tourism,sports and fitness centres,creative work including art worketc. They have been grantedboth through Law 17 of the Boardof Investment (BOI), the InlandRevenue Act as well as otherrelevant legislation. To minimizethe considerable overlapping, the

tax provisions were subsequentlygiven largely through the InlandRevenue Act but the BOI appearsto be granting them as well.

The rationale for the adoption offiscal incentives is that theyconstitute an important, if not amajor element in determininginvestment behaviour. Theyincrease the net rates of returnsand thus reduce the need forlarge capital investment. Theyalso reduce risk and tend tomake otherwise unpromising and

Chart 1: Composition of Government Revenue - 2015

Source: Central Bank Annual Report 2015.



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risky ventures more attractive.Tax incentives benefit concernswhich are profitable and to thatextent, they do not involvegovernment subsidies or publicguarantee to loss makers.Further, even in cases whererelief may seem unnecessary,well-conceived incentives mayhelp ventures to build theirreserves and embark onexpansion. They are alsovaluable as an indirect stimulantto investment because theypublicize and enhance thecountry’s investment climate.They have thus been adopted bymost developing countries.

With a GDP growth target of 8%or higher, Sri Lanka would needto raise its annual investment ratefrom the current 30% of GDP toat least 35% or higher. Withpublic investment to be cappedat around 6% of GDP this wouldneed to come about entirely fromprivate investment within whichforeign private investment playsa crucial role. Foreign DirectInvestment (FDI) to Sri Lanka hasseen a significant increase inrecent years rising from US$ 234million in 2004 to $ 889 million in2008, $ 1066 million in 2011,$1338 million in 2012, and $ 1616million in 2014 which howeverdeclined to $ 970 million in 2015.On average, Sri Lanka attractedan annual average FDI of US $500 million (about 1.5% of GDP)during the last decade.However, to emulate the EastAsian countries, which is SriLanka’s vision, it is necessary toattract FDI in excess of US $5000 million annually, close to5% of GDP.

However the effectiveness of tax

incentives in this respect is

debatable. As Heller & Kauffman

in concentrating upon the

methodology and techniques

adopted to evaluate the

stimulation generated for

investment by tax incentives,

state “Economic science has not

yet attained a level of

sophistication capable of isolating

and quantifying the role of the tax

factors in investment behaviours.”

Incentives by themselves

apparently do not play a major

role vis-à-vis other factors such

as infrastructure facilities, cheap

and easy credit, production costs,

access to markets, a reliable and

skilled labour force, labour market

flexibility, the regulatory

framework, business

environment, and political and

economic stability. Investment

responds to a multiplicity of

factors and compared to these,

fiscal incentives at best play only

a marginal role.

Fiscal and tax incentives have

also been called into question on

other grounds. One is that they

distort investors’ decisions and

thus produce a less than optimum

allocation of resources. Fiscal

incentives tend to attract

investors who are more keen on

making quick profits rather than

investments of a substantial

nature which are crucially required

for developing countries. They

also tend to attract “fly-by-night”

investors who use the generous

incentives only to pull out when

the time comes to be regular

taxpayers. They also provide a

fertile ground for tax avoidance

and tax evasion through “tax

shelters”. Finally, the tax foregone

is a matter of vital concern

particularly in the current context,

as fiscal incentives are costly in

revenue terms. It is felt therefore,

that the cost of fiscal incentives

outweighs their benefits. The

revenue loss is estimated to be

close to 1% of GDP (Presidential

Taxation Commission 2010).

Nevertheless, Sri Lanka

considering the competitive

international context, e.g.,

Malaysia, Brazil, Vietnam,

Thailand etc., cannot completely

do away with tax incentives.

However, the tax incentive regime

must be designed, implemented

and monitored in a more

methodical and cost effective

way, their cost benefit ratio

properly examined and be

subjected to continuous review so

that the impact on revenue is

minimized and the required

economic objectives realized.

Further, tax holiday businesses

and enterprises must be required

to send their accounts and

balance sheets even during the

tax holiday period and should be

checked even though exempt.

Experience has shown that often

they show big profits during the

tax holiday period and after the

exemption is over, they show

losses or pack up and leave. To

prevent this, concessionary rates

may be applied for a short period

after the tax holiday is over before

applying the normal rates.

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7. Elasticity and Buoyancy of the Tax SystemOne of the main reasons for thedecline in government taxrevenue in Sri Lanka is theinherent lack of elasticity andbuoyancy in the fiscal system.

Elasticity in a tax system reflectsthe automatic response or built-inresponsiveness of tax revenue tomovements in national income orgross domestic product.Buoyancy reflects the totalresponse of tax revenue tochanges in national income orGDP including the effects ofdiscretionary adjustments suchas expansion in the tax base,increase in tax rates and otherchanges in fiscal policies. Thetax system is said to be elastic orbuoyant if the elasticity orbuoyancy co-efficients exceedunity. An elastic system willautomatically raise revenue at thesame time or at a faster rate thanthe growth of GDP and facilitate asustained increase in necessarygovernment outlays. An elastic

tax system also reduces theeconomic uncertaintiesassociated with frequentdiscretionary changes in taxes,duties and levies.

An inelastic fiscal system on theother hand, compels thegovernment to rely on frequent adhoc increases in order to maintainshort-term revenue objectives.Such practices over time tend toproduce a complex andeconomically unproductive fiscalsystem and lead to adverseeconomic effects and unintendeddistributional consequences.Frequent ad hoc changes in taxpractices also createuncertainties among taxpayersand affect investment andproduction adversely.

Factors affecting the low elasticityin the tax system may besummarized as follows:

i) Slow expansion in the taxbase;

ii) Absolute as well as relativeexpansion in certainsectors which are difficult totax and gradual reduction insize of the sectors whichare easy to tax;

iii) Expansion in the taxexpenditure coverage;

iv) Lack of progressivity in taxrates;

v) Tax evasion and inefficienttax administration.

In the Sri Lankan fiscalsystem the overall elasticityhas been estimated at 0.7 andthe buoyancy at 0.9.(Indraratna, 2003). Both co-efficients however, are belowunity and hence overall, thetax and fiscal system isinelastic in Sri Lanka. (TaxCommission Report, 1990).

8. Taxation, Savings and Capital FormationTaxation and fiscal policy consti-tute one of the key determinantsof savings, capital formation andinvestment apart from otherfactors such as governmentdevelopment strategy and themacro economic environment.There is a correlation betweendevelopment and savings; higherthe savings, greater the ability tosustain its growth.

An analysis of savings bothdomestic and national savingsindicate that in Sri Lanka, savingscome largely from the private orhousehold sector. Government

savings constitute a relativelyminor share of both domestic andnational savings and in fact,statistically denote a negativeindex. Table 4 below denotesdomestic savings divided intoprivate and government, respec-tively.

It may be noted that the savingsratio to GDP is only 22.6% ascompared to other Asiancountries such as India (31%),Thailand (31%), Malaysia (33%)and Singapore (53%).

Domestic private savings haveindicated a large increase both in

nominal terms as well aspercentage of GDP from 2010onwards and particularly from2012. Tax rates both corporateand individual from 2011 weredrastically reduced from 35% to28% and 12% for the corporatesector and 24% as maximumpersonal tax from that year.

While this may invariably havehad an effect in increasing privatesavings, it is however difficult toquantify or draw a direct causaleffect to this factor alone asmany other factors aredeterminants of savings andinvestment.



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Table 4Domestic Savings and Tax Rates 2004 - 2015 (Rs. Million)

Source: Compiled from Central Bank Annual Report, various years.

Year 2004 2006 2008 2010 2012 2014 2015

Domestic Savings 343,580 498,864 611,598 1,481,123 2,374,918 2,504,682 2,531,040

Private 421,785 568,992 700,048 1,600,938 2,454,481 2,632,374 2,777,819

Government -78,205 -70,128 -88,450 -119,815 -79,563 -127,692 -246,779

% to GDP 16.4% 17.0% 13.9% 23.1% 27.2% 24.0% 22.6%

Tax Rates

Company 30% 35% 35% 35% 28% 28% 28%

12% 12% 12%

Personal Highest Rate 30% 35% 35% 35% 24% 24% 24%

Year 2004 2006 2008 2010 2012 2013 2014Gross Domestic

Fixed Capital

Formation 473,323 730,910 1,115,310 1,452,002 2,189,805 2,536,648 2,752,263

Private 422,060 624,972 852,708 1,128,151 1,695,184 1,946,925 2,119,243

Government 51,262 105,938 262,602 323,851 494,621 589,723 633,020

% of GDP 22.6% 24.8 25.2 25.4% 25.0% 26.4% 26.3%

Tax Rates

Company 30% 35% 35% 35% 28% 28% 28%

12% 12% 12%

Personal

Highest Rate 30% 35% 35% 35% 24% 24% 24%

Table 5Capital Formation and Tax Rates 2004- 2014 (Rs. Million)

Source: Compiled from Central Bank Annual Report, various years.

The same trend is seen in respectof capital formation. It is seen thatover 75% of gross domesticcapital formation comes from theprivate sector while thegovernment’s share is around 25%.Again, capital formation has showna large increase from 2010, 2012onwards. While the decrease in

tax rates, particularly thecorporate rate from 35% to 28%(and concessionary rate 12%) in2011 would invariably have hadan effect in this trend, it isdifficult to establish a direct andprecise statistical correlationbetween tax rates and domesticprivate capital formation. How-

ever, both savings and capitalformation appear to be sensitiveto effective tax incidence. Henceit is logical to conclude that inorder to promote savings andcapital formation, the reduction intaxation appears as a necessary,though not by itself, a sufficientcondition.

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9. Tax Base and CoverageOne of the important elements insecuring a satisfactory level oftax revenue is the base andcoverage of the taxes. Whilecertain steps to broaden the taxbase and coverage have beentaken such as the inclusion toincome tax of public servantshitherto exempt, and widening thebase of the VAT and NBT byadding the wholesale and retailsectors, the base and coveragestill need to be enlarged.

