Sri Lanka looks to tap informal sector to widen tax base
View(s):By Bandula Sirimanna
The Government is making a renewed effort to expand the taxation system by targeting high-income earners in the informal sector, four years after a failed attempt to introduce a progressive tax structure in 2018.
State Minister of Finance, Ranjith Siyambalapitiya, announced plans this week to tax 14 previously untaxed sectors, including large-scale private tuition classes, private schools, private engineering and surveying services, and private medical services. This move aims to increase direct taxation.
Earlier, the Sunday Times Business reported on October 22, 2017 about a similar plan of the then Finance Minister, late Mangala Samaraweera to introduce a progressive tax structure for the informal sector while strengthening the income tax collection mechanism.
The plan of the former Finance Minister was 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.
But this proposal was not included in the 2018 budget due to the pressure exerted by the opposition political parties and interest groups.
However Mr. Siyambalapitiya said the government is determined to implement this plan as the Inland Revenue Department (IRD) has already collected information on the income of persons engaged in the 14 informal sectors.
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.
In 2022, 80 per cent of tax revenue was indirect, while direct was only 20 per cent. This meant that 80 per cent of the state revenue burden fell on everyone equally, from the richest person to the beggar on the street. But now this has changed to 70 and 30 per cent. “In two years, we plan to change this to 60, 40 as in developed countries,” he added.
Total government revenue excluding grants increased by 48.3 per cent to Rs. 1,216.0 billion in the first four months of 2024 compared to Rs. 820.1 billion in the same period of 2023 mainly due to the increase in tax revenue by 50.5 per cent to Rs. 1,117.8 billion from Rs.742.6 billion, finance ministry data showed.
Tax revenue of Rs. 1,117.8 billion accounted for 91.9 per cent of the government revenue excluding grants. With the growth in revenue from VAT and taxes on external trade, direct taxes as a share of tax revenue has reduced to 21.8 per cent in the first four months of 2024 compared to 25.8 per cent recorded in the first four months of 2023.
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