Taxation in Sri Lanka

INSTITUTE OF POLICY STUDIES OF SRI LANKA
Working Paper Series
No.
25
Taxation in Sri Lanka:Current TTrends

rends and Perspectives
D. D. M. WAIDYASEKERA
Table
Table
Tableofof
ofContents
Contents
Contents Taxation
Taxation
Taxation
in SriinLanka
inSriSriLanka
:Lanka
Current
: Current
: Current
Trends
Trends
Trends
and Perspectives
and
andPerspectives
Perspectives
ListList
List
of Tables
ofofTables
Tables ii iiii
ListList
List
of Charts
ofofCharts
Charts ii iiii
Acronyms
Acronyms
Acronyms iii iiiiii
Acknowledgement
Acknowledgement
Acknowledgement v vv
Executive
Executive
Executive
Summary
Summary
Summary vi vivi
Introduction
Introduction
Introduction 1 11
1. 1.1. Functions
Functions
Functions
of aofof
Tax
a aTax
System
TaxSystem
System 1 11
2. 2.2. Economic
Economic
EconomicBackground
Background
Background 2 22
2.12.1
2.1
International
International
International 2 22
2.22.2
2.2
National
National
National 2 22
3. 3.3. Declining
Declining
Declining
Trend
Trend
Trend
of Tax
ofofTax
Revenue/GDP
TaxRevenue/GDP
Revenue/GDP Ratio
Ratio
Ratio 4 44
4. 4.4. Reasons
Reasons
Reasons
for for
the
forthe
Decline
theDecline
Decline 6 66
5. 5.5. Composition
Composition
Composition of Tax
ofofTax
Revenue
TaxRevenue
Revenue – Direct
––Direct
Direct
andand
and
Indirect
Indirect
Indirect 6 66
6. 6.6. Fiscal
Fiscal
Fiscal
andandand
TaxTax
Incentives
TaxIncentives
Incentives 8 88
7. 7.7. Elasticity
Elasticity
Elasticity
andandand
Buoyancy
Buoyancy
Buoyancy of the
ofofthe
Tax
theTax
System
TaxSystem
System 10 1010
8. 8.8. Taxation,
Taxation,
Taxation,
Savings
Savings
Savings
andand and
Capital
Capital
Capital
Formation
Formation
Formation 10 1010
9. 9.9. TaxTax
Base
TaxBase
Base
andandCoverage`
andCoverage`
Coverage` 12 1212
9.19.1
9.1
TaxTax
Free
TaxFree
Free
Allowances
Allowances
Allowances andand and
Treshold
Treshold
Treshold 12 1212
9.29.2
9.2
Deductible
Deductible
DeductibleExpenses
Expenses
Expenses for for
Assessable
forAssessable
Assessable
Income
Income
Income 12 1212
10.10.
10. TaxTax
Rates
TaxRates
Rates 13 1313
10.1
10.1
10.1
Corporate
Corporate
Corporate 13 1313
10.2
10.2
10.2
Personal
Personal
Personal 13 1313
10.3
10.3
10.3
Professionals
Professionals
Professionals 15 1515
10.4
10.4
10.4
FlatFlat
Flat
RateRate
Rate 15 1515
10.5
10.5
10.5
Current
Current
Current
Changes
Changes
Changes 15 1515
10.6
10.6
10.6
TheTheThe
Laffer
Laffer
Laffer
Curve
Curve
Curve 16 1616
10.7
10.7
10.7
Relevant
Relevant
Relevant
Reforms
Reforms
Reforms 17 1717
11.11.
11. Provincial
Provincial
Provincial
andand and
Local
Local
Local
Government
Government
Government Revenue
Revenue
Revenue 18 1818
12.12.
12. Capital
Capital
Capital
Gains
Gains
Gains
Taxation
Taxation
Taxation 19 1919
13.13.
13. TaxTax
Evasion
TaxEvasion
Evasion 20 2020
13.1
13.1
13.1
TaxTax
Avoidance
TaxAvoidance
Avoidance 21 2121
13.2
13.2
13.2
Withholding
Withholding
Withholding TaxesTaxes
Taxes 21 2121
13.3
13.3
13.3
TaxTax
Amnesties
TaxAmnesties
Amnesties 22 2222
14.14.
14. TheThe
The
VATVAT
VAT
Debate
Debate
Debate 22 2222
14.1
14.1
14.1
Threshold
Threshold
Threshold 23 2323
14.2
14.2
14.2
Exemptions
Exemptions
Exemptions 23 2323
14.3
14.3
14.3
Zero
Zero
Zero
Rating
Rating
Rating 24 2424
14.4
14.4
14.4
Rates
Rates
Rates 24 2424
14.5
14.5
14.5
Financial
Financial
Financial
Services
Services
Services 25 2525
14.6
14.6
14.6
Wholesale
Wholesale
Wholesale andandand
Retail
Retail
Retail
Trade
Trade
Trade 25 2525
14.7
14.7
14.7
VATVATVAT
Frauds
Frauds
Frauds 25 2525
14.8
14.8
14.8
Administration
Administration
Administration 26 2626
15.15.
15. Customs
Customs
CustomsDuties,
Duties,
Duties,
Excises
Excises
Excises
andand Miscellaneous
andMiscellaneous
Miscellaneous
Taxes
Taxes
Taxes
andand
Levies
andLevies
Levies 27 2727
15.1
15.1
15.1
Tariffs
Tariffs
Tariffs 27 2727
15.2
15.2
15.2
Excise
Excise
Excise
Duties
Duties
Duties 27 2727
15.3
15.3
15.3
Miscellaneous
Miscellaneous
Miscellaneous Taxes
Taxes
Taxes
andand Levies
andLevies
Levies 27 2727
15.4
15.4
15.4
Simplification
Simplification
Simplification 28 2828
16.16.
16. Revenue
Revenue
Revenue
Administration
Administration
16.1
16.1
16.1
Number
Number
Numberof Taxpayers
ofofTaxpayers
Taxpayers andandand
Files
Files
Files 29 2929
16.2
16.2
16.2
Compliance
Compliance
Compliance 29 2929
16.3
16.3
16.3
Audits
Audits
Audits
andandand
Investigations
Investigations
Investigations 31 3131
16.4
16.4
16.4
Default
Default
Default
Taxes
Taxes
Taxes 31 3131
16.5
16.5
16.5
Appeals
Appeals
Appeals 31 3131
16.6
16.6
16.6
Coordination
Coordination
Coordination between
between
betweenRevenue
Revenue
Revenue
Departments
Departments
Departments 33 3333
16.7
16.7
16.7
Cost
Cost
Cost
of Administration
ofofAdministration
16.8
16.8
16.8
Measures
Measures
Measures Taken
Taken
Taken
for for
Improvement
forImprovement
Improvement 33 3333
17.17.
17. Concluding
Concluding
ConcludingRemarks
Remarks
Remarks 34 3434 i ii
References
References
References 35 3535
Working Paper No. 25
No.
25 Working Paper No 25.
Finally, the tax system is used to
includes investment incentives to always bound to be tradeoffs and
achieve economic growth through
attract foreign direct investment compromises.
its influence on the allocation of (FDI) into the country;
resources.List
Thisofincludes
Tables In analyzing the current trends
(c) Influencing relative factor and perspectives of taxation in
(a) Transferring resources
Table 1. from prices
GDP, Per Capita andforRevenue
enhanced use –ofSelected
Ratio Sri Lanka, it is necessary
labour Years 04
the private sector to the and economizing the use of therefore to examine how
government sector
Table 2. to finance theOperations
Fiscal and
capital andDeficits
foreign2006 – 2015
exchange. adequately and effectively
05 the
public investment programme; fiscal and tax system has
Table 3. Composition of Government
These objectivesRevenue
however2014
may – 2015
to 07 and
performed these functions
(b) Directing private investment some degree be in conflict. For how effective the policy and
Table
into desired 4.
channels Domestic Savings
through and the
instance, Tax objective
Rates 2004 – 2015
of attaining administrative measures11 have
such measures as regulation of a more equitable distribution of been in solving the problems that
tax rates Table 5. grant of Capital
and the tax Formation and Tax Rates 2004 – 2014
income may conflict with growth have arisen.
11
incentives and concessions. This objectives and in practice there are
Table 6. Personal Tax Slabs and Rates 2003/04 - 2016/17 14
Table 7. Budget Outturn for Provincial Councils 2012 – 2015 18
2. Economic Background Table 8. Results of Tax Amnesties since 1964 22
Table 9. VAT Revenue Performance 2002 – 2015 23

2.1 International
Table 10.
changes in the global economy.
VAT Refunds It2005 – 2014
country pursues and when these
24 and
is centred on changing oil and policies change, the fiscal
The current trends commodity prices, geo-political taxation policies themselves
Table 11. and Tariffs, Excise Duties and Miscellaneous Taxes 2010 – 2015 28
perspectives in fiscal policy and uncertainties and stagnating and become altered.
taxation in Sri Lanka haveNumber low inflation in developed
to be of Taxpayers Sri Lanka witnessed two
Table 12. and Tax Files as at 31.12.2014 30
viewed in the context of the countries. contrasting development
economicTable
performance
13. and
Taxtrends
Return Compliance 2012 – 2014 strategies within the last
31 four
both national and international. The volatility of the global decades. The pre-1977 strategy
AccordingTable 14.World Economic
to the economic environment
Analysis of Default Taxes 2014 posed was characterized by an
32
Outlook of the International several challenges to Sri Lanka emphasis on the public sector,
Monetary Fund (IMF), global during 2015 and are expected to fixed exchange rates, a controlled
economic activity remained persist in 2016 and 2017. The economy with the accent on
List of Charts
subdued in 2015 with the decline global economic situation is welfare and income redistribution.
in growth in emerging market and important for a small developing The concomitant fiscal policies
Chart 1. Composition of Government Revenue 2015 08
developing economies amidst the economy such as Sri Lanka involved high import duties, a
modest recovery where external demand is critical redistributive income tax structure
Chart 2. in the advanced
The Laffer Curve. 17
economies. Global growth which as an enabler of sustained high with high marginal rates and
was 3.4% in 2014 slowed down to growth, generating demand relatively few concessions to the
3.1% in 2015 due to slow absorbing labour surplus and private sector.
recovery in the developed world raising productivity. Global
and slowdown in the Chinese changes such as for example The post-1977 development
economy. China’s growth rate Britain’s decision to leave the EU strategy was the reverse, the
was 7.4% in 2014, 6.8% in 2015 (Brexit) tend to have accent being on an open
and expected to fall to 6.3% in repercussions on Sri Lanka’s economy with deregulation and
2016. China is embracing what is economy. decontrols, flexible exchange
termed the “new normal” - slower rates, stimulation of the private
sector and a market-oriented
but slightly higher quality growth. 2.2 National
economy. Consequently, fiscal
Global growth is estimated at From a national point of view, the and tax policies underwent a
3.2% in 2016 and 3.5% in 2017 taxation system has to be viewed change. Import duties were
but these projections are subject as part and parcel of the relaxed, the maximum effective
to revision according to various prevalent economic and level of protection was reduced to
development strategy which the 50%, income tax rates
ii2
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Taxation in Sri Lanka : Current Trends and Perspectives
Introduction
Acronyms
A country’s taxation system reports have been released (Chairman H.S. Wanasinghe
ASYCUDA
and fiscal policy underlying Automated
it, System
from timefor
to Customs
time sinceData
1915 and Secretary D.D.M.
is a major determinant of other when Sri Lanka’s (then Waidyasekera) and the
BDV Brussels Definition of Value
macro-economic indices such Ceylon’s) tax system consisted Presidential Commission on
as economic
BIMUgrowth, public Budget Implementation
only of Import,andExcise and Unit
Monitoring Taxation of 2009 (Chairman
debt, fiscal deficit and inflation Stamp Duties followed by Prof. W.D. Lakshman and
BOI
as well as attaining a proper Board of Investment
Export Duties, Income Tax and Secretary P.D.K. Fernando).
pattern of resource allocation, Apart from these, a number of
BOP Balance ofaPayments
whole lot of other taxes such
income distribution and as Profit Tax, Excess Profits other reports include the Woods
economicBTTstability. Hence Business Turnover Tax Duty, Capital
Duty, Estate Commission (1926), Huxham
periodically, the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report
CUSDEC Customs Declaration (1955), Kaldor Report (1960)
and the tax structure, including Expenditure and Gift Taxes,
its administrative
DL mechanism Defence Levyetc. levied and abolished from and Cox Report (1986) among
has been subject to time to time. Some of these others.
D – VAT
examination and proposals for Digital Value Added Tax
important commissions
modification in order to achieve consisted of the Taxation All these stressed the
EPS Economic Policy Statement
its basic objectives in relation Commission of 1955 (Chairman importance of developing a
to the government’s
ESC policiesEconomic Service
K.R.K. Menon
Chargeand Secretary S. rational, consistent, efficient
and objectives prevalent at the Sittampalam), Taxation Inquiry and simple tax system in order
time. ESCAP Economic and Social Commission for
Commission of 1968 (Chairman Asia and the
to Pacific
achieve its objectives and
FDI A.G. Ranasinha
Foreign Direct Investment and Secretary functions.
In this connection a number of A.G. Jegasothy), Presidential
commissions,
GDP committees and Gross Domestic
TaxationProduct
Commission of 1990
GST Goods and Services Tax
1.The Functions of a Tax System