One of the reasons for thedeclining tax revenue ratio hasbeen the narrowing of the taxbase resulting from ad hocincreases in tax free allowances,liberalizing a whole range ofallowable deductions underSection 25 of the Inland RevenueAct, adjustments to qualifyingpayments under Section 34,among others

9.1 Tax FreeAllowances andThreshold

Tax free allowances forindividuals have been periodicallyincreased from Rs. 144,000 in2001/02 to Rs. 240,000 in 2002/03, to Rs. 300,000 in 2004/05 andin 2011/12 to Rs. 500,000. Foremployees or those withemployment income, an extraallowance in excess of Rs.500,000 ranging from Rs. 100,000to Rs. 250,000 has been grantedin the form of a qualifyingpayment. The tax free allowancehas been extended to non-resident Sri Lankan citizens aswell. The original tax freethreshold for VAT in 2002 of Rs.500,000 per quarter wasincreased to Rs. 650,000 per

quarter in 2009, Rs. 3 million perquarter in 2013 and Rs. 3.75million per quarter or Rs. 15million per annum in 2015 and inMay 2016 to Rs. 3 million perquarter. The Nation Building Tax(NBT) was Rs. 500,000 perquarter in 2011, Rs. 3 million in2013 and in 2015 Rs. 3.75 millionper quarter, and in May 2016 Rs.3 million per quarter. TheEconomic Service Charge (ESC)was Rs. 50 million per quarter in2015, an increase from the earlierRs. 25 million in 2011. All thesemean that persons below thesethresholds do not pay any taxthus reducing the coverage oftaxpayers and reduction of taxrevenue.

There is no hard and fast ruleregarding the appropriate level ofbasic tax free allowance forindividuals. One factor is theadequacy to relieve the minimumsubsistence need of an averagefamily from taxation. Otherfactors include the per capitaincome, equity consideration andease of administration. Somecountries use the per capitaincome multiple (maximum up tofive times) as the basis butothers do not. In thecircumstances, it may beappropriate to consider a suitablemeasurement basis in the contextof Sri Lanka’s currentcircumstances and taxationpolicy. The current practicerecently introduced of tax freeallowance to non-resident SriLankan citizens should also bereconsidered, limiting it toresident individuals and charitableinstitutions as in the original TaxAct.

In this context, the 2016 Budgethas proposed a threshold limit ofRs. 2.4 million for individuals anda flat rate thereafter whichhowever, due to its drasticimplications for revenue as wellas equitable considerations hasbeen suspended or put on hold.The basic threshold for 2015/16 ofRs. 500,000 has thereforeremained for the year ofassessment 2016/17 as well.

9.2 DeductibleExpenses forAssessable Income

Another area which has affectedthe base is the calculation ofassessable and taxable income inrelation to allowable expensesunder Section 25 of the InlandRevenue Act. Section 25(1)allows the deduction of “alloutgoings and expenses incurredby such persons in theproduction” of such profits andincome. Though this concept isnarrower than the U.K. concept of“wholly and exclusively incurredfor the purpose of the trade,” thevarious amendments made toexpand deductible expenses tobe in line with commercial profitsas well as to give variousconcessions to trades andbusinesses, have in practicetended to narrow the net incomeon which the tax rates areapplied.

Recent tax legislation hasliberalized a whole lot ofexpenses as well as allowabledeductions in computing adjustedtaxable profits and income.These include enhanceddepreciation allowances, 75%deduction of advertisement



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expenses originally limited to50%, foreign travelling expenses,foreign training expenses, pre-commencement expenses, 300%deduction for Research &Development (R&D), maintenanceand management expensesamong others.

All these have led to a narrowingof the taxable base and reductionof the adjusted taxable profits andincome of trades and businessesfor tax purposes. In the absenceof proper auditing and monitoringof these expenses by taxofficials, the enhanced allowableexpenditure such as tripleexpenses for R & D, 75%

advertisement expenses etc.,need re-examination andlimitation. For instance, veryoften businesses tend to mixbusiness promotion expenseswhich are allowable withadvertisement, hence thenecessity to limit the latter.Another section that appears toneed re-examination is Section13(ddd) of the Act which exemptsservices rendered to personsoutside Sri Lanka. While theoriginal intention was thepromotion of local professionalservices, it has now beenmisused for foreign business,foreign contracts, etc. with

enormous profits being madethrough information technology,all of which are exempt underSection 13(ddd). All these haveled to an artificial lowering oftaxable income of trades andbusinesses and a major cause ofdeclining tax revenue.It is necessary therefore, to re-examine the validity of theseenhanced deductions and base iton accepted principles andaccounting standards subject torevenue considerations. Whateversystem is adopted it should beapplicable to individuals,companies and all other entitiesin the same manner.

10. Tax Rates10.1 Corporate

Tax rates in Sri Lanka have had achequered history with at onetime in 1978 the corporate rategoing up to 60% and in 1964 thepersonal rate at 80%. Withchanging economic strategiesthey have steadily decreased to45% in 1992/93, 40% in 1993/94,35% in 1994/95, 30% in 2003/04and subsequently the standardrate 28% in 2011. There arehowever a multiplicity ofcorporate rates with 28% forcompanies with taxable incomeover Rs. 5 million, 12% where thetaxable income is less than Rs. 5million (including venture capitalcompanies) while a higher rate of40% is applied for liquor, tobacco,betting and gaming.

The multiplicity of rates however,has its drawbacks in that itunnecessarily complicates andinhibits the smooth functioning ofthe company tax system. Thelower rate of 12% for taxable

income less than Rs. 5 million isa concession for small andmedium enterprises (SMEs) toencourage their growth. There ishowever no definition of a smallcompany in the Inland RevenueAct and taxable income of Rs. 5million is not the sole criterion ofan SME. Further, a companymay be small but the ownersneed not necessarily be personswith low incomes and vice versa.Affluent investors often invest insmall venture companies,whereas shareholders of modestmeans often have their shareinvestments, if any, in largecompanies of a less risky nature.Moreover, the existence of alower rate invites the artificialsplitting up of corporateenterprises into several taxmotivated small companies whichwould, in reality, continue tooperate as parts of the largerenterprises. In order to preventthis, the Act excludes holdingcompanies, subsidiary orassociate of any group of

companies from theconcessionary rate. The mainargument against small companyrelief however, is theadministrative difficulty of drawingthe boundary line between “large”and “small”; it necessarilyinvolves arbitrary choices andadds to the complexity of the taxstructure.

10.2 Personal

The reduction in the rate structurealso applies to personal incometax of individuals (includingprofessionals) in relation to both“slabs” and rates. Currently, thereis a progressive tax structure withspecial lower rates and higherrates for specific activities andsources of income. The slabshave been enlarged with the ratesranging from 4% and going up to8%, 12%, 16%, 20% and 24%(maximum). The maximum rateof tax for employees includingprofessionals however is limitedto 16%.

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These changes to the personalincome tax structure apart fromresulting in lowered tax revenue,have also raised a number ofcontentious issues. Adjustmentsto “slabs” and rates are generallydone periodically to counter whatis known as the “bracket creep” intime of rampant inflation.However, inflation which was at

one time over 20% has remainedconsecutively at single digitfigures and there is nojustification to widen the slabsand reduce the rates, especiallywhen the tax free personalallowances have been increased.Further, the “slabs” in the currentrate structure discourage theearning of higher income, since

any person may reach the highestrate of tax at a relatively low levelof taxable income (above Rs. 3.5million per annum or Rs. 300,000per month).

The table below gives the periodicchanges to the slabs and ratesfrom year of assessment 2003/04to 2016/17.

Y/A 2006/07 -2008/09

Tax Free Allowance Rs. 300,000

Slabs Rs. Rate%

First 300,000 5%

Next 200,000 10%

Next 200,000 15%

Next 200,000 20%

Next 200,000 25%

Next 500,000 30%

Balance 35%

Income at which highest rate is reached

Rs. 1,900,000

Y/A 2003/04 Tax Free Allowance

Rs. 240,000

Slabs Rs. Rate%

First 180,000 10%

Next 180,000 20%

Balance 30%

Income at which highest rate

is reached – Rs. 600,000

Y/A 2005/-06Tax Free Allowance

Rs. 300,000

Slabs Rs. Rate%

First 300,000 5%

Next 200,000 10%

Next 200,000 15%

Next 200,000 20%

Next 200,000 25%

Balance 30%


Rs. 1,400,000

Table 6Personal Tax Slabs and Rates 2003/04 - 2016/17

Y/A 2004/05 Tax Free Allowance

Rs. 300,000

SlabsRs. Rate%

First 240,000 10%

Next 240,000 20%

Balance 30%

Income at which highest rate is

reached – Rs. 780,000

Source: Compiled from Inland Revenue Acts and Amendments.

Y/A 2009/10 & 2010/2011


Slabs Rs. Rate%

First 400,000 5%

Next 400,000 10%

Next 400,000 15%

Next 500,000 20%

Next 500,000 25%

Next 500,000 30%

Balance 35%


Rs. 3,000,000

Y/A 2011/2012 – 2016/17


Slabs Rs. Rate%

First 500,000 4%

Next 500,000 8%

Next 500,000 12%

Next 500,000 16%

Next 1,000,000 20%

Balance 24%


Rs. 3,500,000



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10.3 Professionals

Another contentious issue is theconcessionary rate granted to aclass of professionals underSection 40C of the InlandRevenue Act under AmendmentNo. 8 of 2014. A “professional”under Section 40C(2) has beendefined and if such professionalis employed with effect from1.4.2014, is taxed subject to amaximum rate of 16% (whereasthe normal maximum rate is24%). Further, under Section 59Fthe professional services of theseprofessionals are taxed atdifferent “slabs” with themaximum rate of tax being 16%.

The tax for professionals can besummarized as follows:

These concessions are availableonly to those classified as“professionals” under the relevantsection and includes registeredlawyers, doctors, charteredengineers, charteredaccountants, software engineers,licensed pilots, navigationofficers, researcher and senioracademic recognized as anaccredited professional. Otherprofessionals have been excludedfrom these concessions as wellas other individuals earningsimilar income.

10.4 Flat Rate

A contentious issue is theproposal in the 2016 Budget toincrease the tax free threshold

10.5 Current ChangesDue to these factors, the basis ofgiving concessional rates to smalland medium enterprises (SMEs)on the basis of taxable income(less than Rs.5 million) alone, hasapparently undergone a change totake into account the nature oftheir activity rather than thetaxable profit they make. From 1April 2016 the rates are to bebased both for corporate andpersonal income tax taking intoconsideration their nature andtype of activity as well.

