There is a great need for a ‘National Tax Council’ which can formulate and drive long term and short term tax policies, which should eliminate all the uncertainties in the tax system in Sri Lanka, says Principal, Tax and Regulatory, KPMG, Suresh Perera.
The lack of a national tax council is the main reason for the prevailing uncertainties, contradictions and complexities in the tax system, he said.
He believes officials alone do not have the skill and the capacity to reform the ailing tax system in Sri Lanka. “To minimise the injustices being caused to the tax payer and tax payer’s losing confidence in the system, there is an absolute need for a ‘Tax Ombudsman’. Tax payers can forward their justifiable grievances and find practical solutions with the intervention of a tax ombudsman as opposed to litigation.”
In an interview with the Business Observer, he said substantial reforms in the tax system and not ad hoc measures to increase tax revenue will help increase revenue generation for the government.
He said the tax system of the country has evolved similar to the road network in Colombo. Shortcuts have been taken from time to time focusing on short term interest instead of a long term strategic plan for revenue generation.
Excerpts:
Q: How do you compare the new Inland Revenue Act (IRA) with the previous Act?
A: The new Act has positives and negatives. While it may be considered positive in relation to individual taxation one could not say the same in relation to the export industry in comparison to the export policy of the country and it does not augur well with the exporters.
There are too many teething problems that have to be resolved expeditiously. There should be more awareness creating measures by the Department of Inland Revenue and the Government, if not, there will be uncertainty in the air which does not augur well for the economy, industry and foreign investors.
There are too many teething problems which can kill the effectiveness of the Act. There is uncertainty in relation to the losses brought forward under the previous regime with the profits of the new Inland Revenue regime, the legality of the double tax treaties the country has entered into, the fate of the unabsorbed capital allowances in business, the ability to claim the notional tax credit and withholding tax credit available under the old regime, the legality of the existing tax holidays, under the inland revenue and the other regime such as BOI and SDP.
Due to the elimination of plethora of income tax exemptions on persons, activities and streams of income, introduction of tax on realisation of assets and liabilities, reduction of tax deductible amounts along with the wide powers given to the Commissioner General for the administration of the income tax, one could expect there may be an increase in the collection of direct taxation in the long run even though it won’t happen immediately.
Q: How would the new IRA help narrow the widening fiscal deficit of the country?
A: I don’t think anyone could expect a significant change in the fiscal gap by changing the Inland Revenue act.
Q: Will it not further burden the low income earners and senior citizens whose income will be taxed at a higher rate?
A: This is an absolute misconception. In relation to senior citizens, under the current system any amount of bank interest is not liable for income tax. Under the new Act only those senior citizens who earn an interest income of more than Rs. 125,000 a month will be subject to 5% withholding tax.
When one analyses, assuming a senior citizen is been given a 15% interest on straight-line by the bank, a senior citizen to be liable to tax under the New IRA, should have a deposit of more than Rs. 10 million.
If we analyse the overall thrust of the imposition of income tax on individuals, one could see the policy promotes equity in taxation by providing relief to low income earners and imposing higher burden of tax on high income earners i.e the person with broader shoulders.
However, there is an anomaly when one considers a person who has only bank interest income and the interest is below Rs 500,000 a year, will still be exposed to 5% withholding tax.
Sometimes back, before the introduction of the 2.5% standard rate (prior to 1-4-2015) was to obtain a declaration from the depositor as to the Assessable Income and depending on the Assessable Income to carry out the deduction. It is the abolition of this system that has resulted in inequity to those who have very low interest income only. i.e less than Rs. 500,000 rather than the rate. In my view, the country should go back to the earlier system in relation to bank interest.
Q: What in your view should be an effective tax system for the country?
A: Everyone will agree that there should be substantial reforms in relation to the Sri Lankan tax system. The Sri Lankan tax system has evolved over the years similar to the road network in Colombo.
From time to time we have been taking shortcuts and taking measures looking at the short term instead of working with a strategic plan. As a result resolving the traffic congestion has become a complicated task. In relation to the tax system also, time to time ad hoc measures have been taken by introducing plethora of taxes to the tax system to gather revenue without having a strategic focus for collection of revenue.
As a result we find that there are more than 25 taxes, levies and duties charged by the Commissioner General of Inland Revenue, Director General of Customs level, provincial council and other authorities.
Sometimes, we find numerous taxes being levied and numerous taxes being filed on the same tax base and on the same incidence resulting in duplication and enormous compliance burden. Reforming this system is easier said than done.
When people are discussing about reforming it is apt to refer to an extract from Adam Smith’s wealth of nation on simplification of the tax system in relation taxes “all nations have endevoured, to the best of their judgment, to render their taxes as equal as they could contrive; as certain, as convenient to the contributor, both in time and in the mode of payment and in proportion to the revenue which they brought to the prince, as little burdensome to the people”, Smith goes on to say ‘that most nations have fallen short of the goal’. Hence one should not be excessively critical of the endeavours by the policy makers of Sri Lanka. Having said the above, I must also say that there is a lot of room for improvement in the manner in which the new Act was formulated and implemented.
There is a great need for a ‘National Tax Council’ which can formulate and drive the long term and a short term tax policies in Sri Lanka, which should eliminate all the uncertainties in the tax system in Sri Lanka. The lack of a national tax council is the main reason for the prevailing uncertainties, contradictions and complexities in the tax system.
“I personally don’t believe politicians and IMF alone have the skill and the capacity to reform the ailing tax system in Sri Lanka. To minimize the injustices being caused to the tax payer and tax payer’s losing confidence in the system there is an absolute need for a ‘Tax Ombudsman’.
“Tax payers can forward their justifiable grievances and find practical solutions with the intervention of a tax ombudsman as opposed to litigation,” he said.