IMF
IPO
International Monetary Fund
Initial Public Offer
IPS Institute of Policy Studies of Sri Lanka

The functions of a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT)
involve several
IRD aspects. First, the Revenue
Inland vertical equity, i.e., different
Department and excises. Taxation is also
primary function of a taxation treatment of persons with different used as an instrument of demand
system isISFTA
to raise revenue forIndia
theSri Lanka Free
taxable Trade Agreement
capacity. Thirdly, the management to eliminate or
government for its public fiscal system is also employed reduce inflationary or deflationary
IT Information Technology
expenditure as well as for local for social purposes such as tendencies in the economy.
authorities and similar publicIntegrated Treasury
ITMIS discouraging certain activities
Management Taxation reduces the effect of the
Information System
bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can be used to
LTU Large Taxpayer Unit
primarily judged by whether this Excise duties on liquor and dampen upswings in a trade
function NAV
is performed adequately tobacco,
Net Annual Value the Special Excises on cycle.
and satisfactorily. The second luxury and semi-luxury items, the
function NBT Nation Building
is to reduce inequalities Taxand Gaming Levy are
Betting The size of the multiplier in an
through a policy of redistribution examples of such taxes. open economy is
NSL National Security Levy
of income and wealth. The equity 1
principle PAL
in taxation implies Ports The tax Development
that and Airports system is alsoLevyused to
increase the level of savings and S+M+1
taxes should be imposed in
PAYE Pay As Youcapital
Earn formation apart from where
accordance with the ability to pay
protecting local industries from S= marginal propensity to save
principle. This has two
PSFTA Pakistan Sri Lanka Free Trade Agreement
foreign competition through levies M= marginal propensity to import
dimensions: (a) horizontal equity,
such as import duties (including T= marginal rate of taxation
i.e., similar treatment of persons
11iii
No.
its influence
PSDG on the allocation of Specific
Province (FDI)Development Grant
into the country;
resources. This includes In analyzing the current trends
R&D Research and (c)Development
Influencing relative factor and perspectives of taxation in
(a) Transferring resources from prices for enhanced use of labour Sri Lanka, it is necessary
RAMIS Revenue Administration Management Information System
government
RIDL sector to finance the Infrastructure
Regional capital and foreign exchange.
Development Levy adequately and effectively the
RTVAT Real Time Value Added
These Tax
objectives however may to performed these functions and
SAARC South Asian Association for Regional Cooperation
into desired channels through instance, the objective of attaining administrative measures have
suchSAFTA
measures as regulation
SouthofAsian Free
a more
Tradeequitable
Agreementdistribution of been in solving the problems that
tax rates and the grant of tax income may conflict with growth have arisen.
SCL and concessions.
incentives Special Commodity
This Levyand in practice there are
objectives
SMEs Small and Medium Enterprises
2. Economic Background
SNA System of National Accounts
SRL Social Responsibility Levy
SVAT
Simplified Value Added Tax
2.1SWS InternationalSingle Windowchanges System
in the global economy. country pursues and when these
It is centred on changing oil and policies change, the fiscal and
TIN
The current commodity
trends and Taxpayer Identification prices, geo-political
Number taxation policies themselves
TL Telecommunications
low Levy in developed
inflation Sri Lanka witnessed two
taxation in Sri Lanka have to be
viewed in the context of Terms
the countries. contrasting development
TOR of Reference
economic performance and trends strategies within the last four
both UN United NationsThe volatility of the global
national and international. decades. The pre-1977 strategy
According to the World Economic economic environment posed was characterized by an
VAT Value Added Taxseveral challenges to Sri Lanka emphasis on the public sector,
Outlook of the International
Monetary
VLN Fund (IMF), globalValue Added Taxduring 2015 and
Location are expected to
Number fixed exchange rates, a controlled
modest recovery in the advanced where external demand is critical redistributive income tax structure
iv
2
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
A country’s taxation system
Acknowledgement
reports have been released (Chairman H.S. Wanasinghe
and fiscal policy underlying it, from time to time since 1915 and Secretary D.D.M.
The credit for initiating the project of analyzing the current trends and perspectives of taxation and fiscal policy
must first of all go to Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies of Sri Lanka at
whose requestgrowth,
as economic the author
publicprepared this report.
only Thanks
of Import, are also
Excise and due to Ayoni Rangala
Taxation of of the(Chairman
2009 Institute for the
assistance
debt, fiscal indeficit
formatting the publication.
and inflation Stamp Duties followed by Prof. W.D. Lakshman and
as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando).
pattern of resource allocation, a whole lot of other taxes such Apart from these, a number of
economic stability. Hence Duty, Estate Duty, Capital Commission (1926), Huxham
and the tax structure, including Expenditure and Gift Taxes, (1955), Kaldor Report (1960)
its administrative mechanism etc. levied and abolished from and Cox Report (1986) among
examination and proposals for important commissions
to the government’s policies K.R.K. Menon and Secretary S. rational, consistent, efficient
time. Commission of 1968 (Chairman to achieve its objectives and
A.G. Ranasinha and Secretary functions.
commissions, committees and Taxation Commission of 1990

