SL Government taps informal sector to widen tax base
In the face of dwindling revenue, low tax compliance and a narrow tax base, the government is to introduce a progressive tax structure for the informal sector while strengthening the income tax collection mechanism.
This is through the 2018 ‘Designer’ Budget shifting from the stance of the ‘Robin Hood’ budget 2015, Finance Ministry sources disclosed.
Treasury officials are ‘burning the midnight oil’ in devising 2018 budget proposals on the directions of Finance Minister Mangala Samaraweera to widen the tax on hitherto untapped bases such as informal hotel, private medical practice, large scale private tuition, buying and selling and other un-registered businesses.
According to Finance Ministry statistics, Sri Lanka’s informal sector workforce is in the region of over six million and devising mechanisms to bring the informal sector into the tax net and increasing direct taxation could yield benefits in the long run.
The government will do away with unrestricted powers vested in ministers to grant tax concessions and introduce a transparent system for granting tax concessions to investors.
A concessional tax rate is to be introduced on interest payable to a non-resident on borrowings made in foreign currency from sources outside the country under a loan agreement or by way of issue of any long-term bond.
The corporate income tax rate will be revised while the concessions for various developments can be obtained via enhance depreciation allowances.
The concept of Deemed Dividend tax will be removed whereas the scope of dividend is to be widened to capture capitalisation of profits.
In order to ascertain the business income of a non-resident, the “Permanent establishment” concept has been proposed. A Capital Gains Tax will be introduced in line with the concept of equity in taxation due to growing investments in capital assets, the sources said.
The 2018 budget is not expected to impact overall business sentiment on a macro level, although certain industries will be affected.
Minister Samaraweera’s intention is to accord high priority to improve the standard of SMEe entrepreneurs in the upcoming budget as this sector provides 50 per cent contribution to the national economy.
Agriculture, Fisheries industry, animal husbandry light engineering, printing, tourism, handicraft, apparel and new innovations sectors will be given the highest incentives in the country’s history from this budget, the sources revealed.
A new mechanism is to be introduced to provide maximum financial assistance to small and medium scale entrepreneurs for their project proposals to improve the business deviating from the traditional system of giving bank loans at reasonable interest with simple conditions.
The 2018 Budget is also expected to provide incentives for start-ups and innovation as well. Traditional industrialists engaged in brass, copper and iron works, handicraftsmen and self-employed will be provided with necessary funds through selected public and private banks.
Necessary funds to the banking system towards this end will be obtained from foreign funding agencies.
The Ministry is now preparing budget 2018 in line with performance-based budgeting according to the mid-term budget framework 2018-2020.
As per the proposal approved by the cabinet, the Ministry is to determine budget limits for line ministries considering priority programmes of the government.
Major macroeconomic assumptions for 2018 include real GDP growth of 6 per cent, inflation stabilised at 5 per cent and an overall budget deficit at 4.3 per cent of GDP.