The rationale of the policy makers in slashing the taxes drastically was with the aim of promoting investment and expectation of an increase in consumer spending that would spur a vibrant economy. It is no secret that the tax collected by the Commissioner General of Inland Revenue experienced a drastic decline recently due to the [...]

Business Times

Quo vadis tax policy 2022 of Sri Lanka


Mr. Suresh R.I. Perera

The rationale of the policy makers in slashing the taxes drastically was with the aim of promoting investment and expectation of an increase in consumer spending that would spur a vibrant economy. It is no secret that the tax collected by the Commissioner General of Inland Revenue experienced a drastic decline recently due to the reduction of the taxes (VAT rate reduction from 15 per cent to 8 per cent and threshold increase from Rs.12 million annually (p.a.) to Rs. 300 million p.a, personal income rates, slabs and tax free threshold revisions, abolishing of Nation Building Tax, Economic Service Charge, Debt Repayment Levy, removal of the PAYE and withholding tax scheme etc).

In addition due to the direct downward revision of the taxes, the Government’s coffers have suffered due to the significant dip of border taxes due to the import restrictions introduced with the view of minimising the foreign currency outflows (especially the drying up of the flow of import duties due to restrictions on the import of motor vehicles).

There is no debate that the Government has suffered drastically due to the loss of tax revenue. On the other hand, the objectives of introducing the downward revision of tax have also not being met. Reduction of the VAT rate with the aim of reducing the prices of the consumer goods and services was not successful in the marketplace (due to predictable behaviour of the trader and the absence of anti-profiteering clauses in the Sri Lankan VAT statute). Enhanced consumer spending and the development of a vibrant economy is now a too distant reality due to many factors including rising inflation, COVID-19 impact on specific industries such as hospitality etc.

To address the shortfall of tax revenue, a Tax Amnesty was recently introduced along with the recent budget proposals of a one-off 25 per cent Surcharge Tax, 2.5 per cent Social Contribution Levy, a turnover tax in another name and the VAT on Financial Services rate increased to 18 per cent from 15 per cent.

In the midst of these developments, it is reported that the International Monetary Fund (IMF) recently urged the Government to increase income taxes and VAT. In this context the following should be observed: — In relation to budgetary estimates of tax revenue from proposals for 2022, one must take cognisance of the fact that incremental Rs. 50 billion revenue expected from Special Goods and Services Tax (SGST) may not materialise due to the Supreme Court determination that the Bill is unconstitutional.

The constitutionality of the Surcharge tax bill which is pending before the Supreme Court, would certainly not permit the collection of the first installment by the 31st March 2022 as targeted in the Bill. On the other hand, the Social Contribution Levy targeted to be implemented from 1st of April 2022 has not even reached the Bill stage at the time of writing this article. Thus, fluctuation of the cash flows expected from the proposed taxes for the year 2022 is inevitable and would pose a greater challenge to the cashflow management of the Government.

The policy makers should be aware that every upward revision of VAT rate sans an Anti-Profiteering clause in a VAT statute results in disproportionate increase of prices of goods and services at the marketplace. Whilst the downward revision from 15 per cent to 8 per cent caused a great loss of revenue to the state coffers, it did not result in any benefit to the consumers, whilst the upward revision of the VAT rate will jeopardise the consumer interest due to a price hike by the traders. Successful VAT policy making should avoid frequent VAT rate changes and should also embed Anti Profiteering clause to safeguard the interest of the consumer. Please refer the article titled ‘Passing on the VAT benefit to the consumers’ published on 8th December 2019 for details in this regard ( Passing on the VAT benefit to the consumers | Times Online – Daily Online Edition of The Sunday Times Sri Lanka)

If a revision of a tax system is to take place as urged by the IMF, which may happen eventually, the country should avoid cascading taxes based on turnover, such as the proposed 2.5 per cent Social Contribution Levy. Cascading taxes drive the consumer prices at the marketplace and affects the inflation rate. Hence, revisiting the VAT threshold, removal of VAT exemptions should be prioritised, in substitution of the proposed 2.5 per cent Social Contribution Levy proposed in the Budget which has not been legislated. Due to the revision of the VAT threshold, the number of VAT registrations dipped to a mere 8,152 in 2020 from 28,914 in 2019 (decrease of 72 per cent) as per Inland Revenue Performance Report 2020.

Whilst the concept of consolidation of multiple taxes into a single tax is an attractive notion on paper, the endeavour requires absolute diligence and caution. Such an exercise which effects more than half the total tax revenue flowing to the state from five industries (liquor, tobacco, motor vehicles, betting and gaming and telecommunication) cannot be achieved without a proper study involving the relevant and competent personnel/stakeholders. Consolidation of taxes in the form of SGST is not the priority at this hour.

In the endeavour to revise the web of taxes to enhance tax revenue, policy makers must obtain the assistance of appropriate professionals with relevant tax expertise and experience to avoid implementing short sighted measures that may cause a detrimental impact on the tax system and the economy.A tax system consists of two elements, tax policies and tax administration. Progressive tax policies but not so great tax administration as well as not so great tax policies with a great tax administration yields same results – a failure of the tax system of the country! But when both tax policies and tax administration manifest much room for improvement, resurrecting and reviving the tax system is a herculean task but not impossible. This is where the Sri Lanka’s tax system is, as it stands today.

Share This Post

WhatsappDeliciousDiggGoogleStumbleuponRedditTechnoratiYahooBloggerMyspaceRSS has you covered with quality used or brand new cars for sale that are budget friendly yet reliable! Now is the time to sell your old ride for something more attractive to today's modern automotive market demands. Browse through our selection of affordable options now on before deciding on what will work best for you!

Advertising Rates

Please contact the advertising office on 011 - 2479521 for the advertising rates.