involve several aspects. First, the vertical equity, i.e., different and excises. Taxation is also
system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or
authorities and similar public discouraging certain activities Taxation reduces the effect of the
function is performed adequately tobacco, the Special Excises on cycle.
function is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an
principle in taxation implies that The tax system is also used to
capital formation apart from where
11v
No.
Executive Summary
(c) Influencing relative factor and paper
The perspectives of taxation other
also discusses in
A countr y’s fiscal policy and holidays and other concessions to
taxation system is a major attract much needed Foreign Direct revenue issues such as capital
determinant of macro-economic Investment (FDI), these have to be gains taxation, its abolition and the
government sector to finance the capital and foreign exchange. adequately and effectively the
policy and sustainable economic made more realistic and the current attempt to re-introduce it as
growth particularly in such areas as incentive system must
These objectives be designed
however may to well as customs duties, excise
performed these functions and
government
(b) revenue,
Directing private public debt,
investment and
some implemented
degree be in conflict.in a more For duties and miscellaneous
how effective the policy andtaxes.
into desired
fiscal channels
deficit, inflation through
as well as methodical
instance, the and costof effective
objective attaining Decentralization and provincial
administrative measures have
such measures as
resource allocation, income regulation of manner.
a more equitable distribution of revenue is discussed in detail
been in solving the problems that
tax rates andand
distribution the economic
grant of tax stability. income may conflict with growth including the abolition of the
have arisen.
incentives and concessions. This Other issues
objectives and in discussed
practice there in this
are provincial BTT and its implication for
Currently, Sri Lanka’s fiscal and context is the relatively low both provincial revenue and
taxation system is at a critical elasticity and buoyancy of the tax provincial administration. The
juncture. With the end of the 30 year system in Sri Lanka both being resultant complexity of the tax
old insurgency, Sr i Lanka has below unity, the role of taxation in system due to all these factors and
entered into a new era of growth, savings and capital formation and the need for simplification is also
reconciliation and reconstruction. the low tax base and coverage which stressed including the importance of
2.1 International
Development challenges are many changes
affect theingrowth
the global economy.
of tax revenue. country pursues and when these
promulgating a new Tax Act
both in the international and national It is centred on changing
Another factor that has led to oil andthis policies change, the fiscal and
incorporating all the required
The current In trends and commodity prices, geo-political taxation policies themselves
contexts. this background, this situation is the unplanned and ad changes.
study attempts to analyze the hoc nature of fiscal policy and tax
taxation low inflation in developed Sri Lanka witnessed two
current in Sri Lanka
trends have to be of
and perspectives changes made in respect of In the final analysis, it is the level
taxation and fiscal policy in Sri allowances, slabs and tax rates from of efficiency of the revenue
time administration
decades. Thewhich determines
strategythe
Lanka.
both national and international. The to time in of
volatility order
thetoglobal
meet revenue pre-1977
requirements.
economic environment Thisposed lack of level
was characterized by an revenue
of effectiveness of any
According
Commencing to thewith World Economic
analyzing the consistency leads to
several challenges to Sri Lanka taxpayer system.
emphasisInonthe thecurrent
public context
sector, of
functions of a tax system, it confusion the necessity to increase
Monetary Fund (IMF), global during 2015and andinconvenience
are expected toand fixed exchange rates, a controlled
identifies the declining revenue ratio problems
persist in for
2016 theandtax2017.
administration
The government
economy with revenue,
the accent the on tax
economic activity remained
to GDP as perhaps the dominant global economic situation
as well. The recent changes is in welfare and income
administration, its redistribution.
structures,
subdued in 2015 with the decline
factor in Sri Lanka’s current fiscal important
income taxforrates,
a small developing
changes to VAT The concomitant
systems fiscal policies
and procedures need
in growth in emerging market and
problems. economies
developing The study analyses amidst the the economy and
threshold suchrates
as Srias Lanka
well as other involved highexamination,
through import duties, a its
reasons for the
modest recovery in the advanced decline and miscellaneous taxes likeisNBT
where external demand critical
etc. redistributive income
weaknesses tax structure
identified and
measures necessary
economies. Global growth to reverse
which this as an enabler of sustained high with high marginal rates
measures taken to rectify them. and The
can be cited as examples.
trend3.4%
was and inmake
2014the tax system
slowed down toan growth, generating demand relatively few concessions to the
unsatisfactory number of taxpayers
3.1% in 2015
effective due to slow
instrument of economic absorbing
All these adlabour surplus and
hoc changes also lead private sector.
comprising about 3% of the
recovery
growth. in the In developed
this context, world the to tax evasion which Global
raising productivity. is rampant in population, low compliance, high
composition of tax revenue reveals Sri Lanka and which issue is default taxes,
economy. China’srole growth ratetaxes Britain’s decision to leave the EU strategy was improvement
the reverse, the of audit
the preponderant indirect discussed in this paper. The and investigation
was (Brexit) tend to have accent being on anand open lack of co-
play7.4%
in thein tax
2014, 6.8%ininSri
system 2015
Lanka problems relating to Value Added Tax ordination
and expected to fall to 6.3% in repercussions on Sri Lanka’s economy with deregulationrevenue
bet ween and
in relation to direct taxes and the (VAT) which has attracted much departments
2016. China is embracing what is economy. decontrols, are discussed
flexible exchange at length
necessity to change the proportion attention recently, is discussed in as well stimulation
rates, as recent attempts already
of the private
termed the “new normal” - slower
to a more realistic figure. detail, its pros and cons, the sector(including
and a market-oriented
relatively poor performance and
taken computerization) to
improve the administrative fiscal
economy. Consequently, system.
One of the main reasons for the factors such as theof threshold,
Global growth is estimated at From a national point view, the and tax policies underwent a
decline in government revenue is exemptions,
taxation systemzero has torating,
be viewed rate change. Import duties were
3.2% in 2016 and 3.5% in 2017
the proliferation of tax incentives as part and parcel
changes, refunds, of theetc. and relaxed, the maximum effective
but these projections are subject
and
to exemptions.
revision While
according there are
to various prevalent economic
measures to remedy and these level of protection was reduced to
pros and cons in granting tax development strategy which the
problems. 50%, income tax rates
vi
2
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
ldrl uKav, idrdxYh
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macro-economic
jeo.;a ks¾Kdhlhls indices
' m%OdksuchjYfhkau l%ufõohla yryd l%shd;auconsisted
Ceylon’s) tax system l l< hq;=h' isPresidential
h,a, ksid nÿ Commission
moaO;sfhys on
we;sjk
rdcH wodhu" uyck Kh"public
as economic growth, fmdÿ foafmd< only of Import, Excise and Taxation
ixlS ¾K;djh of 2009
ksid (Chairman
tys ir, lsÍul
debt,
ys fiscalWoa
`.;djh" deficit
Oukhand fukainflation
u iïm;a Stamp
fuu ikaoDuties
¾Nh ;=followed
< idlÉPdby l< fjk;a Prof. W.D. Lakshman
wjYH;djh mek ke.S and;sfnk w;r
as well as attaining a proper
fn§hdu" wdodhu fnodyeÍu iy wd¾Ól Export w;r
lreKq Duties,wfkHda
Income k HTaxjYfhka
and Secretary P.D.K. Fernando).
wjYHlrk fjkia l ïj,g wkq j
pattern
ia:dhS;djh of jeks
resource
wxYhka allocation,
ys fmdÿ foafmd< a whole lot
kuH;djh wvqof
ùuother
iy taxes such nÿ
Y%S ,xldfõ ksApart
¾udKh from
l<these,
kj nÿamk;
number of ul
l%shd;a
income distribution and
iy nÿ whlsÍfï moaO;shg ysñjkafka as Profit
whls Ífï moaTax,
O;sfExcess
ha ieye,a Profits
¨Ndjh hk other reports include the Woods
lsÍu yryd fndfyda wd;;shka ÿre jkq
economic
by< jeo.;astability.
luls' Hence Duty, Estate Duty, Capital
lreKq oaú;ajhu tl;=j" b;sß lsÍïj, Commission (1926), Huxham
we;'
periodically, the fiscal policy Gains
nÿ whlsTax,
Ífï Land Tax, Wealth,
ld¾hNdrh iy m%d.aOk Report (1929), Downs Report
and the tax§ Y%
j¾;udkfha structure,
S ,xldfõ including
fmdÿ foafmd< Expenditure
iïmdokh iyand wvq Gift Taxes, fukau
nÿ moku (1955),úYa
wjidk Kaldor Reportwkq
f,aIKhg (1960)
j wdodhï
its nÿ
iy administrative
whlsÍfï moaOmechanism
;sh mj;skf q ha b;d etc. levied
wdjrKho nÿand
wdodhuabolished
j¾Okhg from
n,mEï and Cox Report
mßmd,kfhys (1986)
M,odhS among
;d uÜgu ´kEu
has been subject to
jeo.;a ld, jljdkqjlh' j¾I 30l time to time.
we;slrjhs' fuu ;;a;jSome of these
a hg n,mEï lrk others.
wd¾Ól moa O ;s h l M,odhS ; d uÜgu
examination
muK ld,hlaand proposals
meje;s l=ßre for
hqoaOfha important
,o ;j;a lreKlacommissions
jkafka fmdÿ foafmd< ;SrKh lrk nj mejish yel' j¾;udk
modification
ks udj;a iu. inY%S order
,xldjto ixj¾Okfha
achieve " m%consisted
;sm;a;sfhysof wl%
theuTaxation
j;a iy wdjiaÓl Allo¾Nh
ika these
;=<stressed
rdcH wdodhuthe by< kexùu"
its basic
ixys `Èhdfõobjectives
iy m%;sixia inlrelation
rKfhys kj iaCommission
jrEmhhs' tfuka of u1955
l,sk(Chairman
a l,g wdodhï nÿimportance
mßmd,kh"oftys developing
jHqyhka" aúu¾IK
to the government’s policies
hq.hla fj; msh ;nd isà' cd;Hka;r K.R.K. Menon and Secretary
wjYH;d imqrd,Su fjkqfjka §ukd, S. rational,
yryd wjYHconsistent,
moaO;s iy efficient
l%shd ms<sfj;a"
and u
fuka objectives
foaYSh ikaprevalent
o¾Nhka oaúat;ajthe
h ;=<u iaSittampalam),
:r iy nÿ wkqTaxation
md;j,g Inquiry
wod,j nÿ and simple tax system
tys y`ÿkd.;a ÿ¾j,;d injorder
iy ta d ksjerÈ
time.
ixj¾Ok wNsfhda.hka fndfydah' fuu Commission
fjkia lsÍuo ofBg1968n,mEï(Chairman
we;s lrhs' lsto
Íugachieve
.; yelsits objectives
l%shdud¾. andms<snòj
miqìu ;=< fuu wOHhkfhka W;aidy A.G. wkq
fuu Ranasinha and Secretary
rEmS;d fkd.e,mS u ksid nÿ functions.
n,j;a wjYH;djla u;= j mj;S ' Y% S
In this
lrkq fhaconnection
Y%S ,xldfõa nÿ
number
whlsÍof
ï iy A.G. Jegasothy), Presidential
f.jkakd úhjq,g iy wmyiq;djhg ,xldfõ ck.yKfhka nÿ f.jkafka
fmdÿ foafmd< m%;sm;a;sfhysand
commissions, committees j;auka Taxation
m;a ùu fuka Commission
u nÿ mßmd,khg of 1990.eg¿ 3] la jeks b;d iq¿ msßila jk w;r
keUq r e;djhka iy oDIA À flda K hka u;=ùuo isÿ fõ' VAT noaog fukau NBT ixLHd;a u lj th b;d wi;= g q o dhl
ms<snòj úYaf,aIKhla lsÍuhs' jeks fjk;a ixlS¾K nÿ iòyd isÿ l< ;;a;ajhls' wkql+,;djh ±laùu wvq nj"

nÿ whlsßfï moaO;sfha l%shdldÍ;ajh
ms<snòj úYaf,aIKh lrñka wdrïN
uE;ld,Sk fjkialï Bg WodyrK f,i
±laúh yelsh'
wêl f,i nÿ fkdf.jd meyer yeÍu"
ú.Kk iy úu¾IK j¾Okh iy
wdodhï fomd¾;fïka;=j w;r
flfrk fuu wOHhkh Y%S ,xldfõ fuu wdjiaÓl fjkialï ish,a, Y%S iïnkaëlrKh wvqùu §¾>j idlÉPd
The
j;a ukafunctions
fmdÿ foafof md<a .eg¿
tax system
w;r jeo.;a in similar
,xldfõ nyqcircumstances,
,j ±lsh yels nÿ andmeyer
(b) cesses),
lr we;s w;rValue
tfuka Added Tax (VAT)
u uE;ld,S kj .kq
involve several
lreKla jYfhka aspects.
o< foaYSh First, the
ksIamdÈ;h vertical
yeÍug fyaequity,
;= jk w;ri.e., fuu
different
f,aLkfhys and excises. Taxation
,en ;sfnk W;aidyhka ^mß.Kl is also .;
primary function of
iòyd wdodhï wkqmd;h my; jeàua taxation treatment
tu .eg¿j of persons with
idlÉPdjg ,laldifferent
r ;sfí' lsused as an
Íï jeks instrument
& mßmd,k moaof
O;sdemand
h by<
system.kS
y`ÿkd is 'towOHhkh
raise revenueu.ska for the
wdodhï taxable capacity. Thirdly,
w.h tl;= l< noao ^VAT& iòyd the wod< management to
kexùug fya;= jkq we;' eliminate or
government
wkq md;h my;for its i`
jeàu public
oyd fya;= fukau fiscalóg
.eg¿ system is also
fmr iúia ;rjemployed
idlÉPd l< reduce inflationary or deflationary
expenditure
fuu as well as
keUqre;djhka for local
wdmiq yrjñka for social
mßÈ purposes such
úYd, wjOdkhla Èkd.ka askd ,§' tendencies in the economy.
authorities and similar
wd¾Ól j¾Okfhys M,odhS fuj,ula public discouraging certain
tys m% . = K khka iy jdis iy.;activities Taxation reduces the effect of the
bodies.
njg Its efficiency
nÿ whls Ífï moaO;s ishtherefore
m;alsÍug which
;;a ;j are
a hka considered
, wfkHda undesirable.
kH jYfhka ukao.dó multiplier and so can be used to
primarily
wjYH lsh judged
% dud¾. úYaby
f,awhether
IKh lrhs this
' fuu Excise dutiesiy
ld¾hidOkh onksliquor
oyia ls andÍï, Y=kH dampen upswings in a trade
function
ika o¾Nh is;=< performed
nÿ wdodhu adequately
wkdjrKh tobacco,
fmd,S wkqmthe
d;,Special
wkqmd;Excises
fjkiaon ùï, cycle.
and f
lrkq satisfactorily.
ha iDcq nÿj,g The iïnka second
Oj jl% nÿ luxury and semi-luxury
kej; f.ùï wd§ lreKq iy l%shdud¾. items, the
function is to reduce
w;súYd, m%udKhla Y%S ,xldfõ nÿ inequalities Betting and Gaming Levy
fuu .eg¿ ksjerÈ lsÍug fya;= fjhs' are The size of the multiplier in an
through
moa O ;s h a;=policy
< ls % hof redistribution
d;a u l nj;a fuu examples of such taxes. open economy is
of income fjkia
;;a;ajh and wealth. lr The equity
h:d¾;j;a fuu f,aLkh fjk;a wdodhï .eg¿o 1
;;a;ajhla ks¾udKh lsÍu jvd that
principle in taxation implies jeo.;a The tax lrk
idlÉPd system is m%
w;r also
d.aOused
k ,dN to nÿ
increase the .eg¿o
level ofta savings S+M+1
taxes shouldnj;a
wjYH;djhla be himposed
' in whls Íu jeks w;r fõ'andth
accordance with the ability to pay bj;a lsÍu iy kej; m%j¾;k
protecting local
idyindustries from S= marginal propensity to save
principle.
rcfha Thismy<
wdodhu hasjeàfï
two tla m%Odk y`ÿka jd§ug W;a .ekSu fuka u f¾.=
foreign
iqrd competition through levies M= marginal propensity to import
dimensions:
fya (a)nÿ
;=jla jkafka horizontal equity,ùu
f.ùug Èß.eka nÿ, nÿ iy m%lS¾K nÿ iòydo tu
l%such as import
.ekSuduties
idOkS(including T= marginal rate of taxation
i.e.,nÿ
iy similar
ksoyitreatment
,nd§u m%.of=Kpersons
khhs' b;d shdud¾.u h jkq we;'
wjYH iDcq úfoia wdfhda c k ^FDI& úuOH.; lsÍu iy m%dfoaYSh wdodhu
wdl¾IKh lr.ekSu iòyd nÿ ksoyi iúia;rj idlÉPdjg ,lalrk ,o w;r
11vii
No.
epiwNtw;Wr; rhuhk;rk
its influence on the allocation of

