Tax: Crisis of credibility

Experts say the government is so desperate for money, that it is resorting to extreme and radical ways to raise funds, resulting in a lack of confidence in administration by the business community and ordinary taxpayers alike.

Old tax files are being reopened and Inland Revenue (IR) officers are constantly checking hotels to find out who’s booking the main hall for weddings and other receptions, a method which is likely to send genuine taxpayers underground.

Commissioner General of the IR, A.A. Wijepala told The Sunday Times FT the government is not strapped for cash because the revenue departments are meeting their targets. The 2007 revenue target for the IR is Rs.315 billion and Wijepala is confident the target can be surpassed. In the first six months of the year, the IR has collected Rs.46 billion from income tax. "When we compare this with last year, it is a 59% increase," he said. "That is tremendous." The VAT collections for the first six months have totaled Rs.86.5billion. All together, Wijepala said Rs.139 billion was collected in those six months.

Taxpayers are irked with tax officers who promoted the tax amnesty under the previous United National Party (UNP) government in 2003 as an ideal opportunity to declare any undeclared assets or money and continue doing business, no questions asked. Now the same officers are digging into these tax files and investigating past records.

The president of a leading chamber of commerce told The Sunday Times FT that the IR gave the impression that under the amnesty all would be abolished and people would be given the opportunity to start off on a clean slate. However, the next government subsequently did away with the amnesty and everyone who applied under it is now being investigated.

Leading tax expert N. Gajendran said the original amnesty given in 2003 was not only for those who evaded taxes but also for people who paid their taxes. The amnesty included all taxes with a guarantee of full immunity. "People made declarations and their returns were accepted," he said.
"This was for good and bad tax payers alike." Good tax payers applied to avoid further queries because as Gajendran explained, most of the time, the people who end up being harassed by the IR are the ones who file their returns and pay their taxes. However, there was a huge public outcry, leading to the abolishment of the original law, also in 2003...

the biggest point of contention against amnesty was that it was being given for tax evaders.

The new government abolished the law and introduced a new one, giving amnesty for income tax only as well as for individuals who have not declared their income or under-declared their income. Gajendran said people had to make completely fresh declarations and the hassle involved meant most people who declared under the original amnesty did not declare fresh claims. In addition, the Commissioner General had to approve each case which was not how the original amnesty worked. "There were huge complications arising out of that situation," he said. "This created a huge credibility issue."

Gajendran said there is nothing in the law that prevents the government from re-opening the files of those given amnesty but the credibility of the government and law making is questioned. "We have a habit of not conforming to the law and regulations of earlier governments," he said. "Bad practices are repeated and that is because governance at the top level is not good. The whole problem is the credibility of the process and the character of the administration.

The revenue target for the IR in 2005 was Rs. 200 billion. In 2006, the target was Rs.260 billion, a 30% growth for revenue. In 2007, the target has further risen to Rs.325 billion. Gajendran said that it is impossible for the IR to have such huge growth year on year. "Businesses are struggling because costs are going up and interest rates are also going up." This creates additional pressure on taxpayers because the same people have to bear the burden.

Businesses are not investing and profits are decreasing due to the soaring costs. "Revenue is not coming down because of inflation but costs are going up," he said. "Cost rises faster than revenue and the bottom line is being eroded." Gajendran said the government has to manage their expenditure because this is all centered on expenditure based corruption. "The organization (IR) has to be trusted and right now, there is absolutely no credibility." In fact, Gajendran said they are only justifying the actions of the tax evaders which will lead to further evasion.

Unsavory practices
The desperation of the government is so profound that they have even resorted to getting information from Colombo's five star hotels on the names and addresses of people holding weddings and other functions in order to see if the cost of the events supercedes what they should be spending based on their income. The chamber president, who declined to be named, said that instead of bringing people into the tax net, the actions of the government will lead to further tax evasion.

"The economy of a country is driven by the private sector," he said and in that respect, the IR should create a think tank instead of harassing five star hotels and their patrons. What the government fails to understand is that people at five star hotels are already being taxed through VAT and a service charge. "Negative approaches for tax collections will make the economy backwards and will lead to a severe recession," he said. "The biggest problem is the VAT." He explained that the VAT system is good for advanced countries in Europe but in Sri Lanka, people are finding it hard to exist due to the current escalation of pries in power and electricity. "The only way out is to increase the standards," he said. It is unfair and completely unreasonable to pay minimum wages of Rs.5000 and then expect someone to pay a Rs.5000 electricity bill.

By reopening the files of tax amnesty recipients, the government is not breaking the law but according to the chamber president, it is a breach of trust. "No one has gone to court and filed action with the IR but there is a better way of collecting taxes. Right now, the government is creating and educating people to rob. People in hotels will just start putting false names and addresses." Similarly, he fears that the government is going to move onto credit cards. "If that happens, all supermarkets will close down because people will use cash and only buy a little at a time." He urged the IR to create a think tank and move into the future instead of using the thinking of thirty years back.

Tax chief Wijepala says the target for increasing the number of taxpayers for 2007 was set at 50,000. In the first six months, 39,000 new files have been created. "It means we can easily exceed the 50,000," he said. "It might be about 70,000." Currently, the total number of tax payers is 450,000 or around 2% of the population which Wijepala says is grossly inadequate. In the next three to four years, he wants to increase the number of tax payers to 1 million.

When Wijepala assumed duties, he said the revenue ratio to direct and indirect taxes as 25 to 75. Currently, it stands at 35 to 60. His aim is to create the ratio of 40 to 60. "Then only can we see improvements in the economy of the country," he said, adding that direct taxes are paid by the country's wealthy. "We must tax the rich and not the poor."

Wijepala said not more than 1,500 files of the 2003 amnesty recipients have been opened only to check on their present position. For example, Wijepala said that if in 2003, an individual declared any assets such as property or houses under the amnesty, the IR is only interested in finding out if the owner is residing there or if it has been given on rent. If the house has been given on rent, the individual must declare the rent. "We don't ask how they finance their things," he said. "Those tax payers should not worry because we are only checking on their present position. We just want to know that if they have declared any assets under amnesty, what would they doing with that asset."

In an effort to stop tax evaders, Wijepala said the IR has begun an advertising campaign inviting non tax payers to register, guaranteeing that they will not be questioned on the previous year, only the current year and the future.

S.R. Attygalle, Director at the Department of Fiscal Policy at the Ministry of Finance, said that around 53,000 tax files related to the 2003 amnesty were opened then. "Some cases have been filed and certain amounts of money have been collected," he said. Attygalle added that some of these files might have been re-opened on questions of legitimacy.

Attygalle said the total expected revenue for all three revenue departments which includes the IR, the Excise Department and the Customs Department is Rs.599.817 billion for the year 2007. "We are actually trying to get more than the 2007 target," he said.

Despite certain ups and downs, Attygalle said income tax, which is performing particularly well, has grown by 60% in the first seven months of the year. "We think that we are definitely going to exceed the income tax target of Rs.102 billion." Attygalle added that there are regular meetings with the three main revenue departments who are given higher targets to achieve.