Efficient tax administration critical to generating expected revenue

By Nimali Liyanage
B.Sc. Accountancy (Sp.), FCA

The broadening of the tax net and the removal of the Value Added Tax (VAT) exemptions have had a positive impact on the economy, but the government will not earn the expected tax revenue if some basic reconciliations cannot be done by the Inland Revenue Department’s (IRD) RAMIS programme. In a country with world-class IT professionals, it is sad to note that the authorities have not been able to digitise the processes to ascertain information to ensure greater tax compliance, and efficiency in collections.

As a tax professional with over 20 years of experience working in the Big 4 in Sri Lanka and overseas, who worked in one of the largest conglomerates in Sri Lanka and led the automation of Withholding Tax (WHT) deduction at source on payment of service fees under Section 85 of the Inland Revenue Act, I would like to make my observations on some of the inefficiencies and unproductive work carried out by the IRD officials and on areas for improvement particularly regards WHT deducted at source on interest income as an example. Many such areas need attention, including VAT deferred under Section 22(7) of the VAT Act.

A) Non-compliance by the banks and financial institutions (‘withholding agent)

Although the IRD has issued guidelines on monthly withholding tax certificates and tax certificate specimens, in most instances, the taxpayers do not get the withholding tax certificates as per the IRD-prescribed format by the due dates.

In an era when withholding tax certificates can be emailed to all customers with a click of a button or can have the option to download through online banking or the banking App, banks and financial institutions require their customers to make written requests for the issuance of withholding tax certificates.

Further, it appears that several banks and financial institutions have failed to educate their officers who deal with their customers on the requirement to issue the WHT certificate to, and this leads to a waste of time visiting the banks several times to obtain the certificates and get them corrected to comply with the IRD specimen.

Furthermore, I believe banks and financial institutions do not report the WHT deducted in a format that can be matched via the RAMIS programme. I can only assume that the IRD has not set a standard format, resulting in the banks reporting them differently without realising its consequences.

B) The IRD inefficiencies add more burden on the compliant taxpayers

Once withholding tax (“WHT”) is deducted, the withholding agent must issue a WHT certificate to the customer before the end of the following month. The taxpayer claims a tax credit against tax payable based on the certificate issued. However, instead of reconciling with the withholding agent’s RAMIS records and obtaining a direct confirmation from the withholding agent, the IRD officials ask the taxpayers to liaise with the respective withholding agent and provide details such as the RAMIS schedule reference number of the taxpayer to support such credit despite the taxpayer having a valid WHT certificate.

The IRD should check whether the bank/financial institution has complied with the guidelines/provisions issued by the IRD when the taxpayer has provided a WHT certificate to support the tax credit. If the IRD cannot reconcile the credit with the taxpayer’s records, or the WHT certificate is not per the specimen, the IRD should take necessary action against the withholding agent without harassing a compliant taxpayer.

This sort of practice will waste taxpayers’ and tax officials’ time on unproductive work and cause taxpayers to spend additional money on tax consultants and lawyers to appeal, and the whole process will drag on for several years, which may, in most instances, not generate additional tax revenue.

When the withholding agent fails to deduct WHT or remit the same to the IRD, the taxpayer should not be penalised. In such instances, the IRD should recover penalties and interest from the withholding agent without burdening innocent taxpayers.

The IRD should be equipped with checks and balances to catch those who claim tax credits using bogus WHT certificates. Further, there should be a mechanism to enable taxpayers with valid WHT certificates to claim compensation from the IRD for the additional time and money spent/wasted due to the IRD’s inefficiencies.

Towards better tax administration on tax deducted at source

If the following measures are implemented, the government can earn the expected tax revenue from tax deducted at source, and the time of IRD officials can be spent on more productive work.

All the banks and financial institutions should report interest income and withholding tax deducted at source in a format that matches the taxpayers’ monthly withholding tax certificates in RAMIS.If a customer does not provide a Tax Identification Number (TIN), then a higher WHT rate should be introduced and applied to such persons, including non-residents.

The withholding agents should issue the WHT certificates proactively without waiting for the customers to make written requests, as the IRD requires the certificates to be given before the end of the following month and not annually.

WHT certificates should be issued to the customers as per the IRD guidelines and facilitated downloading them online or via the banking app, along with downloading the monthly bank statements without an additional fee.

The IRD should capture interest income and WHT deducted against each taxpayer’s TIN based on the RAMIS schedules submitted by the banks and financial institutions. For example, in Australia, taxes deducted at source on all sources of income are recorded in the Australian Tax Office Pre-filling Report, which the taxpayers can access online, and the taxpayers are not required to submit certificates or schedules.

These details are populated in the tax return automatically at the time of preparation of the tax return, and taxpayers can cross-check the accuracy of the details at the time of lodgement of their tax returns, update the details, and make comments if they are incorrect so that the tax authority can follow up with the withholding agents.

Once the IRD captures the details in a report similar to the pre-filling report, the requirement to issue a WHT certificate and furnish the WHT schedule can be removed.

Those who have earned interest income without having a TIN should be tracked, and action taken against them.

There are many such areas that the IRD needs to work on for better tax administration, such as issuing tax clearances for the repatriation of funds overseas so that the taxpayers are not reluctant to pay taxes and use proper channels to remit funds. The corrupt elements among the IRD officials discourage taxpayers from paying taxes and prevent the government from generating the expected tax revenue. The poor administrative practices at the IRD cause waste of time and money.