Corporate Income Tax

(a) Banking and financialservices, insurance industryand trading activities –28%;

Income from MaximumProfession Rate of TaxDoes not exceedRs. 25 million 12%

Exceeds Rs. 25million but does notexceed Rs. 35 million 14%

Exceeds Rs. 35 million 16%

from Rs. 600,000 to Rs. 2.4million per annum and chargeonly a flat rate of 15% on allincome above this amount,irrespective of the amount ofincome. This is a radical changefrom a progressive tax systemwhich has existed in Sri Lankasince the introduction of incometax in 1932 to a regressive one.Apart from such tax havens likethe Cayman Islands, Isle of Man,Bahamas etc. where there is noincome tax, most countries in theworld have a progressive incometax system with relatively fewexceptions which have a flat ratesystem. This is a controversialissue and has been suspendedwith no amending legislation asyet, and the threshold and ratestructure for 2016/17 hasremained on the 2015/2016 basis,subject to the changesannounced from 1.4.2016.

(b) Liquor, tobacco, lottery,betting and gaming – 40%;

(c) All other activities includingmanufacturing and services– 17.5%;

(d) Other sources such asinterest, royalty, dividendsetc., to continue on theexisting applicable ratedepending on the source ofincome.

Personal Income Tax

i) Current rate structure, taxfree allowance, rates etc.2016/17 to continue –maximum 24%;

ii) Employment income atcurrent slabs and rate foremployees with themaximum rate of 16% tocontinue;

iii) Income from any activity(other than financial, trading,liquor, tobacco, lottery,betting and gaming) –maximum rate 17.5%;

iv) Profits from financial ortrading activity – maximum24%;

v) Profits from liquor, tobacco,lottery, betting and gamingactivity limited to 40%;

vi) Income from Net AnnualValue (NAV) etc. – maximumrate 24%.

All these above changes would ofcourse, have to be legislated andpassed for them to be legallyeffective.

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The above changes would involvea number of complications:

1) The small companies whoseincome is less than Rs. 5million would now have to payat 17.5% from the currentconcessionary rate of 12%.This would increase the taxburden of small and mediumenterprises and a disincentivefor SMEs;

2) The overall income tax rate onmost big businesses otherthan those activities (finance,insurance, trading etc.) wouldnow decline from 28% to17.5%. The corporate rate inIndia is 34% and inMalaysia 24%. This wouldlead to a decline in corporateincome tax by a considerableamount, which would beknown only at the end of theassessment year 2016/17;

3) For personal taxation, havingdifferent rates based on natureand activity and income wouldinvolve complication incalculation of tax payable byindividuals;

4) For businesses it wouldinvolve keeping separateaccounting records on thenature of activities carriedon by a business, while forthe tax administration it wouldinvolve complicated auditingand monitoring processes.

Considering all thesecircumstances, there is a viewthat it would be less complicatedand more effective to have auniform rate of corporate taxrather than taxing them on sizeand form or the nature of theiractivity, except in exceptionalcases. Relief for SMEs could begiven in other forms rather than

Considering these factors inrelation to the rate structure, thefollowing issues needexamination:

1. Whether the reduction in thetax rate from 35% prevailingearlier is justifiable consideringthe low tax/GDP ratio and theneedto raise tax revenue andincrease the direct tax ratio.In this connection, it may berelevant to mention that in the1990 Presidential TaxationCommission it was decidednot to lower the income taxrate below 35% and it was theIMF through its representativeand advisor that wasvehemently opposed to anyfurther reduction in the rate;

2. Whether to have one standardfor the corporate sector(except perhaps liquor,tobacco and gambling) insteadof multiple rates whichcomplicate the system, leadsto reduction in revenue,encourages tax avoidance andcomplicates the administrativesystem. Any concessions fordesirable institutions andsectors should be giventhrough other tax provisionsand other means;

merely on their taxable income ortax.

Concessions for SMEs formanufacturers and serviceproviders have been given on thebasis of turnover under Section59B of Amendment Act No. 8 of2014 as follows:

3. Whether having two separaterates for the corporate sectorand individuals who have thebenefit of a high tax freethreshold, with a lowermaximum rate for the latterwho include traders,businessmen, professionalsoften earning very lucrativeincome, is again justifiable.Differentiation of maximummarginal rates of tax forindividuals and companies canlead to unforeseendistortions of economicbehaviour. Earlier the taxsystem had one rate of 35%for all with a reasonablethreshold for individuals.

These are some of the issuesthat need examination andremedial action in the presentcontext.

The basic theory and principlethat underlies the advocacy of alow tax regime and low rates oftax is based on supply sideeconomics. While the Keynsianpolicy of demand management isbased on the proposition that thelevel of aggregate demanddetermines the level of nationalincome i.e., that demand createssupply, the supply sideeconomics on the other hand,emphasizes the conditionsgoverning supply such as theavailability, cost and quality ofresources which are consideredthe long-term determinants ofnational income and prices.

A proposition that characterizessupply side economics is that therates of direct taxation have amajor influence upon aggregatesupply through their effects uponthe incentive to work. According

10.6 The Laffer Curve

Year Turnover Rate

2011/12 – 13 < Rs. 300 million 10%

2013/14 < Rs. 500 million 10%

2014/15 < Rs. 750 million 12%



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to supply side economists likeArthur Laffer, Jude Wanniski andothers, high taxation acts as adisincentive to work because ifmarginal tax rates are high, theindividual is likely to either foregoopportunities to increase incomethrough additional effort or resortto the informal sector (the “blackeconomy”) to avoid paying taxes.

The Laffer Curve indicates theeffect of tax rates on governmentrevenue. Briefly, the propositionof the Laffer Curve as its startingpoint is the simple notion that taxrevenue is zero if the tax rate iseither zero or 100%, with asmooth relationship between therates and tax revenuesconnecting these two polarpoints. The existence of such arelationship suggests that if taxrates are sufficiently high, the“prohibitive range”, then areduction in tax rates could leadto an increase in tax revenues.

The Laffer Curve analysis leads tothe followin conclusions:

• High rates of taxation act as adisincentive to work and thusreduce output andemployment;

• An increase in tax rates doesnot always necessarily lead toincreased revenue. There is acrucial point (point E in chart)beyond which an increase intax rates leads to decreasingrevenue and national income.

• There are always two ratesavailable (A and B) which canproduce the same total taxrevenue, one a higher andanother, a lower rate.Government, therefore neednot necessarily choose a highrate to achieve the requiredquantum of revenue.

Studies of selected countries alsoseemed to indicate that thosethat imposed a lower effectiveaverage tax burden achievedsubstantially higher rates ofgrowth in GDP than did their morehighly taxed counterparts.

The Laffer Curve, however, hashad its critics like Paul W.McCraken, Paul Krugman, RobertLekachman and John KennethGalbraith. They have questionedthe assumptions and theorybehind the Laffer Curve andproved that it is not as scientificas it appears. The supply sidecuts of the 1980s do not appearto have raised work efforts orsaving and they unquestionablyincreased the deficit. Empiricalstudies carried out in twocountries (Jamaica and India)where tax changes relevant to theLaffer Curve had beenimplemented have also concludedthat the assertion that taxreduction would lead to revenueincreases should at best betreated with caution (Ebrill, 1987).

10.7 Relevant ReformsConsidering all the factorsdiscussed above in respect ofmeasures to reverse the decliningtax revenue/GDP ratio includingmeasures relating to taxincentives, broadening the taxbase and coverage, revising theallowable expenses in computingadjusted assessable and taxableprofit, qualifying payments, taxfree allowances and tax rates, itappears necessary to create anew income tax code to generateadequate income tax revenue. Inthis connection, the latest IMFMission in 2016 led by ToddSchneider has made an in-depthanalysis of the entire situationincluding the increasingly difficultexternal environment, the impactof domestic policies includingfiscal deficits, public debt, andbalance of payment position, realGDP growth, inflation andrevenue administration and hasmade some far reachingrecommendations to improve thesituation.

Chart 02 : The Laffer Curve

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Key objectives underlying itsreform agenda include:

i) Improving revenueadministration and tax policy;

ii) Strengthening public financialmanagement;

iii) State enterprise reforms;

iv) Standard reforms to enable a more outward-looking economy, deeper foreign exchange markets and strengthen financial sector supervision.

It has also recommended theintroduction of a new InlandRevenue Act. The introduction ofIncome Tax was made under theIncome Tax Ordinance No. 2 of1932 which was amended 17times between 1932 and 1949.Succeeding legislation include:

1) Act No. 1 of 1949 which wasamended 6 times;

2) Act No. 3 of 1956;3) The Inland Revenue Act No. 4

of 1963 which has 12amendments;

4) Inland Revenue Act No. 28 of1979 which was amended 19times;

5) Inland Revenue Act No. 38 of2000 which had 6 mendments;and

6) Inland Revenue Act No. 10 of2006 which up to now had 8amendments and one morepending on the 2016 Budgetproposals.

As Todd Schneiderrecommended, it is time tointroduce a new Inland RevenueAct incorporating the necessaryrevisions and changes needed toimprove tax collection and taxrevenue in the context of currentfiscal and economic policy.

Recent tax and fiscal changeshave had an impact not only onnational but also on provincial andlocal taxation as well. Therevenue sources devolved onProvincial Councils under theThirteenth Amendment arecontained in items 36.1 to 36.20

of List I of the Ninth Schedule.They account for only 4% of thecountry’s total revenue and lessthan 3% of tax revenue or 0.6%of GDP. Expenditure however isaround 11% of Central Govern-ment expenditure or 2.6% of GDP.The deficit is met by grants from

the Central Government consist-ing basically of three types, BlockGrants, Criteria Based Grants andProvince Specific DevelopmentGrants (PSDG) apart from grantsfor special projects.

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

11. Provincial and Local Government Revenue

Table 7Budget Outturn for Provincial Councils 2012 - 2015, Rs. Million




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Of the revenue sources, the mostimportant was the provincialturnover tax on wholesale andretail sales which producedaround 55% of provincial revenueand was the mainstay of theprovincial revenue system. Thiswas abolished from 1 January2011 by Fiscal Policy Circular No.01/2010 resulting in a drasticreduction of provincial revenue. Itwas replaced by a system oftransfers from the centreconsisting of 100% Stamp Dutycollection, 70% of motor vehicleregistration fees and 33 1/3% ofthe Nation Building Tax (NBT).The abolition of the turnover taxhas narrowed the base andcoverage of the provincialsystem. This is enhanced by thefact that under Section 4.3 of theNinth Schedule, the stamp dutieson immovable property leviedunder Section 36.5 of theProvincial List as well as courtfees, have legally to betransferred to the localgovernment authorities and hencenot a revenue resource for theProvincial Council.

