COLOMBO: Sri Lanka’s Inland Revenue Department is receiving help from the Inland Revenue Authority of Singapore to overhaul the complicated local tax system, Central Bank Governor Arjuna Mahendran said in an interview with The Strait Times. “The Inland Revenue Authority of Singapore is involved in a technical assistance project with Sri Lanka in the revenue department,” he was quoted as saying to Singapore-based Strait Times. According to the Central Bank, in 2014, the tax revenue fell to 10.7 percent of gross domestic product (GDP), or just Rs.1.05 trillion, while the January interim budget has envisaged tax revenue increasing to Rs.1.34 trillion in 2015.
This is considered extremely low and shows a decline from a tax revenue to GDP of 11.6 percent in 2013, 12 percent in 2012 and 24.2 percent recorded when the economy was liberalized in 1978.
In comparison, some of the world’s advanced economies represented in the Organisation for Economic Co-operation and Development (OECD) have tax revenue to GDP average of 36 percent.
Taxes make up the lion’s share of government revenue, and the state is now entering a debt crisis with a debt to GDP ratio of 76.7 percent.
Tax revenue is considered inadequate to even service the debt—mostly Chinese commercial loans—and the government is attempting to restructure the loans.
“Domestically, revenue is the key thing that we need to fix. A lot of work has to be done, to reorient the way taxes are collected in Sri Lanka – simplifying them, making it easier for taxpayers to pay their taxes,” Mahendran was quoted as saying.
According to the Central Bank annual report, direct taxes make up just 20 percent of the total tax revenue and only 15 percent of direct taxation comes from non-corporate taxation.
A majority of the tax revenue comes through a complex web of indirect taxation. In the interim budget, Finance Minister Ravi Karunanayake said that the current 38 taxes will be reduced to 20 as soon as possible.
Taxes are easy to evade in Sri Lanka, according to a recent World Bank report, which said only 4 percent of registered companies are required to submit audited statements to the government.
Most small and medium enterprises are in the informal sector, thereby falling outside regulated avenues.
The World Bank report said that even those companies which are registered pay auditors up to 10 times the tax amount to evade it due to ignorance.