TAX COMPLIANCE
Double standards
N.R. Gajendran
With the government implementing several measures to widen the tax net and combat evasion, N. R. Gajendran believes that achieving a transparent and accountable tax system remains a challenge; it requires collaborative efforts from both the public and private sectors.
“Recent changes to the tax regime have seen income tax rates nearly double from 18 to 36 percent, while VAT rates have risen from eight to 18 percent with numerous exemptions on basic goods and services removed. The Social Security Contribution Levy (SSCL) now stands at 2.5 percent,” he notes.
He says that these measures, combined with the depreciation of the Sri Lankan Rupee and high cost of living, have placed a heavy burden on the middle class, who are struggling to meet their tax obligations amid shrinking disposable incomes.
Gajendran points out that despite these efforts, the tax-GDP ratio is projected to reach only 14 percent by next year – remaining below the 18-20 percent that is typical of other developing nations.
This disparity underscores a huge gap in uncollected revenues that the government aims to address through several initiatives, he explains.
One of the key measures introduced was the Taxpayer Identification Number (TIN), which initially required every individual over 18 to register. However, technological constraints led to the implementation of the Revenue Administration Management Information System (RAMIS), which has faced multiple iterations and challenges.
OPERATIONAL HURDLES The effectiveness of these measures hinges on robust enforcement – and Gajendran asserts that without broad awareness, the tax policies can lead to malpractices among officials.
Technological initiatives such as the RAMIS also face challenges, he laments: “Meant to automate tax administration and minimise human intervention, these systems have not been entirely effective. Risk based audits, intended to be automated, remain manually assessed, leading to inefficiencies and minimal outcomes.”
Moreover, much of the reported outstanding taxes are deemed uncollectible and new measures often fail to produce the desired results, he adds.
Commending the IMF, Gajendran says it is right to question why Sri Lanka struggles uniquely with these issues, suggesting that governance problems need to be addressed for any system to work effectively.
He bemoans that high net worth individuals – other than those who are compliant – who should be contributing substantially to tax revenue, often evade taxes through corruption and malpractices.
“Corruption at the top levels of government trickles down, affecting the entire system. Without addressing corruption at the highest levels, efforts to combat it at the lower levels are futile,” he reiterates.
ACCOUNTABILITY STANDARDS A clear system encouraging accountability is essential. Gajendran says that the Inland Revenue Department (IRD) and Sri Lanka Customs must be held accountable, as should ministers.
He stresses that laws should enforce accountability, adding that the IRD too has agreed to being assessed on key performance indicators (KPIs) with the IMF.
However, Gajendran notes that if these KPIs aren’t met, provisions do not exist within the state sector, unlike in private organisations where failure can lead to painful consequences for employees.
This lack of accountability needs to be addressed, he stresses: “True accountability means being answerable to higher authorities and facing repercussions for failures. Good governance encompasses accountability, transparency, responsibility and ethical behaviour.”
ETHICAL DILEMMAS Gajendran adds that the leadership must mean what they say and say what they mean: “They cannot instruct others to follow rules that they themselves do not adhere to.”
He mentions that there could be many great philanthropists who evade taxes, as they prefer to witness the impact of their financial might through personal contributions to deserving organisations rather than via taxes, which they perceive as funding politicians’ extravagant lifestyles.
Gajendran states that a stringent tax system like those in many other countries requires enforcement and accountability, and claims that “Sri Lanka’s tax laws are among the best, yet they haven’t been enforced due to decision making not being for the benefit of people.”
He sums up: “Enforcing taxes shouldn’t mean harassing taxpayers, whereby the innocent are targeted and evaders go free. The issue isn’t with the tax system but the people implementing it.”
