The only practical means of raising revenue to finance government spending is taxation. If people continue to require the government to provide goods and services then the government requires money to fund these needs. Tax collection in Sri Lanka has steadily declined over the years. Tax as a percentage of GDP has halved over 25 years. Whereas, tax level in major industrialized countries has reached more than 3 times the level in Sri Lanka.
The Ministry of Finance has recently commenced a publicity campaign to encourage people to pay taxes for a better future.
The ideal tax system should raise essential revenue without excessive government borrowing, and should do so without discouraging economic activity. Therefore, the policymakers in Sri Lanka will have to get their policy priorities right and have the political will to implement the necessary reforms. Tax administration must be strengthened to accompany the much needed policy changes.
How does the government achieve this fine balance of raising revenue for its activities and encourage economic activity without creating dissent among the populace?
- Establish a rational, modern, and efficient automated tax systems to increase tax collection and reduce malpractices.
- Prevent profit transfer by foreign investors with tight transfer pricing rules with better administration & monitoring.
- Strengthen legal provisions to deter tax abuse and provide adequate technical training to build a good team of tax auditors. In addition to preventing evasion by auditing it will signal a more robust enforcement to the would be evaders.
- Simplify tax administration. In the Ease of doing business ranking, the combination of number of tax payments per year (47) and the time spent for tax compliance (167 hours) has kept Sri Lanka’s rank down at 158.
- Formalize the informal economic sector also known as shadow economy. This could bring in more people in to the tax net and increase collection. For example a lawyer who is paid in cash, the doctor who does not declare cash receipts from patients and large enterprises in import/export trade that choose to avoid taxes using ‘two’ books. Improving both tax policy and tax administration is important to tackle informality.
- Use better computer systems and advanced analytics to identify suspicious behavior of registered and unregistered businesses. Individual tax payer’s behavior or lifestyle spending can also be analyzed automatically by integrating data on spending patterns, import or purchase of assets, etc.
- Use experts without conflicting client interests or senior tax commissioners to identify and tighten tax loopholes used by companies on an ongoing basis. This way companies may escape one year of non payment due to a specific loophole in law, as opposed to the tax authority taking legal action over many years, later.