PowerPoint Presentation

CURRENT STATUS OF TAX COLLECTION IN SRI LANKA AND SUGGESTIONS FOR IMPROVEMENTHARISON SAMARATUNGACTA, ATII, MAAT, B. Sc. (B. Ad) Sp, HNDC

Chartered Tax Advisor andAuthorized Representative

6th April 2015HWHS1

Global Status of Tax Collection.Current Status of Tax Collection in Sri Lanka.Balance Between Direct and Indirect Tax.Per Capita Income and Tax Free Allowance.Details of Individual Taxpayers.Tax in Default and VAT Productivity.Return Compliances.Problems with the Current System.Reasons for the Current Status.Suggestions for Improvement.CONTENTS

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GLOBAL TAX COLLECTION AS A PERCENTAGE OF GDPAsia%OECD%Other%Bangladesh 8.7 Belgium 45.3 Brazil 14.4 China 10.4 Denmark 48.0 Chile 19.1 India 10.8 France 45.3 Egypt 13.2 Japan 10.1 Germany 37.6 Jordan 15.3 Malaysia 16.1 Italy 44.4 Kenya 15.9 Nepal13.9Luxembourg 37.8 Lebanon 15.5 Pakistan 10.1 New Zealand 32.9 Mauritius 19.0 Philippines 12.9 Norway 42.2 Morocco 24.5 Singapore13.8Sweden 44.3 Seychelles 28.4 Sri Lanka 12.0 United Kingdom 35.2 South Africa 25.5 Thailand 16.5 United States 24.3 Tanzania 11.7

Source : World Bank and OECD (2012)3

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CURRENT STATUS OF TAX COLLECTION IN SRI LANKAYearGDPGovernmentRevenue% ofGDPTax Revenue% of GDPNon-Tax Revenue% ofGDP19606,7111,40420.91,12016.72844.2197013,6642,73620.02,50718.32291.7198066,52713,02219.612,15818.38641.31990321,78467,96421.161,20619.06,7582.11995667,772136,25820.4118,54317.817,7152.720001,257,636211,28216.8182,39215.428,8902.320052,452,782379,74715.5336,82813.742,9191.720105,604,104817,27914.6724,74712.992,5321.720116,543,313967,86214.8845,69712.9122,1651.920127,578,5541,051,46013.9908,91312.0142,5471.920138,673,8701,137,44713.11,005,89511.6131,5521.5

Figures in LKR MillionSources Central Bank of Sri Lanka

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YearDirect %Indirect %200415%85%200516%84%200619%81%200721%79%200822%78%200927%73%201019%81%201119%81%201219%81%201320%80%

Sources: Central Bank of Sri Lanka

HWHS5BALANCE BETWEEN DIRECT AND INDIRECT TAXYearDirect %Indirect %199067%33%199557%43%199621%79%199720%80%199819%81%199922%78%200015%85%200117%83%200217%83%200317%83%

Sources: Central Bank of Sri Lanka and IRD Performance Report YearPopulation in ThousandPer Capita in USDPer Capita in Rs. Tax Free Allowance200519,6441,226123,181300,000200619,8581,402145,744300,000200720,0391,599176,893300,000200820,2461,966212,972300,000200920,4762,033233,716300,000201020,6532,370267,967300,000201120,8692,805310,090500,000201220,3282,862365,192500,000201320,4833,191411,998500,000

PER CAPITA AND POPULATIONHWHS6

Sources: Central Bank of Sri Lanka and IRD Performance Report YearIndividual Tax Files With PAYEIndividual Tax Files Without PAYEWith PAYE of PopulationWithout PAYE of Population2005 325,659 120,570 1.66%0.61%2006 390,336 136,783 1.97%0.69%2007 487,706 163,438 2.43%0.82%2008 552,144 200,418 2.73%0.99%2009 685,739 210,399 3.35%1.03%2010 722,664 192,451 3.50%0.93%2011 705,884 175,8123.38%0.84%2012 708,504 174,6273.49%0.86%2013 458,722 161,4822.24%0.79%

INDIVIDUAL TAXPAYERSHWHS7

Sources: IRD Performance Report YearTax Collected in MillionsTax in Default in MillionsVAT, NBTGST %Collectible%VAT Productivity2005 198,301 102,55559%94% 0.377 2006 253,320 157,550 59%25% 0.373 2007 308,206 158,826 54%31% 0.349 2008 344,571 179,05148%24% 0.308 2009 353,016 194,545 45%25% 0.296 2010 422,512 214,431 46%13% 0.327 2011 443,830 153,30549%16% 0.288 2012 443,456 124,38449%13% 0.252 2013 492,539 117,55745%15% 0.243