attract foreign direct investment
(FDI) into the country;
compromises.
In analyzing the current trends

resources. This includes
(a) Transferring
murhq; f tUkhdk;resources
> nghJf;fld; from
> epjprhu; prices
tpyf; forGfis
fopg; enhancedtoq;Fuse
tjpy;ofgy
labour
rhjf Sri Lanka,
ftdk; nrYj;it jg;is
gl;necessary
Ls;sJ. ,tw;iw rPu;
thewhf;
gw; private
Fiw> sector
gztPf;ftok; the
kw;Wk; tsq;fs; ghjf fUj; J f; f s; kw;
and economizing the use of W k; ntspehl; L ntherefore
r a ; a f ; $ btoa examine
K i w fhow
s; gw;wpAk;
xJf; f P L > tUkhd
government sector togfpu; T kw;
finance theW k; Neub KjyPLfis ftu;tjw;F ngUksT Muhag; g l; L s; s J.
adequately and effectively the
capital and foreign exchange.
nghUshjhu cWjpg;ghL Nghd;w gpupTfs; rYiffs; toq;fg;gLfpd;w NghjpYk;>
mlq;fyhf epiyNgwhd nghUshjhu ,it eilKiwr;rhj;j pakhditahf %yjd Mjha tup> mJ ,y;yhky;
tsu; r ; r p kw; W k; gue; j nghUshjhu These jobjectives
mike; pUf; f Ntz; however
L k; . mj;may to>
J ld; performed
nra; ag;gl;lik these
kw;Wfunctions
k; jw;NghJand mij
(b)
n f hDirecting
s ; i f Mprivate
f p a t winvestment
;wpd; gpujhd some
rYif degree be
Kiw in conflict.vd;gJ>For how effective
kPs mwpKfk; nra;a the policy
Kw;gandLfpd;wik
into desired F
jP u ; k hdnkLf; channels
k; fhuzpahfthroughehl; b d; instance, the
fl;Lf;Nfhg; objective ofnrytPdk;
g hdjhfTk; attaining administrative
kw; Wk; Rq;fj;jPu;imeasurest> ,iw tup have
kw;Wk;
epjprhu;measures
such as Wregulation
nfhs;if kw; k; tupf;fl;lof
ikg;G a more
Fiwe; equitable distribution
j tifapYk; tbtikf;fg;gl; ofL ,been
j u intsolving u p f s ; theN g h d ; w ,ju
problems that
vd; g J mike; J s; s J.
tax rates and the grant of tax eilKiwg; g Lj; j g; g l Ntz;
income may conflict with growth L k; . tUkhdkPll ; f;$ba gpur;rpidfs; gw;wpAk;
have arisen.
,e;j Ma;T ftdk; nrYj;jpAs;sJ.
jw;NghJ ,yq;ifapy; epjprhu; kw;Wk; ,e;j Ma;tpy; ftdk; nrYj;jg;gl;Ls;s gutyhf;Fjy; kw;Wk; khfhz
tupfl; l ikg; G vd; g J ,f; f l; l hd Vida tplaq; f spy; > Fiwe; j kl; l tUkhdkP l ; l y; vd; g Jk; tptukhf
epiyapy; fhzg;gLfpwJ. ehl;by; 30 kPs;jpwd; kw;Wk; ,yq;ifapy; Muhag; g l; L s; s Jld; > ,jpy; khfhz
Mz; L fshf epytpa mikjpaw; w tupf; f l; l ikg; g pd; kpjit jd; i k Kiwikia ,y;yhky; nra;jy; BTT
#o;epiy epiwtile;Js;s epiyapy;> Nghd;wd mlq;fpAs;sd. ,it kw;Wk; mjd; %ykhf khfhz tUkhdk;
tsu;r;rp> ,zf;fk; kw;Wk; xUikg;ghL Fd;wpa epiyapy; kw;Wk; khfhz epu;thfk; Nghd;wtw;Wf;F
kPsf;fl;bnaOg;gy; vDk; xU Afj;jpDs; fhzg;gLtJld;> tup mwtPl;L Kiw Vw;glf;$ba tpisTfs; Nghd;wdTk;
,yq;if gpuNtrpj;Js;sJ. vd;gJ Nrkpg;G kw;Wk; %yjd Muhag;gl;Ls;sd. ,e;j rfy tplaq;fs;
2.1 International
mgptpUj; j prhu; e ; j rthy; f s; vd; g J
ru;tNjr kl;lj;jpYk;> Njrpa kl;lj;jpYk;
changes
Nru; k hdj; jin py; thegq;global
f spg; G economy.
nrYj; J tJ country pursues
fhuzkhf tupf;fl;land ikg;gwhen these
py; fhzg; gLk;
It is centred on changing oil
kw; W k; Fiwe; jsT tup nrYj; Jk;and ,Ug;G rpolicies
p f ; f y ; change,
e p i ythe
f sfiscal
; and W k ;
k w ;
fhzg;gLfpwJ. ,jd; gpd;dzpapy; ,e;j kw;
commodity prices, geo-political tup
W k; tiyaikg; G Mfpad vspikg;
taxation policies themselvesNjit
g Lj; j g; g l Ntz; b a
The
Ma;tcurrent
pD}lhf trends tup mwtP and L njhlu;gpy; tUkhd tsu;r;rpapy; ghjpg;ig vd;gJk; ftdk; nrYj;jg;gl;Ls;sJld;>
perspectives
jw;NghJ fhzg;in fiscal
gLk; policy and
epiyikfs; kw;Wk;
uncertainties and stagnating and become altered.
Vw;gLj;Jfpd;wd. ,e;j epiyf;F ,jpy;> mtrpakhd rfy khw;wq;fisAk;
,aYWj;Nin
taxation jhw;Sri wq;Lanka
fs; kw;W have
k; ,yq; to ibe
fapy; flow
huz inflation
k h f kinw ; Wdeveloped
nkhU tplakhf> SrinLanka
Nkw; fhz;L witnessed
Gjpa tup rl;two l%ynkhd;iw
viewed
fhzg;gLk; in the context
epjprhu; nfhs; ofithef Nghd;wd jcountries.
pl;lkplg;glhj> vOkhw;whd econtrasting
i l K i w g ; gdevelopment
Lj;j Ntz;bajd;
n j h l u ; g p yperformance
economic ; M u h A k ; and t itrends
fapy; epjpf;nfhs;if kw;Wk; Nkyjpf strategies
Kf; fpaj;JtKk; withinMuhag;
the last
gl;Lfour
s;sJ.
mike; J s; s J. nfhLg; gdTfs;>of ntt;
The volatility the Nglobal
tW fl;lq;fs; decades. The pre-1977 strategy
both national and international.
Nghd;wtw;wpy; tup khw;wq;fs; kw;Wk; ,Wjpahf Ma;tpy;> tup epu;thf Kiwapd;
According to gthe economic environment posed was characterized by an
tup fl;likg; pd; World
nraw;gEconomic
hLfs; gw;wp tUkhd Njitfis eptu;j;jp nra;J tpidj;jpwd; kl;lk; vd;gJ ve;jnthU
Muha;tJld; Muk;gpf;Fk; ,e;j Ma;tpy;> several
nfhs; tjw;challenges
F tup tPjq; tofis
Sri Lanka
khw;Wjy; emphasisfl;
tUkhd on the public
l ikg; sector,
g pd; nraw; j pwd;
Monetary
nkhj; j Njrpa Fund (IMF), cw; g j;global
j papy; mjd; during
vd; gJ 2015 mike;and Js;s are
J. expected
njhlu;r;rto paw;w fixed
kl; lj;iexchange
j epu;zapg;grates, a controlled
jhf mike; jpUf;Fk;.
tUkhd
economic activity remained vd; g J
gq; f spg; G tpfpjk; persist
jd; in 2016 and
ik fhuzkhf> tup2017.
nrYj;The Jgtu;fs; economy
murhq; with the accent
f tUkhdj; on
i j mjpfupf; f
Fiwtile;J nry;tij ,dq;fhz;gjhf mglobal
j p f seconomic
T F osituation
g ; g k i lis tJld;> welfare
Ntz; and income
ba Njit fhzg;gredistribution.
Lk; jw;Nghija
subdued in 2015 with the decline
mike;Js;sJ. ,yq;ifapd; jw;Nghija mnrsfu; a j; i jAk; vjpu; n fhs; fpd;wdu;. #o;
The e piyapy; > tup fiscal
concomitant epu; t hfk; > mjd;
policies
in growth gpur; in emerging market and important for a small developing
epjprhu; r idfSf; F Kf; f pa ,J tup epu;thfj;jpYk; gpur;rpidfis fl;likg;Gfs;> kw;Wk; nrad;Kiwfs;
developing,J
fhuzpahf economies
mike;Js;s amidst
J. ,jw; the
fhf economy such as Sri Lanka involved high import duties, a
Vw;gLj;JfpwJ. tUkhd tup tPjq;fspy; njhlu; g py; Mokhd kjpg; g P L fis
modest
fhuzpfis recovery ,e;j Ma; in theT Muha;advanced
tJld;> mwhere
z ; i kexternal
a p y ; Ndemand
kw;nfhs is ; s
critical
g;gl;l redistributive
Nkw; n fhs; s Ntz; income
b As;tax structure
s J> mjpy;
,e; j epiyia
economies. khw; w
Global paikg;which
growth g jw; F k; > as an enabler of
khw;wq;fs;> VAT (ngWkjp Nru;fsustained high
;fg;gl;l with high marginal rates
fhzg;gLk; gytPdq;fs; ,dq;fhzg;gl;L>and
nghUshjhu
was 3.4% in tsu; 2014r;rslowed
pf;F tpidj; downjto pwd; growth,
tup) tup generating
tPjj;jpy; Nkw;demandnfhs;sg;gl;l mrelatively
t w ; i w fewr P concessions
u; n r a ; t jtow ; the
fhf
tha;e;j xU fl;likg;ghf khw; wq;fs; kw;
absorbing Wk; ,ju
labour surplustupfshd
and NBT Nkw; n fhs; s
private sector. f; $ ba eltbf; i ffs;
3.1% in 2015 due to slow
tupf; f l; l ikg; i g khw; w paikg; g J (Njrj;ijf; fl;bnaOg;Gk; tup) gw; w pAk; ftdk; nrYj; j g; g l; L s; s J.
recovery in the raising productivity. Global
vt; t hW vd; g J developed
njhlu; g pYk;world ftdk; Nghd;wtw;iw cjhuzkhf Fwpg;gplyhk;. nkhj;j rdj;njhifapy; 3 rjtPjkhNdhu;
and
nrYj; slowdown
jpAs;sJ. in,jd; the Chinese
mbg;gilapy;> changes such as for example jThe
p U g ; post-1977
jpaw;w development
epiyapy; tup
tup tUkhdj;China’s
economy. jpd; mlf;growthff;$Wfs; ratevd;gJ Britain’s
,e; j midj; decision
J vOkhw; to wleave
hd khw; the
wq;fEU
Sk; strategy
nrYj; J du;was
f shfthe fhzg;
reverse, the w du; .
g Lfpd;
N e u b t u p f S l
was 7.4% in 2014, 6.8% in 2015d ; x g ; g p L ifapy; (Brexit)
tup va;g;Gtend to have mike;Js;sd.
f;F fhuzkhf accent
Fiwe; j being
kl; l on an fopen
xOf; k; > cau; tup
ngUthupahd kiwKf tup mwtPLfis ,yq; ifia nghWj;
repercussions on jSri
kl;bLanka’s
y; ,J fl;lw;w economy
nrYj; with fzf;
j hik> deregulation
F kP s ha;and
T fis
and expected to fall to 6.3% in
,yq;ifapd; tupf;fl;likg;gpy; eeconomy.
piyahf mike;Js;sJ. ,J Nkkk; gLj;jy; flexible
decontrols, kw;Wk; exchange
tprhuizfis
2016.
nfhz;ChinaL s; s jhf is embracing
fz; l wpe; Jwhat is >
s; s Jld; njhlu;ghd gpur;rpidfs; ,e;j Ma;tpy; Nkw;nfhs;sy; kw;Wk; tUkhd
termed the “new
,e;j cs;slf;fj;ij ngUksT normal” - slower rates, stimulation of the private
ftdk; nrYj;jg;gl;Ls;sJ. mz;ikapy; jpizf;fsq;fs; kj;jpapy; NghjpasT
but slightly rhigher
eilKiwr; hj; j pakhd qualityngWkjpahf
growth. 2.2 National
mjpfsT ftdj;ij <u;j;jpUe;j ngWkjp njhlu; G fs; ,d; i k Nghd; w dTk;
khw;wpaikf;f Ntz;ba Njit Nru;ff ; g;gl;l tup njhlu;ghd gpur;rpidfs; economy. Consequently, fiscal
Mokhf Muhag;gl;Ls;sJld;>
vOe;
GlobalJs;growth
sJ. is estimated at From a national
tptukhf Muhag;gpoint
l;Ls;sofJld;
view, the
> mjpy; and tax policies underwent a
fhzg; mz; i kapy; epu; t hf fl; l ikg; i g
3.2% taxation system has to be viewed >
g Lk; rhjf ghjf epiyfs; change. Import duties were
m u r h in
q ; f2016
tUand
khd3.5% in ; 2017
j;jpy tPo;r;rp xg;gPl;lstpy; Nkhrkhd nraw;jpwd;fs; Nkk;gLj;Jtjw;F Nkw;nfhs;sg;gl;Ls;s
butg Ltjw;
these fprojections as part and parcel of the relaxed, the maximum effective
Vw; hd gpujhdarefhuzpfspy;
subject kw;Wk; njhlf;fepiy> tpyf;fopg;Gfs;> eltbf;iffs; (fzpdp kag;gLj;jy;
to
xd;revision
whf> kiwKf according to various
tup mwtP Lfs; kw;Wk; prevalent
g+r; rpa jug;geconomic
Lj;jy;> fl;andlz khw;wq;fs;> level of protection was reduced to
mlq;fyhf)Fwpj;Jk; Muhag;gl;Ls;sJ.
tpyf;fopg;Gfs; fhzg; g Lfpd; w J. tup kPdevelopment
sspg;Gfs; Nghd; strategy
w fhuzpfs;which gw; the
wpAk; 50%, income tax rates
viii
2
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
as economic growth, public only of Import, Excise and Taxation of 2009 (Chairman
debt, fiscal deficit and inflation Stamp Duties followed by Prof. W.D. Lakshman and