This abolition has led to a numberof problems. The turnover tax ofthe Provincial Councils hadlegally no threshold for itsimplementation while thecoverage of the NBT (1/3 ofwhich is now transferred to theProvincial Councils) is Rs. 3.75million per quarter. This has alsohad an adverse administrativeeffect on the provincial revenuemanpower where over 400 areemployed in the revenuedepartments with their workdrastically diminished and a lossof morale all round.

Another issue is the legality of itsabolition as well as the transfer ofother revenue to the provinces. Ithas been abolished by a FiscalPolicy Circular (No. 01/2010) bythe Treasury while any changes toprovisions in the ThirteenthAmendment is a constitutionalprocess involving parliamentaryapproval (by probably a 2/3majority). This issue has beenexamined in the AttorneyGeneral’s Ruling dated 08 August1989 as appearing in the

Appendix in the Salgado Reporton “Financial Devolution to theProvinces”.

In respect of local government,the recent fiscal and tax changeshave however had little impact onlocal government revenue. Thelocal government systemconstitutes 335 institutionsconsisting of 23 MunicipalCouncils, 41 Urban Councils and271 Pradesheeya Sabhas.Overall 60% of their revenue isself-generated sources consistingmainly of such items as propertytax, acreage tax, rents, trade andbusiness licences, refund ofstamp duty and court fees fromProvincial Councils and fees forservices. Recent fiscal changeshave had little impact on localrevenue though their revenuesystem may undergo changeswith the implementation of theGrama Rajjaya concept involvingthe creation of 2500 new units atgrass roots level now beingplanned and considered by thegovernment.

12. Capital Gains TaxationTaxation of capital gains wasintroduced in Sri Lanka in 1959giving effect to a tax reform proposalof Prof. Nicholas Kaldor, but sincethen has undergone several changeswith capital gains on death or on giftbeing abolished in 1977. Capitalgains by definition arise upon thesale, exchange or other dispositionof a capital asset for more than itspurchase price or value onacquisition, less any costs ofbuying and selling and of improvingsuch asset. Capital assets includeland and buildings, machinery andequipment and stocks and shares.The Inland Revenue Act No. 28 of

1979 in addition included suchtransactions as the surrender orrelinquishment of any right in anyproperty and the redemption of anyshares, debentures or otherobligations as giving rise to capitalgains.

The rationale underlying theimposition of capital gains tax isthat realized gains are equivalentto income and provide therecipient with just as mucheconomic power over goods andservices as any other form ofincome. Under this perspective,there is no compelling reason why

capital gains should be treateddifferently from other forms ofincome. They generally accrue tothe property owning class insociety and is concentratedlargely in higher income brackets.Capital gains taxation also tendsto minimize the opportunities fortax avoidance.

Capital gains can be taxed eitheron an accrual basis or on arealization basis. They arenormally taxed on the latter basis.In Sri Lanka capital gains havebeen taxed upon their realizationas from 1 April 1977. In respect of

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immovable property acquiredbefore that date, the value forpurposes of capital gains taxationwas deemed to be the value as at31 March 1977. Section 14 of theInland Revenue Act No. 28 of1979 also provided exemptions oncapital gains arising from certaintransactions of which the mostimportant related to the sale ofresidential houses. With regard toshare transactions, capital gainswere exempted from November1979 for a period of 7 years withthe intention of broad-basingcompanies.

Capital losses were deductibleonly against capital gains withprovisions for allowing anyunabsorbed losses to be carriedforward for set off against futuregains.

The rates of tax on capital gainsvaried with the period ofownership of property. Where theproperty was held for not morethan 2 years the gains wassubject to tax at the normal

personal or company rate. Wherethe property was held for morethan 2 years, the rates variedfrom 25% to 5%, with propertiesover 25 years being nil. Thedifferential rate structure wasintended to distinguish betweenshort-term gains and long-termnominal gains due to inflation.

There are however a number ofproblems in relation to capitalgains taxation. Issues such as“bunching”, lock-in effect, partdisposal, etc. can arise in capitalgains taxation apart fromdistortions caused by inflation.Capital gains should beformulated in such a way that itwould have a minimal impact oninvestment and business.However, the main issue isadministrative arising in respectof valuation such as over-valuation at time of purchase andunder-valuation at time of sale,leading to the increase in thenumber of tax appeals. Sincethere is no separate unit in the

Inland Revenue Department forvaluation, valuation problemsboth in respect of capital gainsand stamp duty are referred to theValuation Department for arealistic valuation. The ValuationDepartment however was not fullyequipped to meet theserequirements speedily especiallyat regional level outside Colombo,leading to both revenue andadministrative problems.Improvements have been made inthe Valuation Department sincebut further improvements areneeded if capital gains taxation isto be reinstated. In thesecircumstances, taxation of capitalgains was abolished in 2002under Section 3 of theAmendment Act No. 10 of 2002and there has been no capitalgains taxation since. However,the government has in June 2016again decided to re-introducecapital gains tax at 10% andlegislation in this respect isexpected to be introduced shortly.

13. Tax EvasionThere is no doubt that the largeincidence of tax evasion in SriLanka is a cause of greatconcern. While the mostimmediate concern is the loss ofrevenue, in the long run suchevasion tends to reduce the built-in elasticity of the tax systemand to the extent that the evadedincome is spent on goods andservices, generates inflationarypressure and raises the prices ofreal property. It also distorts thefundamental objectives of a fairand equitable tax system.

Tax evasion can take diverseforms. These include non-

declaration or under-declaration ofincome and assets, over-statement of expenditure orexemptions, fictitious expenses,transfer pricing, concealment ofsales, stocks and debtors,fictitious creditors, etc. Othermethods resorted to include theformation of private companies,fictitious partnerships, formationof private trusts and family trusts,leading to non-declaration orlimited declaration of dividends,over-stated cash in hand, bankoverdrafts and bank loans,drawings, etc.

All these involve a number ofissues. In the first place, there is

no legal definition of “tax evasion”in any tax statute. While Section163 of the Inland Revenue Act No.10 of 2006 permits the Assessorto make assessments oradditional assessments ongrounds of fraud, evasion or wilfulneglect, the Interpretation Section217 does not define any of theseconcepts. Recourse to judicialdicta do not provide anacceptable definition either.

Tax evasion is not confined tofraud alone, it also includes WilfulDefault as well as WilfulNegligence. However, adistinction has to be made



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between a Fraudulent Return andan Incorrect Return where taxevasion as such is attributableonly to the former. Mere omissiondue to oversight or construing atax statute in a particular way isnot an offence. It must bedeliberately made to avoid tax ormislead a tax officer.

13.1 Tax Avoidance

Tax Evasion has also to bedistinguished from Tax Avoidance.Tax avoidance has been definedas the “art of dodging withoutactually breaking the law”. Thelegal definition between the twohas been enumerated in theclassic tax case of the Duke ofWestminster v CIR 19 TC 490,where Lord Tomlins in hisjudgement made the celebrateddictum “Every man is entitled ifhe can to order his affairs so thatthe tax attaching under theappropriate Acts is less than itotherwise would be”. However, withingenious tax avoidanceproliferating, distinctions weresubsequently made between (a)Evasion; (b) Abusive or BlatantTax Avoidance; (c) Tax Avoidance;and (d) Mitigation.

It is difficult to estimate theextent of tax evasion or blackmoney in Sri Lanka. In 1970 theWanchoo Committee estimated itat 16.3% of GDP while in 1987the National Institute of PublicFinance and Policy estimated thefigure of Black Money at Rs.367,785 crore or 21% of GDP. In1995 Dr. H.N.S. Karunatilake aformer Governor of the CentralBank estimated it at around 10%of GNP. There is a great variancebetween estimates and there areno verifiable data bases toprovide a reliable estimate.However, there is no doubt thattax evasion and black money isrampant in the country.

In this connection, a number ofmeasures have been taken tocurb or reduce the incidence oftax evasion. Statutorily a numberof provisions have beenincorporated in the tax Acts suchas provisions relating to transferpricing and thin capitalization,improving filing and reportingcompliance, extension of theWithholding Tax System, moreextensive auditing, particularly oflarge taxpayers, and informationreporting among other provisions.However, while combating taxevasion provisions like transferpricing, thin capitalization, etc.,have been incorporated in thetaxing statute, actual effectiveimplementation of theseprovisions seems wanting.

Further, there has to be a morestepped up effort to deter taxevasion such as increasing theaudit frequency and auditthoroughness for upper taxbracket taxpayers to ensure thatmost of the tax evaders incursome risk of being discovered. Italso includes implementing aneffective programme to detectnew taxpayers with the focus onareas where there is reason tobelieve that significant netrevenues could be gained. Thisinvolves a more effective systemof securing and analyzinginformation from various sources,sharing of such information withthe relevant units and brancheswithin the IRD as well as co-ordination with other revenuedepartments.

All these processes appear to beinadequate in the current set-up.Further, there should also be amore vigorous application ofpecuniary penalties combinedwith prosecutions in a givennumber of cases each year inview of their deterrent effect.

13.2 WithholdingTaxesThe Withholding Tax system inparticular is an effectiveadministrative method of helpingto minimize tax evasion and is apath to effective taxadministration. It is especiallyeffective in areas where it isdifficult or uneconomic to detectevasion if payments were nottaxed at source.

Withholding tax on dividends andon certain payments to personsoutside Sri Lanka on interest,rent, ground rent, royalty orannuity existed in the tax statutefrom early times. These weresubsequently expanded todeduction under the PAYE scheme, interest on depositspaid by banks and financialinstitutions, payments to foreignentertainers and artistes, profitson sale of gems, payments asrewards or share of fines toinformants, lottery prizes andwinnings from gambling andbetting.

A further important provision wasthe application of withholding taxon “specified fees” paid by“specified persons” under ChapterXVII of the Inland Revenue ActNo. 10 of 2006. “Specified fees”were defined under Section 153as amounts over Rs. 50,000 permonth or Rs. 500,000 per annumand included any commission,brokerage or other sums of likenature paid in the course of anybusiness, profession or vocation,fees paid on construction work orarticles on a contract basisthrough tender or quotation. Italso included rent, lease rent orother payment for the use oroccupation of any specified landor building.

