Lawmakers passed the new Inland Revenue Bill yesterday in Parliament, allowing the Government to scrap the complicated tax system and establish a “fair but transparent” tax policy for Sri Lanka with plans to increase Government revenue from direct tax.
The third reading division received 90 votes in favour and 25 against. The second reading of the new Inland Revenue Bill division received 100 votes in favour and 41 against.
Minister of Finance and Mass Media Mangala Samaraweera, moving the Inland Revenue Bill second reading motion in Parliament, stated that the Government will reduce the gap between direct tax and indirect tax by 2020, enabling the nation to move forward.
“By 2020 we will reduce the indirect tax from 82% to 60%, while increasing the direct tax from 18% to 40%. Issuing a universal tax number for all those who are above 18 years will enable easy and simplified tax payments. You don’t have to pay tax just because a tax file is opened unless taxable income is there. In return, the taxpayers will enjoy many benefits and recognition. I think those who oppose these proactive proposals are nothing but the forces against development,” said Minister Samaraweera.
According to the Minister, state revenue has declined drastically during recent past. In 1990 state income stood at 19% of the GDP but has declined continuously to 10% by the end of 2014.
“Changing the direction, we were able to increase state revenue to 15% of GDP during the past two years. The ordinary people here suffer from higher indirect tax due to the fact that a direct tax is at low levels. We get 82% of our income from indirect tax where the direct tax income is at 18%.”
“If you compare Sri Lanka with the region, Malaysia receives 70% as a direct tax, India maintains it at 50%, while Singapore has it pegged at 55%. Our neighbours Bangladesh gets 35% as direct tax and Pakistan 37%,” he explained.
“According to the income and expenditure survey conducted in 2012, the richest 20% of Sri Lanka controls 52% of the total household income in Sri Lanka. This richest 20% was created during the Rajapaksa regime. The poorest 20% of the country has access to 4% of the household income. So both the richest and the poorest pay for goods and services equally where the indirect tax stands flat. Let’s take the tuition teachers, doctors who are into channel servicing, and the lawyers. They all should pay some income tax rather than avoiding direct tax. So we need to increase the direct taxation to cover high income. You should feel proud to pay income tax. There are only 1.1 million tax files for the entire population. The income tax registration stands very low. Sri Lanka is ranked even below Kyrgyzstan. The number of institutions registered in 2016 for tax stood at 43,990 and the number of people registered for income tax stood at 119,300. Out of these tax files a few would make the payments on time, but many would evade taxes due to various reasons,” added Minister Samaraweera.
Criticising Government plans to increase direct taxation and broaden the tax collection efforts, opposition lawmaker JVP MP Sunil Handunnetti stated that all efforts are being taken by the Government to tax everyone in Sri Lanka.
“The Bill is harmful unless the Government adds the 49 amendments we proposed and takes off the 16 clauses we showed. Clause 97 allows the Government to appoint any individual or an establishment to collect revenue on behalf of the Inland Revenue Department,” he said.
According to MP Handunnetti, the Inland Revenue Bill tabled in the Parliament was the handy work of the IMF targeting Ghana.
“You have translated the IMF’s Bill in Ghana into Sinhala and made a few changes. This is nothing but an effort taken to repay the IMF. Sometime ago the Prime Minister pledged in his policy statement to bring the direct tax to 40% and keep the indirect tax at 60%. But nothing took off. You are not hesitant to tax the poor but the rich,” said MP Handunnetti.
Saying the clauses in the Bill enable the Government to collect taxes from a simple asset transfer within the family or for a dowry an individual would get, Handunnetti said: “More than 43% of the population does not get more than Rs. 320 a day. This Bill proposes to impose a tax on dowry and also on the transfer of assets from parents to children. If someone gets a donation or a gift from the President’s Fund that money also would be taxed. Authors publishing books, stage drama producers, singers and artists will get taxed. Even a small association could get taxed.”
Minister of Development Strategies and International Trade Malik Samarawickrama, joining the debate, stated that an efficient and effective tax code is a dire necessity for the vision of the Government to transform the economy into a competitive social market economy with a prosperous future for the nation.
“The Sri Lankan economy has transited from a low-income country to a middle-income level. As in the case of many legislative enactments, the existing Inland Revenue Act too has evolved over four decades or more and stands outdated. Even the principal enactment of 2006 has gone through nine amendments by now. These were piecemeal amendments, which were done to address issues and concerns that arose in different circumstances and without any holistic review or appreciation of possible implications. Thus, the Act itself has become very complex, difficult to understand and confusing. It has also created loopholes and opportunities for many to escape the tax net and thereby creates a very unfair playing field,” said Minister Samarawickrama.
“As a result Sri Lanka lags behind its peers in Ease of Doing Business in view of the existence of a very complex tax law. This has made a tax payment very difficult, costly and time consuming. Both local and foreign businesses find the Inland Revenue Act a serious impediment that requires immediate change. The new Inland Revenue Bill looks at the issue of taxation from a novel and modern perspective and meeting the current status of our economy. It is simple, easy to understand, which encourages compliance by all rational taxpayers,” he added.
Summing up the debate, State Minister of Finance Eran Wickramaratne stated that people will be taxed based on the income they receive from the respective activities they are engaged in. “We will not tax the beggars, but if a beggar is engaged in a business, yes that business will be taxed. But if a businessman is making an investment, proper accounting will help him to enjoy capital allowance within a specified period. This will allow them to recover the investment and encourage him to make more investments. SMEs will have 14% tax. Exporters will also have 14% tax, which is the lowest tax percentage under the new Act. Tax policies were made by not looking at large businesses,” he said.
Justifying the controversial inheriting tax, which will control the transfer of assets within the a few family members, the Minister said: “If you have three houses and have three children you can give each child a house. Such transfer will not be subjected to inheritance tax. But in case if you give a second house to a child, we think it is fair to tax that second transfer. Doing this bill in Ghana or by IMF is immaterial. All we should be doing is following best practices from all parts of the world. Sri Lankan professionals working abroad should be encouraged to save money. We have offered tax concession up to $ 100,000. So, this will help to curtail the brain-drain. Pageants and donations made to religious establishments will not be taxed. Tax concessions the British gave to temples will continue. The stock market will continue as it is with the share transaction levy,” added Wickramaratne.