where
11
No.
25

government sector to finance the capital and foreign exchange. adequately and effectively the
These objectives however may to performed these functions and
into desired channels through instance, the objective of attaining administrative measures have
such measures as regulation of a more equitable distribution of been in solving the problems that
tax rates and the grant of tax income may conflict with growth have arisen.
2.1 International changes in the global economy. country pursues and when these
It is centred on changing oil and policies change, the fiscal and
The current trends and commodity prices, geo-political taxation policies themselves
taxation in Sri Lanka have to be low inflation in developed Sri Lanka witnessed two
both national and international. The volatility of the global decades. The pre-1977 strategy
According to the World Economic economic environment posed was characterized by an
Outlook of the International several challenges to Sri Lanka emphasis on the public sector,
Monetary Fund (IMF), global during 2015 and are expected to fixed exchange rates, a controlled
modest recovery in the advanced where external demand is critical redistributive income tax structure
2
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
progressively reduced and a wide National savings increased from
According to the statistics of the
ranging framework of tax 21.5% of GDP in 2000 to 33.3%
Central Bank Annual Report 2015,
incentives and concessions were in 2012; investment increased
domestic savings declined from
incorporated in the tax system in from 28% of GDP in 2000 to
27.2% of GDP in 2012 to 24% in
A country’s
the form of tax taxation
holidays,system reportsinhave
39.1% 2012;been released as
unemployment (Chairman H.S. Wanasinghe
2014 and 22.6% in 2015 while
and fiscal policy
exemptions and reliefs. underlying it, from time to time
a percentage of the laboursince 1915force and Secretary D.D.M.
national savings declined from
is a major determinant of other when
in 2012,Sriwas
Lanka’s
4% and (then4.3% in Waidyasekera) and the
33.3% of GDP in 2012 to 27.8% in
The changes in governments
macro-economic indices such Ceylon’s)
2014; tax system
and inflation consisted
of 7.6% in 2012 Presidential Commission on
2015. The growth in the industry
since 1994 onwards
as economic growth,had little
public only of Import, Excise
was reduced to 3.3% in 2014, and Taxation of 2009 (Chairman
sector which was 9% in 2012
impact
debt, fiscalon the broadand
deficit lines of
inflation Stampthe
while Duties
headfollowed by
count poverty was Prof. W.D. Lakshman and
went down steadily to 4.1% in
fundamental
as well as attaining policiesa except
proper ExporttoDuties,
down less than Income
7%. TaxThe and Secretary P.D.K. Fernando).
2013, 3.5% in 2014 and 3% in
changes
pattern ofinresource
emphasisallocation,
depending a wholebudget
overall lot of other
deficittaxes
whichsuch
was Apart from these, a number of
2015 reducing the share of
on the socio-economic
income distribution and as Profit Tax, Excess
9.5% of GDP in 2000 was Profits other reports include the Woods
industry in GDP to 26.2%. The
philosophies
economic stability. of successive
Hence Duty, Estate
reduced to 7%Duty, Capital
in 2010, 5.6% in Commission (1926), Huxham
unemployment rate which was
governments.
periodically, the These
fiscalincluded
policy Gainsand
2012 Tax,5.7%LandinTax,
2014. Wealth, Report (1929), Downs Report
4% in 2012 increased to 4.3% in
such
and the programmes
tax structure, as the Rata
including Expenditure and Gift Taxes, (1955), Kaldor Report (1960)
2014 and 4.6% in 2015. Average
Perata Programme,mechanism
its administrative Regaining Sri The
etc. above
levied and positive features
abolished from and Cox Report (1986) among
annual inflation remained in mid-
Lanka
has been Programme,
subject toMahinda however had also
time to time. Some negative
of these others.
single digit levels, however it
Chintana
examination andand currently
proposals the for aspects.
importantAs stated in the
commissions
picked up in the fourth quarter of
Economic
modification Policy Statement
in order to achieve Institute
consistedofofPolicy Studies (IPS)
the Taxation All these stressed the
2015 and recorded 2.5% by end
(EPS)
its basic of the Prime Minister
objectives in relation 2014 State ofofthe
Commission Economy
1955 (Chairman importance of developing a
2015, 4.8% in May 2016 and 6%
delivered in Parliament
to the government’s on 5th
policies report,
K.R.K. “Beyond
Menon and the Secretary
immediateS. rational, consistent, efficient
in June 2016.
November
and objectives 2015.prevalent at the headline
Sittampalam),macro-economic
Taxation Inquiry and simple tax system in order
time. numbers,
Commission the ofSri1968
Lankan
(Chairman to achieve its objectives and
These policies had both positive The Balance of Payments (BOP)
economy continues
A.G. Ranasinha andtoSecretary
show functions.
and negative effects. The ending which recorded an overall surplus
In this connection a number of skewed growth, high
A.G. Jegasothy), levels of
Presidential
of in 2014 of US$ 1,369 million
commissions, committeesconflict
the thirty year old civil and external
Taxation indebtedness,
Commission ofmodest 1990
in May 2009 and the subsequent registered a deficit of US$ 1,489
export earnings growth and
reconstruction and development million in 2015 and consequently,
limited private sector appetite to
Sri Lanka’s gross official reserves

activity, particularly in
expand production capacity”.
infrastructure including roads, of US$ 8.2 billion in 2014 declined
expressways, irrigation, ports and to US$ 7.3 billion at the end of
According to provisional
airports based on the five hub 2015 equivalent to 3.8 months of
estimates released by the
concept and bolstered imports of goods and services
The functions of a tax by system in similar circumstances,
Department of Census and and (b) cesses), Value Added Tax (VAT)
development and at March 2016 to US$ 6.3
involve several aspects. skills
subsidies, First, and
the vertical equity,
Statistics which i.e., different
in July 2015 and excises. Taxation is also
educational development, led to billion or 3 ½ months of imports.
primary function of a taxation treatmentthe
changed of base
persons yearwith
for different used as an instrument of demand
economic This may be compared to the
system is growthto raiseand had a for the
revenue national accounts statisticsthe
taxable capacity. Thirdly, from management to eliminate or
positive effect. As per the figures foreign reserves of countries like
government for its public fiscal while
2002 system is alsothe
adopting employed
United reduce inflationary or deflationary
in the Central Bank Annual Report Malaysia ($ 137 billion), Indonesia
expenditure as well as for local for socialSystem
Nations purposes such as
of National tendencies in the economy.
2015, GDP at current market ($ 105 billion), Taiwan ($ 420
authorities and similar public discouraging
Accounts (SNA)certain
2008activities
standard, Taxation reduces the effect of the
prices billion) and India ($ 360 billion).
bodies.increased from Rs.
Its efficiency 1,258
is therefore which are considered undesirable.
the economy grew by 4.8% during multiplier and so can be used to
billion
primarily judged by whetherbillion
in 2000 to Rs. 6,414 this Excise
2015 duties ontoliquor
compared 4.9% andin 2014. dampen upswings in a trade
in 2010, Rs. 8,732 billion in 2012, The overall fiscal deficit of 5.4%
function is performed adequately tobacco,
This thewas
growth Special
largelyExcises
drivenonby cycle.
Rs. of GDP in 2013 increased to 7.4%
and10,448 billion inThe
satisfactorily. 2014second
and Rs. luxury
an and semi-luxury
increase in consumption items, the
11,183 in 2015 while total government
functionbillion
is to inreduce
2015. inequalities
The growth Betting and
demand. In Gaming
Sri Lanka, Levy are of
levels The size of the multiplier in an
rate increased from 6% in 2000 to debt increased from 68.7% in
through a policy of redistribution examples of are
consumption suchassociated
taxes. with open economy is
8% in 2010, 8.4% in 2011 and 2012 to 76% in 2015. In terms of
of income and wealth. The equity over-extended government fiscal 1 external debt, it
9.1% in 2012. The per capita the country’s
principle in taxation implies that The tax system
positions, high debtis also used
levels andto
income grew from Rs. 65,838 increasedS+M+1
from 53.6% in 2014 to
taxes should be imposed in increase the level of
current account deficits. savings and
(US$ 869) in 2000 to Rs. 427,559 54.4%
where in 2015 and increasing
accordance with the ability to pay capital formation apart
Investment made only a modest from
(US$ 3,351) in 2012, Rs. 503,032 debt services from US$ 3,479
S= marginal propensity to save
principle. This has two protecting local
contribution and industries
as measured fromby
(US$ 3,853) in 2014 and Rs.equity, million in 2014 to US$
M= marginal propensity 4,683
to import
dimensions: (a) horizontal foreigncapital
gross competition
formationthrough levies
533,398 (US$ 3,924) inof2015. million in 2015.rate of taxation
T= marginal
i.e., similar treatment persons such as import duties (including
decelerated during 2015.
131
No.
25
Another result has been rising

