Sri Lanka 2017 Budget over-estimates tax revenue
Sri Lanka 2017 Budget has over-estimated the tax revenue making the task of tax collection authorities ‘challenging’ and in this context the government should consider additional measures if planned revenue didn’t come in, the Parliamentary Committee on Public Finance (COPF) has warned.
The committee has evaluated and analysed the 2017 budget revenue and expenditure proposals and submitted its report with observations to the parliament recently. COPF Chairman and TNA MP M.A. Sumanthiran also spoke on these discrepancies in a speech in parliament on November 21 when presenting the COFP report on ‘Assessment of the Fiscal, Financial and Economic Assumptions of the Budget 2017.
The report assesses that the government’s revenue projection is too optimistic as the Ministry of Finance has a poor track record of making budget predictions.
The COPF warns that estimated revenue will fall short of around Rs.136 billion from the target due to over-estimation in some of the revenue proposals.
The total revenue of the government is estimated at Rs. 2 trillion (Rs. 2,088 billion) in the 2017 budget. This is an increase of 26.7 per cent over the expected revenue for 2016. In contrast, the increase in revenue from 2015 to 2016 was only 9.2 per cent.
The committee has assessed the assumptions and actions that have been presented in the budget to justify this significant increase in revenue expectation. It has concluded that these actions would be feasible only if revenue administrative measures are successful in creating a revenue growth through economic expansion.
Making observations on tax proposals, the COPF says an overall increase of 44 per cent in corporate income tax collection of Rs.158 billion is ambitious based on past experience, where similar policy actions have been attempted.
There are significant administrative efficiency risks to the successful increases in the tax collection base by over 15 per cent. There is also the same risk in administratively capturing the full increase in the taxable‐base even if that base were to increase by over 15 per cent through the actions set out in the budget, the committee pointed out.
The COPF has recommended a downward revision of the estimates by Rs. 26 billion to account for the risks and discrepancies in the corporate income tax collection.
An overall increase of 59 per cent in PAYE tax collection is at a huge variance from the assumptions and expectations that can be constructed based on budget actions and past experience, the committee said suggesting a downward revision of the estimates by Rs.12 billion to account for adjusted assumptions.
However, taking into consideration collections reported for the first three quarters of the 2016, as well as the changes being made in rates and applicability of VAT, the COPF has assessed this increase as not only plausible within the assumptions and policy position of the government but also as being potentially underestimated by around Rs 10 billion.
The budget estimates the revenue from excise duties to increase by Rs. 131 billion to Rs. 575 billion (growth of 29 per cent)
The increase estimated in the budget speech is based on a Rs. 50 billion increase from motor vehicles and liquor, Rs. 30 billion increase from tobacco and Rs. 10 billion increase from petroleum.
The assumption that vehicle imports will continue to grow and drive increased revenue in 2017 is inconsistent with the information, assumptions and actions that have been revealed in the budget.
According to available data for analysis with regard to the economic environment and relevant policy changes, it is possible that there will be demand substitution due to changes in relative tax rates between types of vehicles.
However the committee was of the view that the sum of Rs. 230 billion anticipated in the budget estimates does not have sufficient support to be deemed plausible.
The Committee has recommended that these calculations be re-evaluated and revised downward by at least 15 per cent (Rs.36 billion) to ensure that projections are not highly over-estimated.
The 32 per cent growth assumption in increased demand for liquor, thus increasing revenue from excise duty to Rs. 180 billion, is difficult to rationalise with the information and actions provided along with past data.
The Committee recommended that these calculations be re-evaluated and revised downward by at least 15 per cent (Rs. 27 billion).
The revenue estimates for cigarettes (Rs. 105 billion) is plausible if revenue is monitored and excise rates are systematically adjusted in 2017. The estimate for petroleum (Rs. 55 billion) is also within the assumptions and information available, the COPF observed.
The anticipated growth in import duty and cess is reliant on improvements in administrative measures that enhance collection. The revenue from cess could be lower than this estimate if the proposed reduction of cess on 100 essential items is implemented during the course of the year. Based on the analysis, a reduction in the revenue estimate by at least Rs. 25 billion would be prudent, the committee said.
Considering the analysis on the external sector and specifically modest import growth in 2017, it is probable that a 15 per cent PAL growth is an overestimate. Assuming flat import growth in 2017, revenue from PAL would need to be driven by administrative improvements. Based on the analysis a reduction in the revenue estimate by at least Rs.10 billion would be practical, the committee observed.