TAX POLICY
COMPILED BY Prashanthi Cooray
TAXING TIMES FOR SRI LANKA
Nisreen Rehmanjee examines and critiques Sri Lanka’s ever changing tax regime
Q: How would you describe Sri Lanka’s tax regime? And what challenges and opportunities exist for taxpayers and the government?
A: Although there has been some progress towards achieving policy consistency, which is crucial for promoting investment and growth, Sri Lanka’s tax landscape remains challenging,
We need to aspire towards fiscal governance structures and processes grounded in consistency, simplicity, transparency and accountability. Equally important is the formulation of policies based on complete, current and verified data and information. The effective and efficient adoption of automation and digitisation would go a long way in supporting and driving such a change.
For taxpayers, I believe that fairness in treatment and access to information about the performance of tax administrators – including data related to the expansion of the tax base – is vital. Additionally, the efficient allocation of tax revenue towards government spending would help build trust in the system and encourage voluntary compliance.
Q: What impact have recent reforms had on foreign investment and the overall business environment?
A: While the high tax environment does impede investment, the somewhat complex and inefficient processes implemented by the authorities does not help our case either.
For instance, even a simple requirement such as obtaining a VAT registration – which is essential for clearing imports during the project implementation phase for new investors – remains unnecessarily lengthy and cumbersome.
Moreover, despite proposals for a single window approval system being discussed for many years, we are yet to see any meaningful progress on this front.
Q: What best practices should organisations adopt to manage tax compliance and reporting?
A: The biggest hurdle, as I see it, is the complexity of our tax laws and the frequent changes that are introduced with little notice.
Understanding the impacts of these changes, adopting IT systems to accommodate them and then grappling with the uncertainty of how the Inland Revenue Department (IRD) will interpret the law for two to three years after filing the return creates persistent uncertainty for taxpayers.
In addition, the large volume of information that needs to be submitted along with VAT returns, which exceeds the requirements in most other parts of the world, is problematic.
Until this landscape changes, taxpayers will continue to face challenges in ensuring seamless tax compliance.
Q: What reforms do you believe are necessary for Sri Lanka to foster a more conducive business environment?
A: A few things need to change.
First, a clear, long-term tax policy framework that provides certainty for businesses and encourages investment is very important.
Simplification of our existing tax laws is also necessary. For instance, the VAT Act has undergone 21 amendments since 2002. This needs to be cleaned up and simplified. The profit base on which income tax is levied should be aligned more closely with the commercial realities of doing business as this would reduce related litigation.
We need to revisit taxes such as the Social Security Contribution Levy (SSCL), which has a distortionary and cascading impact on pricing, and streamline the import tariff structure to make it less complex.
And finally, we should re-examine the high interest rates and penal provisions in law to determine if they’re justified in an environment where even tax administrators struggle to keep abreast of changes to legislation.
Q: How do you see the tax regime evolving over the next few years?
A: What I would like to see is a simplification of our laws.
If we make them simple and consistent, more people – particularly SMEs – will join the tax net voluntarily.
This should be accompanied by a change in the mindset of tax administrators.
A taxpayer whose self-assessment returns are say 95 percent correct should be recognised as compliant and low risk, acknowledging that there could be genuine errors that need to be corrected going forward. These should not be penalised retrospectively.
Using automation and digitisation to collate data and run analytics to risk profile current taxpayers for audits, while also identifying large-scale tax evaders for collection action, is key. This would create the fiscal space needed to reduce tax rates across the board, once sustainable tax collection targets are met.
Such action, along with a robust taxpayer grievance handing mechanism – independent and empowered, such as a tax ombudsperson or a panel of such individuals – would go a long way in curbing corruption and frivolous assessments that discourage voluntary compliance.
Q: What role does stakeholder engagement play in shaping effective tax policies?
A: Many proposals have been submitted by the private sector and trade associations, focussing on policy consistency and improving the ease of doing business in Sri Lanka.
Contrary to perceptions, most proposals do not call for exemptions but highlight opportunities where the government could streamline tax policy and administration.
An open unbiased hearing of these proposals and adoption aligned with government priorities would support the creation of an effective tax policy framework for the country.
