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by Lyn Fernando, Immediate Past Chairman Exporters Association of Sri Lanka

The controversial Tax Amnesty Law, which has been criticised by all, perhaps with the exception of a few errant traders and beneficiaries under the amnesty, has been designed to increase the tax base and encourage more people to be taxpayers.

In order to achieve this, Government has provided an amnesty to all defaulters whether they be Customs, Excise, Exchange Control etc with no penalties or additional taxes, but only the necessity to declare and bring the monies into the formal sector. This is not the first occasion that successive Governments have endeavoured to tap the informal sector and bring it into the formal sector. The present exercise will only benefit a few errant traders, tax defaulters, Customs and Exchange Control violators and will in no way result in an increase in the tax base or meet the Governments target of reducing the informal sector. On the other hand it penalises the genuine taxpayer as well as the honest Official that has taken pains to detect unscrupulous traders.

The tax amnesty law has been controversial, in that it has pardoned firms and individuals that has resorted to either Customs violations, Exchange Control and Excise violations or tax defaulters who are now permitted to show their monies legitimately without any penalties or tax levied on these incomes. In contrast those genuine importers and traders who have over the years paid the correct amount of customs duty and taxes have been placed at an enormous disadvantage by these unscrupulous traders who through underinvoicing and overinvoicing have defaulted the Customs, but more importantly have had an edge over their competitors.

Successive Governments have acknowledged the high incidence of black money resulting in the several tax amnesties and currency demonitisation exercise with poor response. Yet, it is well known that there is a high volume of business conducted in the informal sector with under valued transactions, considerable waste as the money is neither placed in savings nor invested while many have investments and savings abroad. A visit to any star class hotel or holiday resort will give an indication of the extent of waste, as the black money cannot be invested legitimately.

The question that must be addressed by Legislators is to find a simple and practical method of bringing this black money into the formal sector. For example, a few years back as Chairman of an Exporters Organisation we came across a problem faced by a very large company having difficulty in purchasing their requirements of coconut shells whilst many other smaller firms had no difficulty of doing so at much lower prices.

The reason quite simply was that the company required receipts for payments which in turn would result in a tax file number for the recipients. The need to avoid a tax file number has been the main focus of the majority of Sri Lankans resulting in wasteful expenditure and an aversion to invest or save in the formal sector.

At the same time successive Governments have endeavoured to increase the tax threshold under the PAYE scheme and reduce income tax as a means of relief to the lower income earners and improve tax compliance. This policy supported by some Trade Chambers has been pursued over the last several years instead of addressing the core problem which is the inherent aim to avoid having a tax file number and be subject thereafter to continuous harassment.

While the larger tax payers have access to tax Consultants, the smaller taxpayers have no such option but either pay up or make a deal with an official where sadly tax officials income is supplemented by rewards for tax detection. Hence the culture, the desire to avoid a tax file number and conversely the need for Government to address this issue in a more practical and meaningful manner.

Sri Lanka has a variety of taxes and levies which are complicated and complex resulting in a highly distorted system with a very narrow tax base. In a country with a population of 18.5 million only 2% or less are tax payers, with an estimated 50% or more businesses in the informal sector and no less than ten tax amnesties given during the last few decades without much success. Meanwhile, development strategies have concentrated on tax incentives as a means of attracting investment both local and foreign and successive governments have pledged to reduce the tax rate.

The total number of tax payers including PAYE tax is only 381,066 (See table below) It would appear therefore that GST and NSL together contributed Rs.78.8 billion or 67% of revenue. The introduction of the VAT will not make much difference to these figures whilst the recent increase in the PAYE tax threshold will probably reduce the number of taxpayers.

If Sri Lanka is to create a climate for growth and kick start the economy from its present depressed state a more practical and pragmatic approach of eliminating income tax and concentrating on consumption tax and wealth tax would be the answer.

The introduction of a consumption tax only would make it easily collectable and also encourage savings and investments. The immediate advantage of eliminating income tax would be a massive infusion of investment and a shift from the informal to the formal sector. This would result in the disclosure of actual transaction costs, a better collection of stamp duty and the collection of consumption taxes from the majority in the rural areas particularly those in the North and East who do not pay any income tax.

The increase in consumption tax could be introduced in such a manner that it will not have any effect on essential foods and medicines but can be on a four or five tier structure in order to reduce the burden on the poor whilst increasing the tax on consumption on those who can afford. Again if income tax is removed the price of all goods particularly essential food and medicine will decline because all firms absorb a part of an employees tax, which will no longer be necessary and could be passed down in lower prices.

Similarly companies too will benefit and be able to reduce prices. An immediate effect would be the reduction of price on essential milk powder, gas, drugs which can be free of any consumption tax.

In eliminating income tax it would be possible to introduce a wealth tax because wealth (excluding shares and investments) does not generate growth but investment does. Consequently high wealth individuals can be called upon to pay a wealth tax which would also counter criticism from the left.

At this point of time it is necessary to look outside the box and find a solution if Sri Lanka is to utilise this high incidence of black money and create a climate for growth and kick start the economy from its present depressed level.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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