FISCAL AFFAIRS
Compiled by Tamara Rebeira
Q: Many stakeholders are voicing dissatisfaction with the current tax system. What are your thoughts on this?
A: Taxpayer complaints range from uncertainty and frequent changes to policy inequities. The administrators continue to target taxpayers within the tax net while ignoring those operating outside it.
High tax rates and the failure to simplify the system – which consists of multiple direct and indirect taxes, with complicated tax returns and forms to complete and submit – are major concerns too.
There’s also a failure to educate and spread awareness among taxpayers.
Other issues include shortcomings in withholding tax mechanisms, and the failure of the Revenue Administration Management Information System (RAMIS) and technology used in tax administration.
Yet another recurring complaint relates to the waste, corruption and pilferage by government officers collecting taxes from the public.
On the other hand, complaints from the authorities include tax evasion, taxpayers not adhering to the self-assessment payment system with diligence and unwillingness to cooperate with tax officers’ requests.
Meanwhile, the IMF and other global organisations say that Sri Lanka’s tax system isn’t generating adequate income to support government expenditure (and thus the tax-GDP ratio).
Despite the validity of many of these concerns, successive governments have demonstrably fallen short of addressing them properly.
The local tax system is frequently discussed at various forums, and by international institutions like the IMF, World Bank, Asian Development Bank (ADB) and UNDP, which provide assistance and solutions.
Despite these efforts, the system continues to fail to garner adequate tax revenues for state coffers in an equitable, efficient and timely manner.
Though many shortcomings have been cited, remedies and solutions proposed, and occasional ad hoc adjustments to policies and administrative methodologies implemented, the country has failed to address the root causes of the system’s failure.
Q: What are the root causes of the failure of the existing tax system and tax policy-making process?
A: At present, tax policies are being formulated and implemented on a trial-and-error basis.
Sri Lanka lacks a dedicated institution with clear responsibility and accountability for crafting and evaluating tax policies. This impedes a thorough examination and potential impact assessment of policies.
Replacing the current practice of rushing through tax policies – only to face a public backlash and the resulting revisions – with a methodical approach could avoid embarrassment, save valuable time and resources, and ultimately build taxpayer trust.
Our current tax policy formulation suffers from a lack of rigorous research and independent oversight. Political considerations, lobbying and external recommendations hold undue sway, often overshadowing critical assessments of feasibility, suitability, cost-benefit analysis and public acceptance.
Q: And what alternative process or model can be adopted for better tax governance?
A: According to the IMF, all countries must have a tax policy unit (TPU). In Sri Lanka’s context, such a unit could be particularly beneficial given the prevailing fiscal challenges.
Establishing a dedicated TPU at the Ministry of Finance would be a major step towards improving tax policy formulation and implementation.
By adopting best practices and adapting them to the local context, we can leverage this unit to achieve the nation’s economic and social development goals.
Q: So what is the TPU’s role – and its functions?
A: Its role and functions include engaging with stakeholders; developing, communicating and evaluating tax policy proposals; analysing revenue and economic impacts; contributing to drafting of tax statutes; and addressing international tax obligations.
Sri Lanka can draw inspiration from structures implemented by the IMF.
Such a model emphasises a multidisciplinary approach, typically comprising economists, lawyers, statisticians, accountants and tax administrators. Additionally, experts in public policy and econometrics may be brought in to provide comprehensive perspectives.
The TPU can function under the purview of the finance minister, ensuring effective communication and alignment between tax policy development and national financial objectives.
It can be structured with dedicated subunits, each headed by a manager with a qualified team – including drafting direct, indirect and international legislation; revenue forecasting; policy costing; and administrative support staff.
