Inland revenue contributed double digit tax to GDP in 2006

D. Rangalla, Deputy Commissioner of Inland Revenue

In the economic literature on taxation, policy reveals little concern for weakness in tax administration. A good tax policy proposal and technological progress is thought to unambiguously improve the tax system.

However, administrative constraints may prevent the establishment of an optimal tax system, particularly in suffering from a scarcity of trained administration. With the recent changes in Tax-to-GDP ratios many countries have reflected the combined impact of changes in economic growth and lower rates of taxation on personal and corporate income.

Sweden has maintained the highest Tax-to-GDP ratio of 51.1% in 2005. Denmark, Belgium, Norway, Finland, France, Austria, Italy have maintained the Tax-to-GDP of more than 40% of in 2005 and 2006. Tax-to-GDP ratios of some of the countries in 2005 were as follows.

(Chart 1)
 

(Chart 1)
Country		Tax in % of	Country		Tax in % of	Country		Tax in % of  
		GDP (2005)			GDP (2005)			GDP (2005)		
Sweden		51.1		Italy		41.0		Thailand	18.0
Denmark		49.7		Spain		35.8		Singapore	9.9
Belgium		45.4		Germany		34.7		U. Kingdom	35.8
Norway 		45.0		Canada		33.5		Sri Lanka	14.2
Finland		44.5		U.States	26.8
France		44.3		S. Korea	25.6
Iceland		42.4		India		16.0
Austria		41.9		Japan		25.8

The objective of this short article is to explain the Tax-to-GDP of Inland Revenue collection of 2006. Total Government revenue in 2006 increased by 26 per cent to Rs. 477 billion, while the total revenue to GDP ratio continued its increasing trend and reached 17.0 percent compared to 16.1 percent in 2005. The tax revenue GDP of the year 2005 and 2006 were 14.2% and 15.3% respectively.

Inland Revenue tax collection of 2005 was Rs. 198 billion and the total tax revenue of IRD of year was Rs. 253 billion. ‘IRD’s tax collection to GDP for the year 2005 was 9.45% and it was increased to 10.20% in 2006.

(Chart 2)

(Chart 2)
Year	Governments	IRD’s		% of IRD’s	GDP at 		% of IRD’s 
	Revenue		Collection	Collection 	Current		Collection
	Rs. Mn		Rs. Mn		to Govt.	Factor	         GDP
					Revenue		Price
					Rs. Mn
2002	261,887		137,609		52.55%		1,403,286	9.81%
2003	276,465		139,044		50.29%		1,562,737	8.90%
2004	311,473		164,803		52.91%		1,800,750	9.15%
2005	379,747		198,301		52.22%		2,098,323	9.45%
2006	477,334*	253,319		53.07%		2,484,191	10.20%
* Provisional Figure
Source - Central Bank of Sri Lanka (Annual Report - 2006)

The above table very clearly shows that the tax from 2002 to 2005 IRD’s Tax-to-GDP ratios were below 10%. However, it has increased to 10.20% in 2006 and it is a very significant figure for the economic concerns and tax administration concerns.

The Department of Inland Revenue collected its revenue of Rs. 253 billion in 2006 from the taxes of Income, Economic Service Charge (ESC), Valued Added Tax (VAT), Debit tax, Betting and Gaming Levy, Share Transaction Levy, Turnover tax, Stamp Duty, Estate Duty, Goods and Services Tax (GST) and the National Security Levy (NSL). Table shows the IRD collection Year 2002 to 2006.

(Chart 3)

(Chart 3)

		2002		2003		2004		2005		2006
Type of Tax	Colln.	%	Colln.	%	Colln.	%	Colln.	%	Colln.		%
		Rs.(Mn)		Rs.(Mn)		Rs.(Mn)		Rs.(Mn)		Rs.(Mn)	

Income Tax	37,682	27.38	38,602	27.76	37,904	23.00	42,154.821.26	71,481.5		28.22
Economic 
Service Charge	-	-	-	-	4,052.8	2.46	7,283.1	3.67	8,852.9		3.49
Value Added Tax	35,181	25.57	97,754	70.30	117,030.9	71.01	141,877.9 71.55	164,070.8 	64.77
Debit Tax	1,310	0.95	3,601	2.59	4,488.8	2.72	5,700.8	2.87	6,254.8			2.47
Betting & 
Gaming Tax	55	0.04	56	0.04	77.1	0.05	196.4	0.10	282.2		0.11
Share
 Transaction Levy	-	-	-	-	-	-	451.2	0.23	420.2		0.17
Turnover Tax	678	0.49	4	0.00	106.2	0.06	143.1	0.07	232.6		0.09
Stamp Duty	2,331	1.69	69	0.05	51.3	0.03	8.9	0.00	1,495.2		0.59
Estate Duty	2	0.00	-	-	0.4	0.00	0.5	0.00	0.06		0.00
Good & Services
 Tax		31,511	22.90	(759)	-0.55	852.6	0.52	448.9	0.23	135.7		0.05
National 
Security Levy	28,859	20.97	(284)	-0.20	239.9	0.15	34.6	0.02	92.6		0.04
		137,609	100	139,043	100	164,804	100	198,300	100	253,319		100

Source - Inland Revenue Performance Report - 2006

The increase in tax revenue was mainly driven by increase in revenue from Income Tax, Value Added Tax.

Revisions introduced to both corporate and personal Income Tax rates, restrictions imposed on carry forward losses, closing loopholes through amendments to tax legislation, revision introduced to the economic service charge and improved tax administration and enforcement contributed to increased revenue from Income taxes.

