CB Governor says tax incentive system must change

Sri Lanka cannot afford to have tax incentives implemented over and over again and Central Bank Governor Ajith Nivard Cabraal has told the government that the system has to change.

Despite the abuses that have plagued the system in the past, most recently the ongoing VAT scandal, Cabraal said a rational system of taxation has to be implemented in order for the government to maintain law and order, provide national security and uphold justice. Speaking at a seminar this week on 2007 amendments to tax legislation, organized by the Faculty of Taxation & Taxation Committee and the Institute of Chartered Accountants of Sri Lanka (ICASL), Cabraal said that tax administration must be improved in order to create more efficiency in revenue collection.

Cabraal pointed out that the Inland Revenue (IR) is being modernized and that there are 'good signs that the IR is becoming more responsible.' However, the IR only has 400,000 clients which are insufficient because a lot of burden is currently being placed on the middle income bracket. If more people were able to contribute to taxation, the burden will be lessened on the middle sector. Cabraal said the tax to GDP ratio currently stands at 17% and this too is insufficient. If Sri Lanka is to match up to other countries, the ratio should be between 19 – 20%.

He described the 6.1% growth this quarter as 'not something to be ashamed of. In fact, he said it was good and robust and shows resiliency. However, the country needs to maintain this growth momentum for at least the next 15 years. There are many developments and several new projects in the works for infrastructure development and others which he described as unprecedented. He said the Mahaweli projects, although impressive, pale in significance to the development that is happening now.

Cabraal also urged more growth and development outside of the Western province. The per capita income in the Western Province is US$1900. In other provinces, the per capita income is somewhere between US$735 to US$785. Similarly, 42% of the banking sector is also located in the Western province as well as the ports and airports. Cabraal said the other provinces must find ways to attract business.

N.R. Gajendran, Alternate Chairman at the Faculty of Taxation described the salient features of the Inland Revenue (Amendment) Act No. 10 of 2007 which included the various tax exemptions in the Act. Exemptions are in place on interest from Treasury bond investment external rupee accounts, dividends from any unit trust or mutual fund, sale of shares and agricultural undertakings amongst others.

Duminda Hulangamuwa, Partner at Ernst & Young spoke on changes to VAT and the Economic Service Charge (ESC). Some highlights were the reduced VAT rate to 5% with effect from 6 June 2007 for essential goods such as gram, green gram and tinned fish. Exemptions from VAT, effective from 1 January 2007 include certain types of fuel oil, locally manufactured handloom textiles, machinery or equipment for electricity generation and prawns, to name a few.

Hulangamuwa mentioned that VAT returns filed by electronic means are recognized but said that currently, the IR is simply not equipped to handle electronic VAT refunds, much less paper refunds. He said that even though the IR says refunds can be handed out in a month, it actually takes close to nine months. Entering a return takes one month and the assessor who looks over the case, assuming there are no issues or disputes, will take another additional seven to eight months. However, Hulangamuwa said the IR was working in accordance with its resources.