Time to overhaul outdated tax laws

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2017-08-25

Parliament will today begin the debate on the much awaited Income Tax Bill which seeks to reform Sri Lanka's out-dated Inland Revenue Act.

This is the first time that Sri Lanka has attempted to reform the tax laws since 1948.
The proposal is controversial as the impression created in Sri Lanka is that this Bill is being pushed through at the behest of the multi-lateral lending agencies and would increase taxes for all Sri Lankans.
It is true that the International Monetary Fund provided Sri Lanka with an Emergency Facility only after the government gazetted the reforms.

But the lending agencies have been calling for reform of Sri Lanka's Inland Revenue structure for many years with good reasons.
Sri Lanka has one of the lowest rates of tax collection as against Gross Domestic Product in the world.
In a recent paper Prof. Mick Moore of the UK-based Institute of Development Studies stated the way taxes are collected in Sri Lanka today is similar to what the structure was in 1938, with export and import trades bearing the biggest burden.
Moore, who has studied taxation in India, Taiwan and Sri Lanka for the past four decades, said that from 1950 to 1980, the Government of Sri Lanka on average collected 21 per cent of GDP in taxes and spent that money on what he referred to as 'popular welfare' such as education, health care and transport.

But since then, the collection of revenue has declined with the biggest decline tracked during 2010-2015 period.
The current ratio of taxes to GDP is at 12.4%, one of the lowest in the region, and frighteningly below the debt service to GDP ratio which is at 17.4% this year.

Simply put, the country is not collecting enough money to pay its debts.
The reforms proposed in the current Bill have their genesis in proposals put forward by a Presidential Taxation Commission in 2009-2010 which were compiled in consultation with businesses, trade unions and a host of other stakeholders.
The reforms make a major fundamental change to the way Inland Revenue officials make decisions. It gives the power only to the Commissioner General to grant exemptions. Currently a variety of officials down the chain of command can grant tax windows and exemptions.

Critics of this current practice say that this opens the door to corruption. It has also been used by various lobby groups to get favours for their businesses.

The Joint Opposition in a studied statement signed by former President Mahinda Rajapaksa on the proposed Bill has also criticized this change stating that this gives too much power to the Commissioner General of Inland Revenue. The statement also noted that the Finance Minister has the power to appoint the Commissioner and that gives the Minister too much authority over taxation.
Also in the past ten years or so the taxation has been shifted to consumption away from income. This has meant that the middle classes and the poor are now bearing a disproportionately larger burden of taxation as against the rich.
For instance a person earning Rs 25,000 per month is paying the same amount of tax for a loaf of bread that a person earning Rs 200, 000 per month does.

This Bill by redirecting taxation to income seeks to correct that anomaly.
Those earning less than Rs 100,000 will not pay any income tax but the taxes on the rich will rise. This is why the GMOA, whose members make huge pay packets on private practice, are complaining that 'professionals' will be discouraged by the new Bill.
The country also has little time to make the change. Sri Lanka is moving into an income range where we will not qualify for concessionary loans from multilateral lending agencies or soft loans and aid from foreign countries.
We will have to earn our own money if we are to develop.
So there is no doubt that tax reform is urgently needed.

The government comprises the country's two biggest political parties, and apart from a few matters outlined in Former President Rajapaksa's statement, there are no major objections raised by the JO to the Bill as well.
The Janatha Vimukthi Peramuna should support the changes because it will serve its political base which is hard hit by the taxes on consumption.

This is an opportunity for Parliament to build a consensus for much-needed tax reform, an opportunity for the government to listen to the Opposition and make changes if necessary and pass an Act that will serve Sri Lankans for generations to come.

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