Need To Cap Revenue-Expenditure Gap

The biggest fiscal problem Sri Lanka is facing is its revenue to expenditure gap, a tax consultant addressing a seminar in Colombo said on Tuesday. N.R. Gajendran, partner, Gajma & Company an audit firm and Chairman, International Fiscal Association Sri Lanka branch, told this reporter that the solution to this was the pruning of Government of Sri Lanka’s (GoSL’s) expenditure.
However, when one looks at GoSL’s expenditure, according to the latest available statistics, one does not see a pruning down on this score. In fact Government’s current expenditure figure in the first five months of the year increased by 22.6% year on year (YoY) to Rs. 506.4 billion (see also this publication’s last week’s business editorial).
In contrast revenue and grants in the review period increased by a mere 8.9% to Rs. 389.1 billion. At the same time GoSL’s capital & lending minus repayment in the review period grew by 45.3% YoY to Rs. 189.6 billion.
Gajendran said that one of the reasons for low revenue growth was due to the bringing down of tax rates.  But he questioned the feasibility of granting certain companies long tax holidays.
Gajendran also said that with the war end three years ago and with a lot of money available out there in global markets, Sri Lanka should have had received foreign direct investment (FDI) totalling between US$ ($) 2-5 billion annually and not the paltry $ one billion it received last year and $ 500 million in the previous.
One doesn’t know how FDI would end up this year? he further said. As such there is a need to examine as to why FDI inflows were low, said Gajendran.
One reason that was pointed out at this seminar as to why FDI was low was because, unlike in the past, BoI now has no powers to grant tax holidays, with the subject of such being the sole prerogative of the Inland Revenue Department (IRD) currently.
It was also pointed out that BoI stands the risk of being sued if it appears to be granting tax holidays to investors under the various laws governing such actions, whereas such powers have in actual fact had been taken away from it, thereby making it impotent in this score, consequent to new laws that were subsequently enacted recently.
It was also brought to the notice of participants that another confusing feature was that under BoI law the concessionary tax regime was 15%, but under the new law, where such things are now solely the prerogative of the IRD, the tax regime for such was the lower 12% slab.
Suresh R. I. Perera, Principal, Tax & Regulatory, KPMG in his speech said that generally when a country’s GDP grows its VAT revenue also increases. But in Sri Lanka’s case the reverse was happening. VAT revenue which was 5.6% of GDP in 2006 had fallen to 3.2% of GDP by last year, he said.
Perera also said that the IT-BPO industry in Colombo alone provides employment to 50,000 with the industry growing by 20% YoY. “But if we scale down on tax holidays we shall lose out to competitor countries,” he warned.
Tax consultant S. R. Balachandran said that the simplified VAT system, known commonly as sVAT, was not simplified, because in certain instances some nine forms had had to be completed by the taxpayer to be eligible to be an sVAT member.
“Additionally a grama sevaka’s letter of confirmation was also needed for such a company to be registered as an sVAT beneficiary,” added Gajendran. He said that this was allegedly due to certain companies producing fake invoices to obtain VAT exemptions, but that’s a different issue, said Gajendran.
He also said that IRD was averse to giving taxpayers’ identification numbers (TINs) when requests for such certifications are made.
IRD Commissioner General Mrs. Mallika Samarasekera in her speech said that the challenge before the authorities was the tax gap brought about by tax avoidance and mitigation.
She further said that a tax liberalized regime was a disincentive for tax income.
Another problem that hits tax revenue is that foreign money coming into the local banking system not being subject to tax. The authorities have had allowed this state of affairs because the country is facing a balance of payments crisis, Samarasekera however said.
But the danger is that this way tax evaded money may enter the system. Therefore it was important to have on board an anti-avoidance mechanism, she said.