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Administratively, these provisionsconstituted a very effectivemethod wide in scope in detectingtax evaders, increasing thecoverage of taxpayers and taxrevenue, and combating taxevasion. However, from 1 April2011 these provisions wereremoved thereby diluting theadministrative means and

13.3 Tax AmnestiesAnother policy response that hasbeen used in reducing taxevasion and black money is thegrant of tax and foreign exchangeamnesties. In Sri Lanka, 11 suchtax amnesties have been granted

Apart from the above taxamnesties there was thedemonetization exercise of 1970.Even this was a relative failurewhere although an additional taxcollection of Rs. 100 million wasexpected, the actual collectionwas only Rs. 13 million. (ESCAP,1983).

14. The VAT DebateIn the early days, consumptiontaxes in Sri Lanka consistedmainly of customs duties andexcises. In 1963 the BusinessTurnover Tax (BTT) wasintroduced by the Finance Act No.11 of 1963 and implemented from1.1.1964. In 1981 the BTT wasrevised by the Turnover Tax ActNo. 69 of 1981 which was virtuallya partial VAT. The GST Act No. 34of 1996 introduced a more fullervalue added system but wasimplemented only from 1.4.1998along with another tax called theNational Security Levy (NSL),

under the NSL Act No. 52 of 1991which was a turnover tax leviedon gross sales. These two levieswere amalgamated in August2002 and termed a VAT under theVAT Act No. 14 of 2002.

There is no doubt that in principle,a VAT system is superior to otherforms of sales taxation. Itachieves neutrality betweenmethods of production andbetween propensities to save andconsume. It permits lower andfew rates, minimizes distortion inresource allocation and is

transparent, thereby enabling thetax content of a price to beknown. Above all, a VAT systemeliminates the cascading effectsof a turnover tax and through itsin-built, self-enforcing and cross-checking mechanism is moresuitable for administrativepurposes. For these reasons,over 160 countries have a VATsystem in some form or other.

In spite of these advantageshowever, the VAT has alsoseveral weaknesses and defects.Some of these are inherent in the

Table 8Results of Tax Amnesties since 1964

effectiveness of taxadministration and should be re-incorporated in the new Tax Act.

from 1964 to 2002. However, allthese amnesties have notproduced the expected results.The following Table gives theresults of the tax amnesties from1964 to 2002.

Year No. of Declarants Amount Recovered

(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.



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VAT system itself, such as itsdesign, base, coverage and rates.Others are associated withpractical and administrativeproblems, and still others with thecontext in which VAT wasimplemented, its timing andeffectiveness and its relationshipwith budgetary goals and mediumterm strategy of governments.

In terms of revenue, the VAT hasnot shown much improvement

over the Turnover Tax or GST. Theturnover tax has been a regularand reliable source of incomewithout much complexity or needfor manipulation. The VAT has notshown such regularity and hasbeen characterized by volatilityand the need for complexmanipulation to prevent revenueerosion in the form of input creditand refunds. An analysis of theVAT performance from itsinception in 2002 to 2015 from theCentral Bank Annual Reports,shows that every year the actualrevenue collected has fallen short

of its estimates, the onlyexception being in 2010 where thecollection was Rs. 219 billion inrelation to the estimate of Rs. 206billion. In 2014 the estimate wasRs. 303 billion while the actualcollection was Rs. 275 billion, andin 2015 the estimate was Rs. 296billion and the actual collectiononly Rs. 219 billion.

In terms of revenue productivitywhere the standard rate is 1(perfect productivity) i.e., what

14.1 ThresholdThe threshold for registration of aperson liable to VAT from 1.8.2002

Year Estimate Rs. Actual Rs. Shortfall Rs.

Billion Billion Billion

2002 87 66 -21

2003 120 97 -23

2004 124 120 -4

2005 142 138 -4

2006 174 164 -10

2007 202 187 -15

2008 248 203 -45

2009 185 171 -14

2010 206 219 +13

2011 238 215 -23

2012 264 229 -35

2013 283 250 -33

2014 303 275 -28

2015 296 219 -77

Table 9VAT Revenue Performance 2002 - 2015

Source : Central Bank Annual Reports 2015 and various years.

every 1% raise of VAT rate interms of VAT revenue or GDP, SriLanka’s Productivity Rate is0.315. This may be comparedwith countries such as Vietnam(0.562), Nepal (0.398), Indonesia(0.353) and Singapore(0.415).There are a number ofreasons for the low performanceof the VAT in Sri Lanka.

was Rs. 500,000 per quarter orRs. 1.8 million per annum. Thishas increased from 1.1.2009 toRs. 650,000 per quarter or Rs. 2.5million per annum. From 1.1.2013 itwas increased to Rs. 3 million perquarter or Rs. 12 million perannum, and was further increasedfrom 1.1.2016 under the VATAmendment Act No. 11 of 2015 toRs. 3.75 million per quarter or Rs.15 million per year. From 2 May2016 it was revised to Rs. 3million per quarter. This regularincrease of the threshold hasreduced the coverage and numberof taxpayers resulting in a declinein revenue.

14.2 ExemptionsUnlike in countries like NewZealand, Singapore, Canada etc.where the base of the tax is verybroad with few exemptions, in SriLanka under the First Schedule ofthe VAT Act, a large number ofgoods and commodities as wellas services have been exemptedfrom the tax. These include itemsof mass consumption as well asservices and items considered asincentives for several socio-economic sectors. This hasconsiderably narrowed the baseand scope of VAT, retained thecascading effect on such goodsand led to the necessity toimpose higher rates.

Further, ad hoc changes havebeen made in respect ofexempted items and servicesfrom time to time. For instance,under Amendment Act No. 11 of2015, VAT liability on certainmotor vehicles imported andlocally manufactured wasremoved from October 25, 2014,cigarettes and liquor from October25, 2014 and ethyl alcohol from 1January 2015. These howeveragain changed in June 2016 whencertain exempted sectors have

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14.3 Zero Rating

Zero rating is a mechanismadopted in a VAT system torelieve certain goods andservices from the incidence ofVAT. Unlike exemptions however,zero rating enables a supplier ofzero rated goods to reclaim all theinput taxes he paid on hispurchases. Section 7 of the VATAct includes not only exportswhich are normally so in adestination principled VATsystem, but also includes a host

It will be seen that in the earlyyears, refunds averaged around6% of gross VAT collection and inthe manufacturing sector about1/3 of gross manufacturingreceipts went out as refunds.Steps have been taken tominimize these refunds throughstricter administrative monitoringand controls such as by theimplementation of the DefermentScheme and in 2011 by theSimplified VAT scheme (SVAT).This scheme minimizes VATrefunds for VAT registeredpersons who are engaged inexports and special projects bythe system of issuing creditvouchers. Refunds both overalland in manufacturing have sincebeen reduced from 2011 onwardsas the figures above indicate.

However, refunds under a VATsystem cannot be entirelyeliminated and the taxadministration has to manage it ina proper and effective manner.Moreover, refunds have to be paidwithin one month and interest at1% every month is due thereafter.Zero rating and refunds havetherefore to be controlled carefullyto prevent fraudulent requests forrefunds.

of services consumed outside SriLanka. Further, it hasincorporated a key clause called“international transportation(including trans-shipment) ofgoods and passengers” whoseinterpretation is in fact very wide.All these zero rated items haveled to a large refund elementwhich has adversely affected netrevenue collection.

Of the gross receipts, aconsiderable element goes out asrefunds especially in sectorssuch as leasing, construction,exports, garments, manufacturingand the hotel sector. Table 10gives the amount of refunds inrelation to gross collection andmanufacturing for a selectednumber of years.

14.4 RatesWhen the VAT system was firstintroduced in 1998 in the form of aGST, it was characterized by asingle uniform rate of 12.5%. Asingle rate is best both from acompliance and administrativepoint of view. Multiple ratesdistort both producer andconsumer choices andcomplicates the system.

In Sri Lanka, VAT rates have beensubject to ad hoc changes fromtime to time. While the VAT ActNo. 14 of 2002 had originally two

been made liable to VAT such asthe telecommunication sector,health care services (with someexemptions), etc. Such ad hocchanges and lack of consistencylead to confusion amongtaxpayers and the general publicapart from variations in taxrevenue.

Year VAT Collection Refunds %

2005 Gross 154,199 12,321 8%

Manufacturing 31,504 12,279 40%

2006 Gross 175,247 11,176 6%


2009 Gross 179,518 8,400 5%

2010 Gross 228,432 8,869 4%


2011 Gross 221,768 6,348 3%


2012 Gross 207,805 3,149 1.5%


2013 Gross 218,146 459 0.2%

2014 Gross 239,028 1,112 0.4%

Manufacturing 46,174 732 1.6%

Table 10VAT Refunds 2005 - 2014 (Rs. Million)

Source: Compiled from IRD Performance Reports, various years.



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positive rates of 10% and 20%, itwas soon unified into a single rateof 15% from January 2004. Therewas again a modification of rateswhereby from 19.11.2004 therewas a basic rate of 5%, a luxuryrate of 18% and a standard rate of15% which were in 2005subsequently changed to 5%,20% and 15%, respectively. In2009 the system was againchanged to a single rate systemof 12% which in 2015 wasreduced to 11% and from 2 May2016 increased to 15%. However,according to IMF estimates, inorder to be revenue neutral, theVAT rate in Sri Lanka should bearound 17%.

14.5 FinancialServicesDue to the difficulty of computingvalue added in the case offinancial services such asbanking and insurance, mostcountries exclude financialservices from VAT. Suchproblems include disentanglingthe costs of intermediation, thesensitivity of the sector to finemargins, the likelihood ofencouraging offshore provision offinancial services and theimportant role finance plays inthe economy. In 2014 leasing ofmovable properties after25.10.2014 was included asfinancial services subject to VAT.

In Sri Lanka, financial serviceswere exempted till 31.12.2002 butfrom 1.1.2003 were includedunder Chapter 111 A of the VATAct. However, the method ofcomputing was not the normalOutput minus Input used in othersectors but the additive methodof Net Profit plus Wages, underwhich method there is nodeduction for input taxes paid.Hence, most banks tend to passon the VAT to their borrowers

leading to cost of credit andaffecting investment.