3. Poorest 40% receive 13.3% economic policies pursued by
inequality. According to the
D. D. M. WAIDYASEKERA of total household income the prevalent respective
Department of Census and governments during this period
Statistics figures, the percentage 4. Gini Coefficient increased has led to both positive and
share of household income from from 0.43 to 0.48 in 2012 for negative results. Perhaps the
1995 to 2012 has shown the households and 0.53 for income most important aspect however,
following indicators: receivers. is in the sphere of fiscal sector
development in relation to
1. Poorest 20% declined from Source: Department of Census and
government revenue,
5.4% to 4.4% Statistics – Household Income and
expenditure, budgetary deficits,
Expenditure Survey 2012/13.
overall management and the
2. Richest 20% increased from
results thereof.
50.3% to 53.5% Thus as can be seen from the
indicators above, the socio-
3. Declining Trend of Tax Revenue/GDP Ratio

In 1963, Nicholas Kaldor argued development without causing neighbours India (10.4%),
that for a country to become inflation. (Zuhair, 1985). In higher Pakistan and Bangladesh (7.6%).
“developed”, it needed to collect income countries the ratio is The irony of the situation is that
taxes at 25-30% of GDP. The tax about 42% of GDP, middle while overall GDP as well as per
ratio is generally regarded as a income countries, about 25-29% capita income in Sri Lanka has
sort of “national virility symbol.” It and developing countries around been steadily increasing over the
indicates the proportion or share 20%. Sri Lanka’s performance years, government total revenue
of national income transferred to compares poorly with countries and tax revenue has been
the government sector to meet like Vietnam (21.1%), Thailand steadily decreasing! The Table
budgetary requirements so as to (17.7%), Malaysia (16.6%) but below shows the relationship
increase the tempo of economic better than its South Asian between the growth of GDP and
per capita income and
government revenue.
Table 1
GDP, Per Capita and Revenue Ratio - Selected Years
Year 1990 2000 2006 2010 2012 2013 2014 2015
GDP Rs. Billion
(at market prices) 322 1,258 2,939 6,414 8,732 9,592 10,448 11,183
Per Capita
Rs. 18,934 65,838 147,776 310,214 427,559 466,110 503,032 533,395
US $ 473 869 1,421 2,744 3,351 3,610 3,853 3,924
Total Revenue Ratio 21.1 16.8 16.3 12.7 12.0 11.9 11.4 13.0
Tax Revenue Ratio 19.0 14.5 14.6 11.3 10.4 10.5 10.1 12.1
Non Tax Revenue 2.1 2.3 1.7 1.4 1.6 1.4 1.3 0.9
Source: Central Bank Annual Report 2015 and various years.
It is seen that total government 11.3% in 2010 and 10.1% in 2014. in 2015 as well as in nominal
revenue as a percentage of GDP Even non-tax revenue in the form terms was due to the
has steadily declined from 21.1% of dividends and transfers of introduction of one-off taxes on
in 1990 to 16.8% in 2000, 12.7% in profits from public institutions has private businesses called the
2010 and 11.4% in 2014. Tax declined from 2.3% in 2000 to Super Gain Tax. The Super Gain
revenue ratio has declined from 1.6% in 2012 and 0.9% in 2015. Tax was a levy applicable on any
19.0% in 1990 to 14.5% in 2000, The increase in the relevant ratio company or individual who
4
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
earned profits over Rs. 2000 However the 2011 Budget Referring to the measures taken
million in the assessment year proposals appear to be largely to address these issues, he
2013/14 at the one-off rate of 25%. based on its recommendations stated “during the last few
It generated Rs. 50 billion and and legislated under 15 amending months, we took some efforts to
A country’s taxation
also the imposition of a “Mansionsystem reports have been
Acts and in 2013 when 21 released (Chairman
address H.S.issues
these Wanasinghe
opting for
and fiscal policy
Tax” on housing as well as underlying it, from time to time
amending Acts were passed in since 1915 and Secretary D.D.M.
innovative measures of taxation.
is a major
increase in determinant
excise dutiesof on other when Sri Lanka’s
Parliament. (then
Nevertheless, the Waidyasekera)
However, it is timeandtothe deviate
macro-economic
motor vehicles, liquorindicesandsuch Ceylon’s) tax system
declining revenue ratio has not consisted Presidential
from temporary Commission
solutions on
but
as economic growth,
cigarettes made during 2015, public only of Import,
been reversed. Excise and Taxation of 2009 (Chairman
endeavour to create a tax regime
debt, from
apart fiscaladeficit
number andof inflation
other one- Stamp Duties followed by Prof. W.D.
based Lakshman
on strong reformsandto move
as well
off levies.as attaining a proper Export
This Duties,has
situation Income
been Tax and Secretary P.D.K.
forward, implementing such Fernando).
pattern of resource allocation, a whole lot by
recognized of the
other taxes such
current Apart from
reforms whichthese, a number
will have far of
The
income critical nature ofand
distribution the situation as Profit Tax, when
administration ExcesstheProfits Finance other reports include the
reaching benefits for the country.” Woods
and the vital
economic necessity
stability. Hence to reverse Duty, Estate Duty,
Minister Hon. Ravi Karunanayake Capital Commission (1926),
(Finance Minister in 2016 BudgetHuxham
the declining the
periodically, trend has policy
fiscal been Gains
in Tax, Land
his 2016 Budget Tax, Wealth,
Speech stated Report (1929),
Speech on 20tth Downs
November Report2015).
recognized
and the taxby the respective
structure, including Expenditure
“It is obvious and that Gift
the Taxes,
strength of (1955), Kaldor Report (1960)
governments.
its administrative In fact it was one
mechanism etc. fiscal
any leviedsystem
and abolished
dependsfrom on the and revenue
The Cox Report (1986) among
deficiency is so
of
hasthebeenmainsubject
terms to of reference of time to time. Some
ability to generate a sufficient of these others.
serious that as the Central Bank
the 2009 Presidential
examination and proposals for Taxation important
amount commissions
of revenue to meet the Report 2015 states “the country’s
Commission
modification in appointed
order to by the
achieve consistedand
planned of necessary
the Taxation All theseisstressed
revenue not sufficientthe even to
government.
its basic objectives The firstin item in the
relation Commission of
expenditure. 1955 (Chairman
Unfortunately it is importance
finance of developing a
the maintenance
TOR
to thegoes as follows:policies
government’s K.R.K.
not the caseMenon in and Secretary
Sri Lanka” . He S. rational, consistent,
expenditure efficient
of the government.
and objectives prevalent at the Sittampalam),
continued Taxation
“Declining Inquiry
government and simple tax
Hence the government is system in forced
order
“2.1Study
time. the country’s tax Commission
revenue to GDPof 1968 ratio (Chairman
portrays a toto have
achieve its objectives
recourse and
to borrowings
system and make an assessment A.G. Ranasinha
major economic concern and Secretaryfor the functions.
even for its day to day operations”.
as to why
In this revenue ainnumber
connection relation of to A.G. Jegasothy),
country and this trend Presidential
has to be (p. 172). As far as expenditure is
GDP has declined
commissions, over the and
committees years Taxation on
reversed Commission
a priority basis.of 1990Sri concerned several measures
and make proposals as to how Lanka’s tax revenue was 19% of have been taken to ensure proper
tax/GDP ratio that is comparable GDP in 1990 falling drastically to management of public

with other emerging economies 10.2% of GDP by 2014. Ironically expenditure to avoid overrun in
could be achieved through a the growth of tax revenue in recurrent expenditure while
buoyant performance in tax absolute terms was just 4.4% in maintaining public expenditure at
revenue and that will also prevent 2014 much below the nominal the expected level. These include
the
Theneed to make
functions of afrequent
tax system in similar
growth circumstances,
ratio of 7.3%. Thusand tax (b) cesses), Budget
National Value Added Taxand
circulars (VAT)
the
changes in taxation.”
involve several aspects. First, the vertical equity, i.e.,
revenue has been unable to keep different and excises. Taxation
establishment of a Budget is also
primary function of a taxation treatment
pace of personsexpansion
with economic with different used as an instrument
Implementation of demand
and Monitoring
The
system Taxation Commission
is to raise revenuereport for the taxable capacity. Thirdly, the management to eliminate or
evidenced in recent years which Unit (BIMU). Nevertheless,
was finalized in October
government for its public 2010 but fiscal system is also employed reduce inflationary or deflationary
is a serious phenomenon.” recurrent fiscal deficits continue
is still not available
expenditure as well to asthe for public.
local for social purposes such as tendencies in the economy.
as indicated in Table 2 below.
bodies.
Table 2 Its efficiency is therefore which are considered undesirable. multiplier and so can be used to
primarily
Fiscal judged
Operationsby whether this
and Deficits Excise duties
2006-2015 on liquor and
(Rs. Million) dampen upswings in a trade
Year 2006 2008 2010 2012 2014 2015(Prov)
function is to reduce
Total Revenue and inequalities
Grants 507,901Betting and Gaming834,188
686,482 Levy are 1,067,532 The size of the multiplier
1,204,621 in an
1,460,892
Expenditure & Lending
(MinusinRepayments)
principle taxation implies that-713,646The tax -996,126
system is-1,280,205
also used to-1,556,499 -1,795,865 -2,290,394
taxes should
Current be imposed in
Account
Surplus + /Deficit - -70,127protecting
-88,450local -119,815from -79,563
industries -127,692
S= marginal propensity -246,779
to save
Budget Surplus + /Deficit equity,
- -205,745foreign competition-446,017
-309,644 through levies M=
-488,967 marginal
-591,244 propensity to
-829,502 import
dimensions: (a) horizontal
i.e.,Assimilar
% of GDPtreatment of persons -7.0 -7.0 -7.0 -5.6 -5.7 -7.4
Source: Central Bank Annual Report 2015 and various years.
151
No.
25
The 2016 deficit, with fiscal

These deficits have been iii) Decreasing the investments
measures to enhance revenue
financed by domestic borrowings
and reduce expenditure, is both bank and non-bank as well of the private investors;
targeted to be brought down to as foreign borrowings. These iv) Decreasing local savings;
5.4% of GDP with the medium fiscal deficits have also a number
v) Increasing inflation;
term 2020 deficit targeted at of economic effects such as:
3.5%. vi) Decline in international
i) Increase in public debt; credibility.
ii) Increase in interest rates;
4. Reasons for the Decline

