Come April 1 (not an April Fools joke!), Sri Lanka will see the implementation of a whole new tax regime.
Among the key changes in the tax structure is the plan to tax government servants for the first time in 33 years. Public servants were taxed before until the UNP Government of 1977 provided tax-free status to public officials with the intention of attracing the best talent in a new economic environment after Sirima Bandaranaike’s 1970-77 closed-doors economy.
The tax-free status has been revered by the public sector but frowned on by all other sectors – civil society and the private sector – who had to pay taxes even if their salaries and wages were lower than that of public servants. The call for an equal and indiscriminate income tax system has been growing over the years with taxes badly denting the incomes of private individuals.
The reluctance over the years to restore the statusquo as per taxing the public servant has been mainly due to political reasons. Fearing they would lose a vital vote base if the tax burden is heaped on government workers, ruling party politicians have avoided taking such a decision despite the protests. However, with President Mahinda Rajapaksa winning elections with ease over the years and the opposition in tatters, and confident that such a move won’t dent the government’s popularity while on the other hand bring in some welcome, additional revenue, the administration has gone back to the pre-1978 tax regime where everyone was liable to pay a tax based on income levels.
The move will bring in 1.5 million public servants into the tax net and result in some millions of rupees in revenue.
Another proposal that merits attention is the selective offer of tax holidays for investors which the government says has been abused over the years without clear guidelines, which now will be issued and strictly enforced. Work at the Board of Investment (BOI) has been constrained over the past few months due to the lack of clear guidelines on the tax holidays which in future will be administered by the Finance Ministry and the Inland Revenue Department unlike in the past where the BOI was authorised to provide such benefits to investors.
The government’s concern is one of losing revenue with too many tax holidays particularly for projects that don’t deserve such treatment and furthermore such incentives were provided at a time when the country was struggling to attract investors due to the risks involved due to the conflict. With the conflict ending and Sri Lanka back to a peaceful environment, the government believes there is no need to provide such incentives as there are no such war and political risks anymore but will provide tax benefits to mega investors who bring in big bucks and are here for the long haul.
Along with the lack of clear guidelines to tax holidays, the BOI has also been plagued with some protests over the restructure of the organisation and reducing the large space (floors) it has at the World Trade Centre. While insiders and trade unions say no applications have been processed due to the uncertainty over taxes and restructuring, BOI chief Jayampathi Bandaranayake has said work is progressing as usual. Bandaranayake’s tenure is also coming to a close and the government is looking for a new chairman. Bandaranayake, a former chairman of the Ceylon Chamber of Commerce and current chairman of Ceylon Tobacco Co, has said that he has in the past indicated to the government that he was taking on the BOI assignment only for a limited period.
In the meantime how the government would enforce the President’s proposal in the budget where he said the BOI law ‘will be amended to create a position for a Director General to ensure continuity in executive responsibilities’ remains to be seen. Currently the top position of Chairman and Director General is held by one individual.
Some other proposals in the budget are yet to be enforced. For example it was announced that the former Sri Lanka Tourist Board which is split into four agencies would be merged to one except for the Hotel School as a single agency capable of effectively promoting tourism within ‘the first 100 days of 2011”. The proposals are yet to be implemented or presented to parliament to amend existing legislation in the Tourism Act.
The Presidential Tariffs Commission proposals simplying the tax system reducing the number of taxes to around 15 from 25 will also be effective from April.
All this would not only simplify the taxes for the consumer (VAT, etc) and wage earner (income tax) but also ease the workload of the Inland Revenue Department. The government has been short of cash and trying to raise the revenue collection by threatening prosecution of those who delayed to pay their taxes. As the new tax regime takes effect, one hopes it will not trigger another witchhunt against the genuine tax-paying public by a department hounded by the mandarins at the Treasury to collect, collect and collect to fill depleted coffers!
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