14.6 Wholesale andRetail Trade

Under Section 3 of the VAT ActNo. 14 of 2002, VAT was notcharged on the wholesale andretail trading sector (unless theywere manufacturers or importersof such goods) and they wereliable only to Business TurnoverTax (BTT) to the ProvincialCouncils under Section 36.1 ofthe Ninth Schedule of theThirteenth Amendment andsubsequently in 2011 to the NBT.

With the abolition of the provincialturnover tax in 2011, wholesaleand retail trade was made liableto VAT under VAT Amendment ActNo. 17 of 2013. The quarterlyturnover applicable to VAT onwholesale and retail tradeoriginally in 2013 was Rs. 500million and in the process ofenlarging the VAT base andcoverage, was reduced to Rs. 250million in 2014 and Rs. 100 millionper quarter in 2015. On 2 May2016 the threshold wasadministratively reduced to Rs. 3million per quarter or Rs. 1 millionper month which meant that VATwas payable on liable goods andservices on turnover over Rs.33,000 per day. Such frequent adhoc changes to the threshold aswell as rates, lead to problemsboth to the taxpayers as well asthe tax administration. The latestproposal is to revise the thresholdfrom Rs. 12 million to Rs. 50million per annum i.e., from Rs.33,000 a day to Rs. 138,000 aday. Enlarging the coverage oftaxpayers including VAT payersand the base of the tax includingVAT is a necessary ingredient increating a more effective taxsystem, particularly in the

However, reducing the thresholdof small and medium wholesaleand retail traders creates manypractical problems for taxpayersin keeping and maintainingrecords of sales and purchases interms of VAT liable and exemptgoods, zero rated goods etc. Italso creates problems ofmonitoring, inspections, auditingetc. for the tax administration aswell. In this context, it may havebeen more practical to haveincreased the tax rates whilekeeping the threshold intactwithout reducing it to too lowlevels. In fact, even as early as1985, the IMF Mission headed byCarlos A. Aguirre whenconsidering the introduction ofVAT to Sri Lanka, recommendedthat “Small retail traders whousually keep inadequate or norecords of their activities could beexcluded from the tax net” (IMFReport October 25, 1985, p. 15).It is on this basis that Section 3of the VAT Act No. 14 of 2002excluded wholesale and retailtrade (other than those ofmanufacturers and importers)from VAT.

14.7 VAT FraudsVAT is a tax that is susceptible tofraud and is common in manyVAT countries. For instance, in2005 in Germany the “VATcarousel fraud” or “missing traderintra-community fraud” amountedto 17.6 million Euros or 11% ofGermany’s annual VAT revenue.In 2006 the VAT fraud acrossEurope was estimated at amassive Euro 23 billion. Fraudshave also been reported fromPoland, Canada, Italy, NewZealand, UK etc. From goods ithas recently moved into servicesas well.

context of the crucial need toenhance tax revenue and reversethe declining tax/GDP ratio.

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There are three leadingtechnology based solutions tothis problem. (1) the Real TimeVAT (RT VAT); (2) the VATLocation Number (VLN) system;and (3) the Digital VAT (D-VAT).The RT VAT focuses on securingthe tax, the VLN focuses onsecurely tracing the supply andthe D-VAT certifies that thecorrect tax is charged, collectedand remitted.

In Sri Lanka, the massive VATfraud during the years 2002 to2004 amounted to around Rs. 4billion making it one of thebiggest in South Asia. It wasbased on fraudulent invoices ofcompanies some of which werenon-existent. There are manyreasons for VAT being easilysusceptible to fraud in Sri Lanka.The refund due to overpaid inputtax, zero rating, eligiblility to fullrefunds, the relatively large sectorbeing put in the zero rated list aresome legal provisions in the Act.Others are administrative such asweak administration, lack of afool proof audit system andverification of invoices, lack ofco-ordination of information withinas well as between revenuedepartments, and corrupt officialsare other main reasons.

14.8 Administration

One of the most important factorsin the inadequate performance ofthe VAT system in Sri Lanka, are

the problems connected with thetax administration. VAT types oftaxes are not easy to administerand the much vaunted self-checking and self-policing featureof the VAT has been found to bewanting in the Sri Lankanexperience.

Some of the basic requirementsfor the successful administrationof the VAT include:

• A simple VAT return and ataxpayer identificationnumber (TIN);

• An effective taxpayerassistance programme;

• A reliable computerizedsystem providing accurateand timely information;

• An effective system of audit,supervision, monitoring andcontrol;

• A coordinated informationsystem for cross-checkinginformation, invoices,vouchers etc. in the VATreturn with information fromother sources to detectunder-reporting or fraud;

• A sound and effectivepenalty system.

In most of these issues, theexperience of Sri Lanka’s VATadministrative system has, in

practice, been found to bewanting. Various attempts havesince been made to rectify theshortcomings, improve thesystem and streamline the VATadministration. These include:

• The provision of adequateresources;

• Development of skills andtraining;

• An extended computerizationand EDP system;

• Advance Tax scheme andVAT deferment scheme;

• Optional VAT;

• Simplified VAT system(SVAT);

• Mechanism to cross-checkinput credit;

• Streamlining regulationsrelating to refunds such asthe establishment of a VATRefund Fund and the systemof releasing funds based ona Bank Guarantee from theexporter;

• Streamlining appealprocedures and arrearscollection.



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15. Customs Duties, Excises and MiscellaneousTaxes and Levies15.1 Tarrifs

Excise Duty is an old levy havingbeen introduced by the ExciseOrdinance No. 8 of 1912 andrecently broadened by the Excise(Special Provisions) Act No. 13 of1989. They are based partly on aspecific basis and partly on an advalorem basis. Excise dutieshave a large potential forincreased revenue due to theincrease of demand for items likeliquor and cigarettes which isgenerally inelastic and hencehave been subject to frequentrate increases to generategovernment revenue. There isalso considerable scope forenlarging the Special Exciseswhich are levied on the sale ofcertain luxury and semi-luxuryitems on an ad valorem basis andto increase the rate of duty aswell.

In 2014 Excise duties brought inRs. 256 billion or 2.5% of GDPwhile in 2015 it brought in Rs. 497billion or 4.4% of GDP. As a share

of revenue, Excise duty produced34% of tax revenue in 2015.

Excise duties if properlyadministered could therefore beutilized to further expandgovernment tax revenues withoutaffecting incentives for savings,investment and production.However, its ultimateeffectiveness would depend onseveral factors like theidentification of excisable items,an appropriate rate structure, arational system of classificationand valuation, and last but notleast, a properly organizedeffective administrative network.

15.3 MiscellaneousTaxes and LeviesApart from the taxes and leviesdiscussed above in the national,provincial and local level, are anumber of other miscellaneoustaxes and levies that constituteSri Lanka’s taxation system.They include such taxes as theNation Building Tax (NBT),Economic Service Charge (ESC),Betting and Gaming Levy, ShareTransaction Levy, Cellular MobileTelephone Subscribers Levy,Special Commodity Levy, Portand Airport Levy (PAL), StampDuty, Telecommunication Levyand Cess Levy (SCL). Theybrought in a considerable amountof revenue in 2014 at Rs. 239billion or 2.3% of GDP and in2015 Rs. 243 billion or 2.2% ofGDP. These other taxesconstituted 17% as share ofrevenue for 2015 as shown inChart 1.

The Mission statement of the SriLanka Customs is “to enforce thecustoms laws and revenue andsocial protection laws whilefacilitating trade and industry withthe objective of contributing to thenational effort and in duerecognition thereof”.

In respect of tariffs, export dutieshave been abolished since 1993(except on scrap iron and a fewother items) and import dutiesunder the current fiscal systemare used not so much for revenueas for protective purposes. Theyare based on the HarmonizedSystem of goods classificationand the valuation is based on the“Brussels Definition of Value”(BDV).

A number of steps have beentaken to simplify and harmonizecustoms procedure and practicessuch as the widespread use ofInformation Technology (IT), theHarmonized CommodityDescription and coding system,Uniform Customs Declaration(CUSDEC) and the ASYCUDA ++automated data processingsystem. The Tariff Commissionas early as 1985 recommendedsimplifying and rationalizing therate structure by reducing thenumber of duty bands, based onreducing intended levels ofeffective protection.

The rationalization of the tariffstructure is however complicateddue to international agreementslike the Indo-Sri Lanka Free TradeAgreement (ISFTA) and thePakistan-Sri Lanka Free Trade

Agreement (PSFTA), apart frommultilateral trade agreements likeSAFTA as well as the WTO. FromJanuary 2005 there were 5 bandswhich were subsequently reducedto 4 bands, zero, 7.5%, 15% and25% and in 2015 were simplifiedto a three band structure of zero,15% and 30%.

From a revenue point of view, theimport duties brought in Rs. 81billion or 0.8% of GDP in 2014and Rs. 132 billion or 1.2% ofGDP in 2015 which was 9% shareof revenue.

15.2 Excise Duties

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15.4 Simplification

Table 11Tariffs, Excise Duties and Miscellaneous Taxes 2010 -2015 (Rs. Million)

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


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

Such a complex system createsdifficulties for the revenueadministration and leads toconfusion both among investorsand taxpayers. The simplificationof this complex system is anurgent necessity. At one time,there were 22 taxes and levies atnational level (apart from the one-off taxes in 2015), 20 at provinciallevel and 5 at local governmentlevel. As part of the simplification

process of this complex system,a number of taxes were abolishedsuch as Debits Tax, SocialResponsibility Levy, RegionalInfrastructure Development Levy,Construction Industry GuaranteeFund Levy and the BTT atprovincial level. However thenumber is still large and thesystem needs furthersimplification.

Simplification however does notdepend on legislative measuresalone but also on administrativeprocedures and regulations.While various proceduralguidelines have been issued toclarify and simplify matters, it hasnot been as effective asexpected.



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16. Revenue AdministrationIn the final analysis, it is the levelof efficiency of the revenueadministration which determinesthe effectiveness of any revenuesystem. In the current context,with the declining tax ratio and theurgent need to increasegovernment revenue, theeffectiveness of the taxadministration, its structures,systems and processes needthorough examination, itsweaknesses identified andmeasures taken to rectify theseweaknesses and make the taxadministrative system an efficientand effective instrument of taxcollection.