The revenue from VAT was increased due to increase in the mark-up of imports, rate increase is financial services, increased imports of high valued items such as motor vehicles, high international commodity prices, growth in service sector, particularly the telecommunication service sector and measures introduced to streamline VAT refunds.

Department of Inland Revenue concerns, in 2006 IRD reached the revenue estimates fixed by the General Treasury.

Especially in VAT and Income tax exceeded the targets. Revenue estimate, revenue collection and collection as a percentage of estimates in 2006 are as follows.

(Chart 4)

(Chart 4)
Total Revenue Collection - 2006

Type of Tax	Revenue			Revenue		Collection	Collection
		Estimate		Collection 	as a % of	as a % of
		+ Rs.	Rs.				Estimate	Total
									Revenue
Direct Tax

Income Tax *	66,158,000,000		71,481,521,231	108.5		28.22%
Economic 
Service
Charge		9,614,000,000		8,852,985,755	92.08		3.49%
Stamp Duty	1,200,000,000		1,495,293,475	124.61		0.59%
Debits Tax	6,841,000,000		6,254,885,377	91.43		2.47%
Betting &
Gaming Levy	460,000,000		282,294,230	61.37		0.11%
Share 
Transaction
Levy		475,000,000		420,180,879	88.46		0.17%
Estate 
Duty **		-			646,558		-		0.00%

Sub Total	84,748,000,000		88,787,807,505	104.76		35.04%
Indirect 
taxes		
Value Added
Tax		162,298,000,000		164,070,832,668	101.09		64.77%
Turnover Tax	150,000,000		232,565,201	155.04		0.09%
Goods &
Services
Tax **	-	135,752,036		-				0.05%
National
Security
Levy **	-	92,560,902		-				0.04%

Sub Total	162,448,000,000		164,531,710,807	101.28		64.95%
		247,196,000,000		253,319,518,312	102.48		100%

Source - Inland Revenue Performance Report - 2006

* Includes Social Responsibility Levy, Which is collected by the Department together with income tax 
** No estimate was made as this tax had been abolished. The collection, out of the amount in default, is small when compared with the total collection.
+ Revised.

Gross income tax collection under PAYE (pay as you earn scheme) was Rs. 7.6 billion of the year 2006, and withholding tax on interest, rent and specified fees generated the income of Rs. 20.7 billion and these were other reasons to increase the income tax revenue in 2006. Further improvement of service sector especially in banks and financial sector made significant contribution to increase the income tax revenue in 2006.

Improvement of the banking and financial sectors, high import prices and high volume of imports and the increasing the mark up of computing VAT of the point of import made a significant increase on the VAT revenue in 2006. VAT on import of 2006 was Rs. 92.4 billion. The combined of all of these increased the VAT revenue than estimated revenue from VAT.

Furthermore, officers of the Inland Revenue Department have managed to increase the number of tax files of each tax. The details analysis is given bellow.

(Chart 5)

Particulars of Audits  and Additional Tax Collection during the year
	
Income			PAYE		VAT		ESC		NSL		Total
			Tax
	
Total amount of		5,545		4		2,851		74		24	   8,498
additional tax
assessed during 
the year 2006 
(Rs. Mn)

Total amount of 
additional tax
collected during 
the year 2006
(Rs. Mn)		3,306		0.4		2,849		24		24	   6,203.4

Number of Audit
cases commenced
during the 
year 2006								3,178

Number of Audit
cases finalised
during the year 2006							2,834

Source - Inland revenue Performance Report - 2006

In addition to the above officers of the IRD managed to maintain the returns and payment compliance rate up to satisfactory levels and managed to carry out the audit functions and collect additional tax of Rs. 6.2 billion during the year 2006. Details are as follows:

(Chart 6)

Income tax exemptions granted for certain Business Undertakings were effected to cushion the potential revenue from income tax.

Large number of Goods and Services were not subjected for VAT and that being exempted from VAT during 2006 and therefore, a large amount of potential VAT revenue were lost.

If not for the above tax to GDP would have increased to more than 12 per cent during 2006.

Improvement of efficiency and effectiveness of tax administration and, new tax policies introduced to the tax system will positively affect the increase the Tax - to-GDP in 2007. Let us hope so.

It is certain that the 100 per cent returns and payments compliance, minimum tax avoidance and evasion, sound fiscal policy, economic growth, minimum tax exemptions for income tax and limited exemptions for indirect taxes will definitely increase the tax to GDP of the country.

(Chart 6)
Number of Tax Files as at 31-12-2006 and 2005

Files						31-12-2006		31-12-2005

Income Tax		
* Resident Companies				23,405			21,644
* Non Resident Companies			434			370
* State Corporations, Statutory Boards and 
State-owned Institutions			161			73
* Individuals					136,783			120,576
* Partnerships					16,105			12,632
* Bodies of Persona etc				2,115			2,512
Total Income Tax Files				179,303			157,807
Employers Registered under PAYE Scheme		10,988			9,766
Persons and Partnerships registered for ESC	6,990			7,701
Persons registered for VAT			25,808			22,852
Persons registered for Debits Tax		835			943
Betting Levy Files				1,004			1,054	
Gaming Levy Files				8			7
Total Number of Files Handled by the 
Department as at 31-12-2006			224,636			200,130

Tax File under PAYE Scheme 		`	253,553			205,089

Source - Inland Revenue Performance Report - 2006 and 2005