Increasing the tax free threshold, lifting the tax free exemption on public servants and politicos salaries and rationalizing BoI tax holidays are among the recommendations made by the Tax Commission which submitted its report to President Mahinda Rajapaksa last week.
“When public servants and politicos are brought into the tax net, though revenue accrued as a result may be marginal, we are however then laying the foundation for an equitable tax base in the country,” a source close to the Commission told this reporter.
The report has a greater focus on the public sector in relation to taxation, he said.
Other recommendations include reducing the financial services VAT which is currently at 20%, a tax which is having a negative impact on the performance of such institutions. The revenue earned by the government from this tax last year was Rs. 25 billion, it’s projected to be a little less this year.
In the event the Government decides to downscale the financial services VAT, the Commission has also recommended to the President not to try to recoup this loss by the addition of indirect taxes.
The report also recommended the reduction of indirect taxes which currently comprise 80% of tax revenue by taking a cue from progressive economies where direct taxes and not indirect taxes form a greater part of their tax revenue by exploiting the “capacity to pay” dictum.
Other suggestions include: Reducing the personal income tax rate which currently is at the 35% level, more than doubling or tripling the tax free threshold from the present Rs. 300,000 per annum to between Rs. 720,000-Rs. 900,0000 per annum due to the present high cost of living, while at the same time ensuring that only a handful of those from the public sector would enter the tax net.
A rationale behind the recommendation of a higher tax threshold is that it would help to boost greater economic activity by giving more space to the consumer, thereby bringing in more to the tax net.
Not to adjust for the revenue loss as a result of this uplift by imposing more consumption or indirect taxes.
Rationalize BoI tax holidays (which, in certain cases are as long as 15 years) by making such holidays consonant with Inland Revenue Department’s (IRD’s) tax holidays for enterprises introduced during the import substitution era of the 1970s, which holidays were of a 3-5 year duration.
Let BoI tax holidays be applicable to those which are investing a minimum sum of US$ 10 million only. Reduce the corporate tax rate from 35% to 25%; have a single VAT rate, or, if need be, a low second rate affordable to the poor; Encourage investments in research and development (R&D) by doubling the current tax break from 100% to 200%. In this connection, whereas Sri Lanka’s investment in R&D is in the region of 0.19% of GDP, that of Singapore is in the region of 5% of GDP.
Disallow giving tax breaks to those companies catering to the local market, a misadventure in this regard being the BoI tax breaks given to the telecoms sector which were servicing the local market, as opposed to servicing the export market and entice people into the tax net by making it visible to them that their tax rupees are working, such as by providing better infrastructure facilities like better roads and a better transportation system and connecting the Government’s revenue earning mechanisms’ such as the IRD, Customs and the Land Registry by computerisation for better monitoring and compliance.
At present the IRD computer system is not “taxpayer friendly” nor does it factor in the practical way the Government machinery in relation to refunds work, where the reality is that there are inordinate delays for the taxpayer to get his refunds and not having a mechanism in the computer to set off his future liabilities in the event there is a delay in obtaining such refunds, thereby wrongly penalizing the taxpayer for no mistake of his.
The report is an echo of the Wanasinghe Tax Commission report of 1990 called for by the late President Ranasinghe Premadasa which recommended the simplification of the tax regime and broadbasing it, the source said.
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