The problems and gaps inrevenue administration relate bothto the level of policy formulationas well as at the implementationlevel. At the policy formulationlevel, the gaps relate to (i) lack ofeffective institutional structures;(ii) absence of adequate andeffective processes for publicparticipation in policy formulation;(iii) inadequacy of monitoring andevaluation of policyimplementation; (iv) lack ofsufficiently trained personnel fortax policy analysis and research;and (v) unification of collectiontechniques. At the implementationlevel, the weaknesses include:

i) The relatively low number oftaxpayers and level ofcompliance;

ii) Improvement of worksystems and methods;

iii) Insufficiently trained personneland modernizing of taxadministration;

iv) Attitude of taxadministrators towardstaxpayers and insufficientpublic education;

v) Inadequate coordinationbetween different taxadministering departmentssuch as between InlandRevenue, Customs, Exciseand other revenueauthorities includingprovincial and localauthorities;

vi) Shortcomings in theoperation of taxadministration includingaudits, inspections, defaulttaxes, combating taxevasion, etc.

According to the Inland RevenueDepartment Performance Report2014, the total number oftaxpayers as at 31.12.2014 was625,376 comprising 3% of thepopulation. The total number ofcorporate files was 39,535 thoughthe number of functioningcompanies under the CompaniesAct No. 7 of 2007 was at October2011, 48,658 including listedcompanies in the StockExchange 296.

The total number of incometaxpayers was 559,360comprising of 148,720 individualsand PAYE employees 354,758.VAT registered persons amountedto 15,530, NBT 22,381,Employers registered under thePAYE scheme 12,104 andEconomic Service Charge 3515.The total number of Betting andGaming files was only 1072.

16.1 Number ofTaxpayers and Files

Unregistered taxpayers, stopfilingtaxpayers, tax evaders anddelinquent taxpayers are howeverthe key factors in judging theeffectiveness of a taxadministration.

16.2 ComplianceVoluntary compliance is the goaland cornerstone of a taxadministration and the mosteconomical way of collecting tax.It is more so under a system ofself-assessment. It may be saidthat the main tasks of taxadministration are facilitatingcompliance, monitoringcompliance and dealing with non-compliance. The IRD has taken anumber of measures to improvecompliance such as providingbenefits to individual taxpayers inthe form of awarding PrivilegeCards (Gold and Silver), grant oftax concessions on importation ofmotor vehicles, discounts onearly tax payments among others.However, the return compliancefor income tax on due dateappears inadequate as shown inTable 13 below.

Nevertheless, it should also benoted that the return forms arecomplicated running into severalpages. Taxpayers find it difficultto complete them and often haveto take recourse to accountantsor tax practitioners therebyincreasing costs and leading topersonal complications. Taxreturns should be re-designed andmade simpler and preferablylimited to a single sheet.

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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.

Table 12Number of Taxpayers and Tax Files as at 31.12. 2014



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16.3 Audits and Investigations

Under the existing self-assessment system prevalent,96% of tax collection is throughself-assessment and only 4% byway of official assessment.Nevertheless, auditing andexamination of returns andaccounts is an integral part ofassessment procedure. The auditfunction should be evaluated interms of the quantity and qualityof audits carried out and therevenue “voluntarily” paid. Auditshave been undertaken ontaxpayers particularly in the LargeTaxpayer Unit (LTU) in terms ofbusiness activity, entity type andbusiness size. It has been foundthat the most productive use ofinvestigation resources has paiddividends in respect of the largesttaxpayers.

However, considering the extentof under-reporting of profits andincome, particularly by largecompanies, traders andbusinesses, professionals andothers, whether the extent andscope of auditing, investigationand additional tax collected issufficient is debatable. Forinstance, as at October 2011 thetotal number of functioningcompanies was 48,658 while thenumber of resident company filesas at 31.12.2014 was 38,502. In2014 the total additional incometax assessed and agreed in theCorporate Large Taxpayer Unit(LTU) after audit was Rs. 10 billionor about 8% of total additional taxassessed and agreed for the year.

16.4 Default Taxes

Total taxes in default as at31.12.2014 stood at Rs. 128billion, which is relatively high.This includes some taxes whichhave been repealed, abolished oruncollectible like Debit Tax,Turnover Tax, GST, Wealth Tax,Gift Tax etc. Steps should betaken to write off these obsoletetaxes from the books andeffective steps taken to collectthe balance in a planned andspeedy manner, as provided inthe Default Taxes (SpecialProvisions) Act No. 16 of 2010which stipulates that arrearsshould be maintained at less than3% of taxes levied in theimmediately preceding year.

Table 13Tax Return Compliance 2012 to 2014

Source: Inland Revenue Department, Performance Report 2014.

Tax Year Sector Compliance on

Due Date %

Income Tax 2012/2013 Corporate 56%

Non-Corporate 41%

2013/2014 Corporate 53%

Non-Corporate 42%

PAYE 2011/12 52%

2012/13 53%

2013/14 55%

VAT 2012 89%

2013 78%

2014 49%

ESC 2012 80%

2013 93%

2014 71%

NBT 2012 79%

2013 77%

2014 84%

16.5 AppealsThe speedy and effectivesettlement of appeals is animportant element in improvingthe administrative system. Thereare a number of problems inappellate procedure which islopsided and heavily weightedagainst the taxpayer, largely dueto the absence of a vociferoustaxpaying public. The failure tofollow proper procedure has oftenled to protracted delay in thesettlement of appeals. In thisrespect, the earlier Board ofReview has been replaced by theindependent Tax AppealsCommission through the TaxAppeals Commission Act No. 23of 2011 which covers Customsappeals as well. However, thereare a number of issues which hascropped up including thenecessity to make a 25% depositof the amount of tax and penaltyin dispute in order to validate anappeal, a provision which hasdrawn severe criticism.

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Typ

e o

f Tax

Gro

ss T

ax in

Pen

alty

(Rs)

Def

ault

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axes

Ex-

Pen

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Rel

ated

toC

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Pen

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(Rs)

Dis

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Tax

es (R

s)(R

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ty (R

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me

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56,8

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1,39

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Val

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Val

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(Fin

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8,53

84,

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727,

620,

407

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9,17

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1,21

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702,

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-2,

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2,61

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91,

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2,40

91,

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-16

7,34

9,80

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8,97

9,46

2,34

281

,096

,880

,572

111,

700,

944,

745

71,3

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47,2

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,597

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8,63

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Tab

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201

4

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rce:

IRD

Per

form

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Rep

ort 2

014.



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16.8 Measures Takenfor Improvement

Considering the weaknesses inrevenue administration and thenecessity to remedy theseweaknesses and improve theefficiency of revenueadministration, a number ofmeasures have been taken at allrevenue departments includingInland Revenue, Customs andExcise.

In Inland Revenue, the TaxService Unit establishedfacilitated taxpayers and thepublic to access theDepartment’s serviceconveniently. In 2014 the Unitissued 6,054 TIN certificates and7908 temporary VAT applicationsfor opening of new files as wellas 321 clearance certificates fornon-taxpayers. Consultancyservices were made to the publicthrough the “One Stop ServiceCentre” while 14 awarenessprograms were organized duringthe year.

The Internal Audit Branchexamines all payments, daily

vehicle running charts, paysheets, annual board of surveyreports and bank reconciliationapart from other actions such asrecovering amounts due todishonoured Cheques,, refundsand checking imprest accounts.

The Economic Research andPlanning Unit carries out differenttypes of researches by analyzingdata received from varioussources such as the CentralBank, Census and StatisticsDepartment etc. The TrainingBranch vital for training of taxofficers to perform their dutieseffectively, while organizingawareness programs fortaxpayers, also providedoverseas training for tax officers,participation in overseasseminars and workshops to learnthe best practices in othercountries in order to maintain ahigh level of professionalism astax administrators. Locally, itconducted several programs toprovide specialized knowledge onapplication of tax statutes andother relevant technical areasapart from in-house training,particularly in taxation andaccountancy.

In 2011 a Committee forInterpretation of Tax Laws wasappointed which is responsible forthe issuance of interpretations,clarifications, guidelines etc. onthe provisions of the various Actsadministered by the Department.The objective of this is to ensureuniformity with regard tointerpretations and procedures intax legislation and administration.A total of 73 interpretations havebeen given in 2014.

Internationally, in order toeliminate or mitigate theincidence of juridical doubletaxation and fiscal evasion in

16.6 Coordinationbetween RevenueDepartments

One of the principal defects of thetax administration system in SriLanka is the lack of coordinationbetween the revenuedepartments, and on the policyside the present fractured andisolated character of the activityof policy formulation. As regardsthese, the previous TaxCommissions have recommendedthe constitution of a Board ofRevenue or Revenue Authorityand the creation of a permanentNational Taxation Commission asa remedy.

In respect of the former, the lackof coordination between theInland Revenue, Customs, Exciseand provincial and local revenueauthorities as well as the FiscalPolicy Division at the Treasury,affects policy formulation,information exchange, and themonitoring of the implementationof taxes. They all tend to operatein isolation. In order to remedythis, the establishment of a Boardof Revenue or Revenue Authorityvested with the overall authorityfor revenue administration hasbeen recommended in order tocoordinate and improve theoverall tax administration systemof the country. Such a RevenueAuthority is not expected to be atax collector but to reorganize theadministration of the threedepartments, eliminateoverlapping functions and effectcoordination where it is possible,so as to cater for lessbureaucracy, expedition andincreased collection of legitimaterevenue.

16.7 Cost ofAdmninistration

As per the Performance Report ofthe IRD for 2014, the totalexpenditure of the Departmentwas Rs. 3,087 million (includescapital expenditure for RAMIS)and the revenue collected wasRs. 514 billion. In 2013 theexpenditure was Rs. 1,876 million.The productivity ratio is 166:1 i.e.,the cost of collection for Rs. 100was 60 cents or 0.6% whichcould be considered asreasonable.

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17. Concluding RemarksSri Lanka’s fiscal and taxationsystem is at a critical juncture.With the end of the 30 year oldinsurgency, Sri Lanka has entereda new era of growth, reconciliationand reconstruction. Developmentchallenges are many both in theinternational and nationalcontexts.