HWHSTAX IN DEFAULT AND VAT PRODUCTIVITY8

Sources: IRD Performance Report YearIncome CorporateIncome TaxNon-CorporateVATNBTESCPAYE200537 %28 %----200634%33%----200736%26%----200837%27%----200949%39%87%78%79%45%201052%41%94%98%81%51%201156 %42 %94%89%85%63%201256 %39 %89%79%80%52%201356 %41 %78%77%99%53%

HWHS9RETURN COMPLIANCES

While overall GDP and Per Capita Income steadily increasing, tax revenue has been steadily decreasing.Disproportionate share of indirect taxes to direct taxes.Tax on importation has contributed major share to the indirect taxes.Inadequate number of individual taxpayers compared to the population of the country.Low degree of taxpayers compliance with tax laws.Unrealistic amount of tax in default.Low productivity ratio of VAT.Too many types of taxes but less income in compared with other developing countries.

HWHSPROBLEMS WITH THE CURRENT SYSTEM10

Unplanned ad hoc tax incentives. Narrow tax base and coverage.Increase in Allowable Expenses.Periodic increase in the tax free allowances and reductions in tax rate.Lack of elasticity and buoyancy in the tax system.The grant of periodic tax amnesties.Abnormal amount of tax in default.Revenue losses due to the entry of smuggling, contraband, counterfeit and malpractices.Weaknesses in the tax administration.Complicated tax system and lack of awareness of the taxpayers.

HWHS11REASONS FOR THE CURRENT STATUS

1. Broadening the Base and CoverageIntroducing much lower single corporate tax rate for all industries other than betting, gambling, liquor and tobacco.Decreasing individual tax free allowance and slabs.Considering the lowest individual tax rate of 10% thereby eliminating 4% and 8% rates.Minimizing wide range of tax incentives in the form of tax holidays, exemptions, reliefs, concessionary rates, duty waivers etc.Re-considering VAT exempted items and zero rated list.Key income groups like professionals who will remain elusive are fully brought into the tax net.Implementing transfer pricing rules and regulations fully.Reducing NBT threshold to Rs. 25 Million for hotels, agriculture etc.

HWHS12SHORT-TERM SUGGESTIONS FOR IMPROVEMENT

Legal Action Against Defaulters Must be Accelerated. Also Amnesties Like Providing Penalty Waivers to Defaulters Must be RemovedRe-thinking Unrealistic Deductions in the Inland Revenue ActCurtailing Revenue LossesProhibition of importing under different product names & HS codes.Removal of duty free allowance for arriving passengers at the airport.Restricting duty free vehicle permit entitlements .Avoiding pilferage and smuggling from ships berthed in outer harbor.Restriction of containing several goods in one cargo container.

HWHSSHORT-TERM SUGGESTIONS FOR IMPROVEMENT con13

Enhancing Tax AdministrationMaking sure that all employers who are liable to be registered under PAYE Scheme are registered.Making sure that registered employers are deducting correct PAYE tax.Checking the accuracy of declarations furnished by deposit holders.Making sure that all banks and finance companies correctly comply with the WHT provisions.Making sure that all registered companies are registered for income tax.Compulsory registration with IRD if turnover exceeds certain limit.Re-introducing withholding tax on rent and other specified fees.Re-introducing the Tax Reserve Certificates Scheme.Declaration of tax file number in large value transactions.

HWHSSHORT-TERM SUGGESTIONS FOR IMPROVEMENT con14

The current lopsided overall ratio of 20% direct and 80% indirect has to be brought to a more balanced ratio of around 40:60Broadening the Base and CoverageAppointing a group of independent professionals with no conflicts of interest to do special field surveys in the informal sector.Avoiding frequent changes in tax policy except for inflation adjustments.Re-Evaluation of BOI Tax IncentivesIntroducing new Cost-Effective incentive scheme for new BOI projects.All tax incentives should be brought under the purview of the IRD.

HWHSLONG-TERM SUGGESTIONS FOR IMPROVEMENT15

Enhancing Tax AdministrationImplementing relevant tax laws reasonably and fairly for all industries.Introducing a simplified and more people friendly tax system.Facilitating revenue authorities with new technology.Comprehensive Reward System for informers.Improving the effectiveness of tax audits.Further recognition of taxpayers.

HWHSLONG-TERM SUGGESTIONS FOR IMPROVEMENT con15

Shorter Tax Return FormIt has been suggested that instead of the present long and complicated tax return form, a shorter form should be issued by the Inland Revenue Department to taxpayers with the following message.How much money did you make last year?How much have you got left?Send it.

HWHS17ABOUT TAX

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HARISON SAMARATUNGACTA, ATII, MAAT, B.Sc. (B. Ad) Sp, HNDCChartered Tax Advisor andAuthorized Representative6th April 2015

HWHS18THANKING YOU FOR WATCHINGPlease mail your feedback to: taxoffice7878@gmail.com

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