There are many reasons for this 2. Narrow tax base and system both being less
declining trend in government tax coverage, the total number than unity;
revenue in spite of the overall of taxpayers being about
increase in GDP and per capita 3% of the population; 7. The existence of a large
income. Some of these include informal economy resulting
the following: 3. Increase in allowable in large scale tax evasion
expenses under Section 25 and avoidance;
1.Unplanned ad hoc tax of the Inland Revenue Act;
incentives in the form of 8. The grant of periodic tax
various tax holidays, reliefs 4. Periodic increases in tax amnesties which have
and concessions, duty free allowances and ad hoc been largely failures not
waivers, etc. which have reductions in rates of tax; producing the expected
eroded and narrowed the results;
fiscal base. The exact tax 5. Ad hoc changes to the tax
9. A complicated tax system
loss from these system to meet short-term
and weaknesses in tax
concessions for each cash flow requirements of
administration and the
assessment year the government consequent
administrative mechanism.
has not been calculated per to lack of consistency in
year but has been government fiscal policy,
estimated at being close to leading to uncertainty These issues have to be
1% of annual GDP among existing taxpayers; addressed and remedial
(Presidential Taxation measures taken in order to check
Commission 2010); 6. Lack of elasticity and the tax revenue decline and bring
buoyancy in the tax it to a satisfactory level.
5. Composition of Tax Revenue - Direct and

Indirect
Direct versus indirect taxation is equity effects and ease and cost used for reducing income and
an age-old controversy. The of administration. wealth inequalities and thereby
arguments for or against direct socially more desirable. They
and indirect taxes can be Direct taxes tend to be cause little or no distortions in
analyzed in the context of progressive and intimately related resource allocation of the
revenue generation, efficiency and to the ability to pay and can be economy and leave taxpayers
6
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
better off in welfare terms. It is Another argument in their favour be regressive. Studies have
also revenue elastic due to the is that their yield is substantial, shown that the increase in the tax
fact that as the income of the individuals are given a choice and burden for the low and middle
community rises, so does the they reduce disincentive effects. income groups indicates that the
yield from direct taxes. system reports have been released
There is also the added attraction (Chairman
rise H.S.taxes
in indirect Wanasinghe
has been
and fiscal policy underlying it, from time to time since
that the public is less conscious 1915 and Secretary D.D.M.
faster than the rise in income of
However,
is a majorthey are moreofdifficult
determinant other to when
of the Sri
tax Lanka’s
burden as (then
the taxes are Waidyasekera)
these groups. Indirectand thetaxes have
impose in developing
macro-economic countries
indices such Ceylon’s) hidden
generally tax systemin theconsisted
prices and Presidential
also a greaterCommission
adverse effect on on
where the structure
as economic growth,of public
the only of Import, Excise
their presence is not readily felt and Taxation of 2009 (Chairman
the allocation of resources than a
economy
debt, fiscal is deficit
markedly anddifferent
inflation Stamp
by Duties followed
the consumer. Sincebythey are Prof. W.D.
direct tax andLakshman and level
at a macro
from developed
as well as attaining onesa dueproperto such Export
paid Duties, Income
piecemeal when the Tax and
taxpayer Secretary P.D.K. Fernando).
can cause cost-push inflation.
conditions as the existence
pattern of resource allocation,of a a whole
enters lot some
into of other taxes such
transaction, it is Apart from these, a number of
large
income informal economy
distribution and and as Profit Tax, Excess
convenient and less burdensome. Profits Inother reports countries,
developed include thedirect
Woods
severe
economic unemployment.
stability. Hence They are Duty, Estate Duty, Capital Commission
taxes such as(1926),incomeHuxham
tax
also a drag on
periodically, thesaving
fiscal andpolicy Indirect
Gains Tax, taxes LandareTax,
alsoWealth,
perhaps Report (1929),
constitute Downs Report
a significant portion of
investment
and the taxand thus onincluding
structure, economic the only means
Expenditure andofGiftreaching
Taxes, the (1955),
total tax Kaldor
revenue, Report
while(1960)
indirect
efficiency and improvement
its administrative mechanism of vast majority
etc. levied andof abolished
the population from and Cox
taxes such Report
as taxes (1986)
on among
living
has beenstandards.
subject to whom
time tothe time.tax net
Some often fails to
of these others.
international trade and on
examination and proposals for capture
important andcommissions
the informal and hard domestic goods and services,
Indirect taxation
modification is defined
in order as
to achieve to tax activities.
consisted of the TheyTaxationare also All these
play a lessstressed
significant therole. In
taxation
its basicimposed
objectives upon other than
in relation often not affected
Commission of 1955 by economic
(Chairman importance
contrast, of developing
in the developing a
the person
to the who is intended
government’s policiesto crises
K.R.K.and Menon thusand remain relatively
Secretary S. rational, consistent,
countries the oppositeefficient
is the case
bear the final burden
and objectives prevalent at thewhich constant.
Sittampalam), Administratively,
Taxation Inquiry and simple tax system
with the bulk of government in order
ultimately
time. falls on the consumers indirect
Commission taxes ofare 1968easier to
(Chairman to achieve
revenue comingits objectives and
from indirect
of the taxed commodities. They implement
A.G. Ranasinha than direct taxes and
and Secretary functions.
taxes such as customs duties,
are an important
In this connectionelement a number in of since they are included
A.G. Jegasothy), in the
Presidential VAT, sales taxes, excise duties
raising quick revenue
commissions, committees and and price of aCommission
Taxation commodity cannot of 1990be etc. while direct taxes are of
mobilizing resources for public easily evaded, and the lesser importance.
investment and social welfare. administrative costs in their

Indirect taxes are also a powerful collection is relatively low. In Sri Lanka, income taxes
tool for guiding resource comprise on average less than
allocation and discouraging However, indirect taxes are 20% of tax revenue or 2% of
demand on undesirable goods heavily criticized for GDP while the indirect taxes
The activities
and functionsas of well
a taxassystem
an in similar circumstances,
unnecessarily imposing heavy and (b) cesses), Value
comprise aroundAdded 80% orTax8% (VAT)
of
involve several
effective way to aspects. First, the
correct negative vertical equity,
burdens i.e., different
on the lower and middle and excises.
GDP. Taxation of
The composition is also
revenue
primary function of a taxation
externalities. treatment
income of persons
groups and those with least
different used
is as an instrument
illustrated in the Tableofand demand
system is to raise revenue for the taxable capacity. Thirdly,
able to pay and therefore tend to the management
Chart below. to eliminate or
Tableand
authorities 3 similar public discouraging certain activities Taxation reduces the effect of the
bodies.Composition
Its efficiency of is
Government
therefore Revenuewhich are 2014, 2015
considered undesirable. multiplier and so can be used to
primarilyYear judged by whether this Excise duties2014 on liquor and dampen 2015 upswings in a trade
function is performed adequately tobacco, the
Amount Percentage Percentage Special Excises on cycle.
Amount Percentage Percentage
Taxes Rs. Million Share of GDP Rs. Million Share of GDP
through Income
a policyTaxes of redistribution 198,115 examples17% of such taxes. 1.9 262,583 open economy 18% is 2.3
of income VATand wealth. The equity 275,350 23% 2.6 219,700 15%
1 2.0
Excise Duties 256,691 21% 2.5 497,652 34%
S+M+1 4.4
taxes should be imposed in increase the level of savings and
Import Duties 81,108 capital formation7% apart 0.8from 132,189 where 9% 1.2
principle.Other ThisTaxes
has two 239,099 20% 2.3 243,655 17% 2.2
Tax Revenue 1,050,362 such as 88% import duties 10.1 (including 1,355,779 T= marginal 93% rate of taxation
12.1
Source: Central Bank Annual Reports 2014 and 2015.
171
No.
25

Chart 1: Composition of Government Revenue - 2015 5th November 2015. The EPS has
even set a quantitative target of
securing 40% of the tax revenue
from income taxes by 2020 as
against the historical average of
20% on that account. This
requires policies to reduce the
share of indirect taxes from the
present 80% to 60% over the
years and means increasing the
income tax by 100%.
Source: Central Bank Annual Report 2015.
It has been realized that this proportion of direct to indirect

proportion of direct to indirect taxes than Sri Lanka. It is in this
taxes of 20:80 is too unrealistic context that the 2009 Presidential
if Sri Lanka is to achieve a Taxation Commission had
developed country status from a recommended that the tax ratio of
middle income country status. direct to indirect should be
Apart from developed countries, progressively changed to 60:40.
even countries such as This policy has been reiterated
Malaysia (over 60%), India recently in the Economic Policy
(over 50%), Pakistan (around Statement (EPS) delivered by the
40%) Thailand (50%) and Kenya Prime Minister Hon. Ranil
(above 42%) have a higher Wickremasinghe in Parliament on
6. Fiscal and Tax Incentives

One of the main reasons for the reduce their scope and coverage tax provisions were subsequently
decline in government tax from time to time, they are still given largely through the Inland
revenue has been the considerably large covering Revenue Act but the BOI appears
proliferation of tax incentives in various sectors such as to be granting them as well.
the form of tax holidays, agriculture, fishing, exports,
exemptions, expanded allowable gems and jewellery, IPO, The rationale for the adoption of
expenses in determining taxable healthcare, education, tourism, fiscal incentives is that they
income, reliefs, duty waivers and sports and fitness centres, constitute an important, if not a
concessions which have eroded creative work including art work major element in determining
and narrowed the tax base. They etc. They have been granted investment behaviour. They
were originally used from 1951, both through Law 17 of the Board increase the net rates of returns
and after 1977 became a major of Investment (BOI), the Inland and thus reduce the need for
instrument of development Revenue Act as well as other large capital investment. They
policy. Though attempts have relevant legislation. To minimize also reduce risk and tend to
been made to prune them and the considerable overlapping, the make otherwise unpromising and
8
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
risky ventures more attractive. adopted to evaluate the revenue loss is estimated to be
Tax incentives benefit concerns stimulation generated for close to 1% of GDP (Presidential
which are profitable and to that investment by tax incentives, Taxation Commission 2010).
extent, they do not involve state “Economic science has not
government subsidiessystem or public reports have been released (Chairman H.S. Wanasinghe
yet attained a level of Nevertheless, Sri Lanka
guarantee to lossunderlying
and fiscal policy makers. it, from time to time since 1915 and Secretary D.D.M.
sophistication capable of isolating considering the competitive
is a major
Further, even determinant
in cases where of other when Sri Lanka’s (then Waidyasekera) and the
and quantifying the roleconsisted
of the tax international context, e.g.,
macro-economic
relief may seem unnecessary,indices such Ceylon’s) tax system Presidential Commission on
factors in investment behaviours.” Malaysia, Brazil, Vietnam,
as economic growth,
well-conceived incentives publicmay only of Import, Excise and Taxation of 2009 (Chairman
Incentives by themselves Thailand
Prof. W.D.etc., cannot and
Lakshman completely
debt, fiscal deficit
help ventures to build their and inflation Stamp Duties followed by
as well asand attaining a proper apparently do not
Export Duties, Income play aTax major
and do away with
Secretary tax Fernando).
P.D.K. incentives.
reserves embark on
pattern of resource role vis-à-vis
lot ofother
otherfactors such However,
Apart from these, a numberregime
the tax incentive of
expansion. They areallocation,
also a whole taxes such
income distribution
valuable as an indirect and stimulant as infrastructure
as Profit Tax, Excess Profits
facilities, cheap must
other be designed,
reports includeimplemented
the Woods
economic stability.
to investment because Hence they Duty, Estate Duty, Capital
and easy credit, production costs, and monitored(1926),
Commission in a more
Huxham
periodically,
publicize andthe fiscal policy
enhance the Gains Tax,
access Land Tax,a Wealth,
to markets, reliable and Report (1929), Downs
methodical and cost effective Report
and the tax
country’s structure, climate.
investment including Expenditure and Gift Taxes, (1955),
way, Kaldor
their cost Report
benefit (1960)
ratio
skilled labour force, labour market
its administrative
They have thus been adopted by mechanism etc. levied and abolished from and Cox Report (1986)
properly examined and be among
flexibility, the regulatory
has been
most subject countries.
developing to time to time. Some of these others.
subjected to continuous review so
framework, business
examination and proposals for important commissions that the impact on revenue is
environment, and political and
With a GDP growth
modification in ordertarget of 8%
to achieve consisted of the Taxation All these stressed the
economic stability. Investment minimized and the required
or
its higher, Sri Lanka in
basic objectives would need
relation Commission of 1955 (Chairman importance of developing a
responds to a multiplicity of S. economic objectives realized.
to
to raise its annual investment
the government’s policies rate K.R.K. Menon and Secretary rational, consistent, efficient
factors and compared Further, tax holiday businesses
from the currentprevalent
and objectives 30% of GDP at theto Sittampalam), TaxationtoInquiry
these, and simple tax system in order
fiscal incentives at best play only and enterprises
to achieve must be required
its objectives and
at least 35% or higher. With
time. Commission of 1968 (Chairman
public investment to be capped aA.G.
marginal role. and Secretary
Ranasinha to send
functions.their accounts and
In around
at this connection
6% of GDP a number
this wouldof A.G. Jegasothy), Presidential balance sheets even during the
commissions, committees
need to come about entirely from and Fiscal
TaxationandCommission
tax incentives have
of 1990 tax holiday period and should be
private investment within which also been called into question on checked even though exempt.
foreign private investment plays other grounds. One is that they Experience has shown that often