The current taxation and fiscalpolicy issues discussed are ofcrucial importance especially therecent declining growth in taxrevenue ratio, the reasons for the

decline and measures necessaryto reverse the trend and make thetax system into an effectiveinstrument of economic growth.Relevant issues discussedinclude the direct and indirecttaxes, the pros and cons of theValue Added Tax system and itsproblems, tax evasion, capitalgains taxation, elasticity andbuoyancy of the fiscal system,the tariff structure, simplificationof the tax system and last but notleast, the problems of the tax

administration, its weaknessesand measures necessary tostrengthen the administration inorder to make it an effectivemechanism of collecting muchneeded revenue.

international transactions, SriLanka has entered into a numberof double taxation agreements.The avoidance of double taxationis important for attracting foreigninvestments, obtaining expertise,modern technology, employmentopportunities etc. Sri Lankacurrently has 42 such Double TaxTreaties and one multilateraltreaty (SAARC).

Finally, the ongoingimprovements in tax complianceadministration include theautomation of revenue agencies,introducing the Single WindowSystem (SWS) at Sri LankaCustoms linking all stakeholdersand incorporating into theASYCUDA World system,automating of the activities of theMinistry of Finance under theIntegrated Treasury ManagementSystem (ITMIS), introducing thezero based budgeting system bythe Finance Ministry and settingup of Budget Implementation andMonitoring Unit (BIMU) to ensureclose monitoring of expenditureprogrammes.

At Inland Revenue, theautomation process involves theimplementation of the RevenueAdministration and ManagementInformation System (RAMIS)aimed at further simplifying thetax administration and tax fortaxpayers. RAMIS is alsoenvisioned to support inincreasing the revenue collectionby enabling IRD to reach out totaxpayers in a more efficient andeffective way. It is expected tomeet the requirement ofinfrastructure facilities such asend user hardware, computers,printers and scanners that arenecessary to perform theactivities of the Department.

RAMIS is expected to widen thetax net and improve compliance,enhancing the efficiency of therevenue collection process,increasing the quality of the workenvironment to generate higherproductivity and provide betterservice to taxpayers with a viewto increasing voluntarycompliance. It is expected to becompleted by end 2016.

However, it may also be statedthat in many instances theexpectation of greatereffectiveness fromcomputerization has notmaterialized. Computerization isa necessary but not a sufficientcondition to improve theeffectiveness of taxadministration. Whilst computertechnology helps perform routinetasks more rapidly, there is noguarantee that it wouldautomatically increase revenuecollections substantially.Computer technology facilitatesand improves tax administrationbut unless accompanied byeffective enforcement activities,may help in increasing revenueonly marginally. Successfulcomputerization must beaccompanied by a fundamentalreorganization of both systemsand procedures and cannot beused by itself to side-step much

needed reform.



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ReferencesAmirthalingam, K. 2012, “The Importance of Taxation and Role of Indirect Taxes in Developing Countries: ASurvey of Literature,” Sri Lanka Economic Journal, Vol. 13 No. 1 June.

Central Bank of Sri Lanka, Annual Report 2015 and previous years.

Department of Inland Revenue 2014, Performance Report.

Ebrill, Liam P. 1987, “Evidence on the Laffer Curve: The Cases of Jamaica 1989 and India” in Supply Side TaxPolicy: Its Relevance to Developing Countries, ed. Ved P. Gandhi. IMF Washington DC.

ESCAP 1983, “The Integration of Tax Planning with Development Planning in the ESCAP Region”, DevelopmentPaper No. 3, ST/ESCAP/231.

Fernando, Vincent Mervyn, 2015, “Basic Concepts in the Budgetary Policy and Budget 2016”, EconomicReview Oct. – Dec 2015, People’s Bank, Colombo.

GOSL Inland Revenue Act No. 10 of 2006 and Amendments.

- Taxation Commission Reports 1955, 1968, 1990, 2010.

- Value Added Tax Act No. 14 of 2002 and Amendments.

Heller, Jack and Kenneth M. Kauffman, 1963, “Tax Incentives for Industries in Less Developed Countries,”Cambridge: The Law School of Harvard University.

Indraratne, Yukthika, 2003, “The Measurement of Tax Elasticity in Sri Lanka: A Time Series Approach,” StaffStudies, Central Bank of Sri Lanka, Vol. 33 Nos. 1 & 2.

Kaldor, Nicholas, 1960, “Comprehensive Reform of Direct Taxation”, GOSL Sessional Paper IV of 1960.

Premaratne, C. 1985, “Some Structural Characteristics of Sri Lanka’s Tax System”, Staff Studies Vol. 15 Nos. 1and 2 April/September; Economic Research Department, Central Bank.

Salgado, M. Ranji P. 1989, “Report on Fiscal Aspects of the Public Sector Restructuring Project” (FinancialDevolution to the Provinces). World Bank.

Sri Lanka State of the Economy 2015 & 2014, Institute of Policy Studies of Sri Lanka, Colombo.

Sri Lanka Tax Review 2015, Sri Lanka Institute of Taxation, Dehiwala.

Waidyasekera, D.D.M. 2012, “Taxation, Fiscal Policy and the Economy in Sri Lanka”, Stamford LakePublication, Colombo.

- 2011, “The Value Added Tax System: Ideal Instrument for a Market Economy but Ill-suited toAdministrative Capacity”, Economic and Social Development under a Market Economy Regime in SriLanka, Vol. I. Ed. Saman Kelegama & Dileni Gunawardena, Vijitha Yapa Publications, Colombo.

- 2003, “Current Fiscal Policy”, Economic Policy in Sri Lanka, Issues and Debates. Ed. SamanKelegama, Sage Publications, New Delhi.

Zuhair, A.J.M., 1985, “Tax Ratio Analysis in a Tax Capacity Model,” Staff Studies, Central Bank of Sri Lanka,

Vol. 15 Nos. 1 & 2.

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• Sri Lanka: State of the Economy 1998 (October 1998)

• A Strategy for Nature Tourism Management in Sri Lanka (November 1998)

• Effective Local Governance - The Foundation for a Functioning Democracy in Sri Lanka (May 1999)

• Labour Legislation and Female Employment in Sri Lanka’s Manufacturing Sector (July 1999)

• Monitoring the 20/20 Compact on Budget and Aid Restructuring in Sri Lanka (August 1999)

• The Impact of Credit on Small & Medium - Scale Industries (SMIs) in Sri Lankas (September 1999)


• How Successful is Samurdhi’s Savings and Credit Programme in Reaching the Poor in Sri Lanka? (November 1999)

• The Integrated Rural Development Programme in Sri Lanka: Lessons of Experience for Poverty Reduction (December1999)

• The Economic Cost of the War in Sri Lanka (January 2000)

• Designing Retirement - Income - Security Arrangements: Theory, Issues and Application to Sri Lanka (February 2000)

• South Asia Economic Journal (March 2000)

• Policy Impact Analysis in Contemporary Sri Lanka (March 2000)

• Review of Literature Linking Macroeconomic Policies to Household Welfare in Sri Lanka (March 2000)

• Annotated Bibliography of Macroeconomic and Adjustment Policies in Sri Lanka (May 2000)

• Review of Poverty Related Data and Data Sources in Sri Lanka (May 2000-2001)

• A literature Survey of Macro Econometric and CGE Models in Sri Lanka (June 2000)


• Effectiveness of Welfare Programmes in Improving Estate Performance in Sri Lanka (December 2000)

• The Problems of Measuring Cost of Living in Sri Lanka (June 2000)

• An Economic and Environmental Analysis of Shrimp Farming Industry in Sri Lanka (September 2001)


• Regional Economic Cooperation in South Asia: A Sri Lanka Perspective (November 2001)

• The Implications of the Changing Role of Governance in Sri Lanka (December 2001)

• Policies and their Implications for the Domestic Agricultural Sector of Sri Lanka: 1995 - 2000 (August 2002)

• Sri Lanka Electricity Industry: Long Term Thermal Generation Fuel Options (September 2002)

• Irrigation and Agriculture in Sri Lanka (October 2002)

• Forward Contracts: A Market Based Alternative to Government Intervention in Agriculture Marketing in Sri Lanka (January2003)

• The Delivery of General Education in Sri Lanka - An Alternate Approach (March 2003)

• Assessment of the Pension and Social Security Benefit Scheme for the Self-Employed Persons in Sri Lanka (August 2003)

• Assessment of the Farmers’ and Fishermen’s Pension and Social Security Benefit Scheme in Sri Lanka (August 2003)

• Assessment of the Employees’ Provident Fund in Sri Lanka (August 2003)

• Cross Border Competition: Implications for Sri Lanka (December 2003)

• Ready Made Garment Industry in Sri Lanka: Facing the Global Challenge (June 2004)

• Liberalization of International Air Transport in Sri Lanka: Policy Options. (July 2004)

• Economic Policy in Sri Lanka: Issues & Debates - A Festschrift in Honour of Gamani Corea (September 2004)

• Sri Lanka: State of the Economy: 2004 (October 2004)

• Governance Issues in Poverty Reduction in Sri Lanka (October 2004)

• Identification of the Poor in Sri Lanka: Development of Composite Indicator and Regional Poverty Lines (December 2004)

• Phoenix from the Ashes? Economic Policy Challenges and Opportunities for Post-Tsunami Sri Lanka (April 2005)

• Sri Lanka’s National Accounts (May 2005)

• Input Output Tables for Sri Lanka - 2000 (June 2005)

• Labour Standards and International Trade: The Case of EU GSP Concessions to Sri Lanka (July 2005)

• Regulatory Impact Assessment: A Tool for Better Regulatory Governance in Sri Lanka? (August 2005)

• Impact of Trade Liberalisation on Poverty and Household Welfare in Sri Lanka (September 2005)

• South Asia After the Quota System: Impact of the Mfa Phase-Out (October 2005)

• Decentralization and Provincial Finance in Sri Lanka: 2004 - An Update (November 2005)

• Sri Lanka National Health Accounts 2000-2002 (December 2005)

• Microfinance in Sri Lanka : A Household Level Analysis of Outreach and Impact on Poverty (December 2005)

• A Framework for Social Accounting Matrices (SAMS) of Sri Lanka (January 2006)

• Devolution Revisited: Towards A More Effective Devolutionary Polity (February 2006)

• Livelihoods in Post-Tsunami Sri Lanka: “Building Back Better”? (April 2006)

• Rural Land Sector in Sri Lanka: Major Characteristics, Determinants and Implications for Land Policy (May 2006)

• Utilization of Preferential Trade Arrangements: Sri Lanka’s Experience with the EU and US GSP Schemes (January 2007)

• Beyond Twenty Million: Projecting the Population of Sri Lanka 2001-2081 (March 2007)

• Disaster Management Policy and Practice in Sri Lanka: Sharing Lessons among Government, Civil Society

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