Treasury re-activates old tax revenue circulars
The Treasury, short of cash for development projects and immediate recurrent expenditure, is re-activating old tax revenue circulars which have been inactive and a level of laxity in meeting out punishment to offenders.
According to the Central Bank’s 2013 annual report, tax revenue fell to Rs.1, 005.9 billion from the budgetary target of Rs.1,131 billion. The declining trend in tax revenue continued further with the drop to 11.6 per cent of GDP in 2013 from 12 per cent of GDP in 2012.
Last month, the Inland Revenue Department (IRD) re-activated a 1994 circular on tax clearance certificates to banks and authorised dealers making this mandatory for communication services including telecommunication and Internet services, computer software and information services, royalties. License and franchise fees, remittances relating to foreign loans, capital repayment and interest payments as well as remittances for management services for persons outside Sri Lanka and remittances for service contracts including human resources and IT management.
Informed sources said that a special unit in the Treasury is now examining other tax circulars which have been ignored or not complied with by banks and other institutions. ‘The plan is to see whether we could enforce these properly and get more revenue,” one official said.
According to the IRD circular SEC/2014/02, Sri Lankan companies engaged in telecommunication and Internet services are required to furnish tax clearance certificates to make their procurements from foreign countries.
When contacted, a senior official of the IRD told the Business Times that the department has re-activated a 1994 circular on the directions of Treasury Secretary Dr. P.B. Jayasundera as certain commercial banks and authorised dealers have failed to comply with the IRD directive.
IT companies including BOI approved IT firms say that they will be severely impacted by this circular discouraging future investments in the island.
In a letter to Business Times, an official from an IT firm noted that they have been asked to pay 10 per cent tax and submit a tax clearance certificate on behalf of their overseas vendors in order to remit funds.
He also alleged that BOI approved IT companies are required to pay tax on outward remittances on behalf of the overseas software vendor.
These companies have already signed agreement with the vendor to develop the software and they insist Lankan companies to make full payment as foreign firms are not taxable in Sri Lanka.
When asked to clarify this matter, a senior IRD official said that the International Unit of the IRD is looking at these firms on a case by case basis and in terms of double taxation avoidance agreements with 54 countries and provisions of Inland Revenue Act.
But company official said that even if there is a possibility of that this tax paid to IRD being deductible from tax paid in the relevant foreign country, it would increase administrative, legal and specialist consultancy cost which will be passed on to Sri Lankan consumers.