a crucial role. Foreign Direct
Investment (FDI) to Sri Lanka has
seen a significant increase in
distort investors’ decisions and
thus produce a less than optimum
they show big profits during the
tax holiday period and after the
allocation of resources. Fiscal exemption is over, they show
recent years rising from US$ 234 incentives tend to attract losses or pack up and leave. To
The functions
million in 2004 of to a$ tax
889 system
million in in similar circumstances, and (b) cesses), Value Added Tax (VAT)
investors who are more keen on prevent this, concessionary rates
involve several aspects.
2008, $ 1066 million in 2011,$ First, the vertical equity, i.e., different and excises. Taxation is also
primary function of a taxation making
treatment quick profits rather
of persons than
with different may
usedbe asapplied for a short
an instrument period
of demand
1338 million in 2012, and $ 1616
systeminis 2014 to raise revenue for the investments
taxable capacity.of a substantial
Thirdly, the after the tax holiday
management is overorbefore
to eliminate
million which however
government nature which are crucially required applying the normal rates.
reduce inflationary or deflationary
declined to $for 970 itsmillion
public in 2015. fiscal system is also employed
expenditure
On average, Sri Lanka as well as attracted
for local for
for developing
social purposes countries.
such as They tendencies in the economy.
an annual average FDI of US $ public also tend to attract
discouraging certain “fly-by-night”
activities Taxation reduces the effect of the
bodies.
500 millionIts(about
efficiency1.5% is of
therefore
GDP) which arewho
investors considered
use the undesirable.
generous multiplier and so can be used to
primarily
during thejudged by whether this
last decade. Excise duties
incentives onlyon to liquor
pull outandwhen dampen upswings in a trade
function istoperformed
However, emulate the adequately
East the time comes to be regular on
tobacco, the Special Excises cycle.
and satisfactorily.
Asian countries, which is The second
Sri luxury and They
taxpayers. semi-luxury items, athe
also provide
function vision,
is to reduce inequalities Betting and Gaming Levy are The size of the multiplier in an
Lanka’s it is necessary to fertile ground for tax avoidance
throughFDI
attract a policy
in excess of redistribution
of US $ examples of such taxes. open economy is
and tax evasion through “tax
of income
5000 million and wealth. close
annually, The equity
to 1
shelters”
The tax. system
Finally, isthe taxused
also foregone
to
principle
5% of GDP. in taxation implies that
is a matter of vital concern
particularly in the apart
capital formation current context,
from where
accordance
However thewith the ability of
effectiveness to tax
pay
as fiscal incentives
protecting are costly
local industries fromin S= marginal propensity to save
principle. This has
incentives in this respect is two
revenue terms. It is through
foreign competition felt therefore,
levies M= marginal propensity to import
dimensions:As
debatable. (a)Heller
horizontal equity,
& Kauffman
suchthe
that as cost
importof duties (including
fiscal incentives T= marginal rate of taxation
in concentrating upon the
outweighs their benefits. The
methodology and techniques
191
No.
25
7. Elasticity and Buoyancy of the Tax System

One of the main reasons for the tax system also reduces the i) Slow expansion in the tax
decline in government tax economic uncertainties base;
revenue in Sri Lanka is the associated with frequent
inherent lack of elasticity and discretionary changes in taxes, ii) Absolute as well as relative
buoyancy in the fiscal system. duties and levies. expansion in certain
sectors which are difficult to
Elasticity in a tax system reflects An inelastic fiscal system on the tax and gradual reduction in
the automatic response or built-in other hand, compels the size of the sectors which
responsiveness of tax revenue to government to rely on frequent ad are easy to tax;
movements in national income or hoc increases in order to maintain
gross domestic product. short-term revenue objectives. iii) Expansion in the tax
Buoyancy reflects the total Such practices over time tend to expenditure coverage;
response of tax revenue to produce a complex and
changes in national income or economically unproductive fiscal iv) Lack of progressivity in tax
GDP including the effects of system and lead to adverse rates;
discretionary adjustments such economic effects and unintended
v) Tax evasion and inefficient
as expansion in the tax base, distributional consequences.
tax administration.
increase in tax rates and other Frequent ad hoc changes in tax
changes in fiscal policies. The practices also create In the Sri Lankan fiscal
tax system is said to be elastic or uncertainties among taxpayers system the overall elasticity
buoyant if the elasticity or and affect investment and has been estimated at 0.7 and
buoyancy co-efficients exceed production adversely. the buoyancy at 0.9.
unity. An elastic system will (Indraratna, 2003). Both co-
automatically raise revenue at the Factors affecting the low elasticity
efficients however, are below
same time or at a faster rate than in the tax system may be
unity and hence overall, the
the growth of GDP and facilitate a summarized as follows:
tax and fiscal system is
sustained increase in necessary inelastic in Sri Lanka. (Tax
government outlays. An elastic Commission Report, 1990).
8. Taxation, Savings and Capital Formation

Taxation and fiscal policy consti- savings constitute a relatively nominal terms as well as
tute one of the key determinants minor share of both domestic and percentage of GDP from 2010
of savings, capital formation and national savings and in fact, onwards and particularly from
investment apart from other statistically denote a negative 2012. Tax rates both corporate
factors such as government index. Table 4 below denotes and individual from 2011 were
development strategy and the domestic savings divided into drastically reduced from 35% to
macro economic environment. private and government, respec- 28% and 12% for the corporate
There is a correlation between tively. sector and 24% as maximum
development and savings; higher personal tax from that year.
the savings, greater the ability to It may be noted that the savings
ratio to GDP is only 22.6% as While this may invariably have
sustain its growth.
compared to other Asian had an effect in increasing private
An analysis of savings both countries such as India (31%), savings, it is however difficult to
domestic and national savings Thailand (31%), Malaysia (33%) quantify or draw a direct causal
indicate that in Sri Lanka, savings and Singapore (53%). effect to this factor alone as
come largely from the private or many other factors are
household sector. Government Domestic private savings have determinants of savings and
indicated a large increase both in investment.
10
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
Table 4
Domestic Savings and Tax Rates 2004 - 2015 (Rs. Million)
Year 2004 2006 2008 2010 2012 2014 2015
Domestic Savings 343,580 498,864 611,598 1,481,123 2,374,918 2,504,682 2,531,040
isPrivate
a major determinant 421,785 of other 568,992
when Sri Lanka’s1,600,938
700,048 (then 2,454,481Waidyasekera)
2,632,374and the 2,777,819
Government -78,205 -70,128 -88,450 -119,815 -79,563Taxation-127,692 -246,779
of 2009 (Chairman
as economic growth, public only of Import, Excise and
debt, fiscal deficit and inflation
% to GDP 16.4% Stamp Duties
17.0% 13.9% followed by
23.1% 27.2%Prof. W.D. 24.0%
Lakshman and22.6%
Tax Rates
income
Company distribution and 30% 35%as Profit Tax,
35% Excess Profits
35% 28% other reports include the Woods
28% 28%
periodically, the fiscal policy Gains Tax, Land Tax, Wealth, 12% Report (1929),12%Downs Report 12%
and the tax structure, (1955), Kaldor Report (1960)
Personal Highest Rate including
30% 35%Expenditure and Gift Taxes,
35% 35% 24% 24% 24%
Source:
has Compiled
been from Central
subject to Bank Annual Report, various
time to years.
time. Some of these others.
modification in order to achieve consisted All these stressed the
The same trend is seen in respect tax rates, of the Taxation
particularly the ever, both savings and capital
of capital formation. It is seen that corporate rate from 35% to 28% formation appear to be sensitive
over 75% of gross domestic (and concessionary rate 12%) in to effective tax incidence. Hence
and objectives and simple tax system in order
capital formationprevalent
comes from at the
the Sittampalam), Taxationhave
2011 would invariably Inquiry
had it is logical to conclude that in
time. sector while the Commission of 1968 (Chairman to achieve its objectives and
private an effect in this trend, it is order to promote savings and
government’s share is around 25%. difficult to establish a direct and capital formation, the reduction in
Again, capital formation has shown precise statistical correlation taxation appears as a necessary,
a large increase from 2010, 2012 between tax rates and domestic though not by itself, a sufficient
onwards. While the decrease in private capital formation. How- condition.

Table 5
Capital Formation and Tax Rates 2004- 2014 (Rs. Million)
TheYear
functions of a tax2004 system 2006 in similar 2008 circumstances,
2010 and2012
(b) cesses),
2013 Value2014 Added Tax (VAT)
involve
Grossseveral
Domestic aspects. First, the vertical equity, i.e., different and excises. Taxation is also
primary
Fixed function
Capital of a taxation treatment of persons with different used as an instrument of demand
Formation 473,323
government for its public 730,910 1,115,310 1,452,002
fiscal system is also employed2,189,805 2,536,648 2,752,263 or deflationary
reduce inflationary
Private 422,060 624,972 852,708 1,128,151 1,695,184 1,946,925 2,119,243
Government
bodies. Its efficiency51,262 105,938 which
is therefore 262,602 323,851undesirable.
are considered 494,621 589,723 633,020
multiplier and so can be used to
% of GDP 22.6% 24.8 25.2 25.4% 25.0% 26.4% 26.3%
andTaxsatisfactorily.
Rates The second luxury and semi-luxury items, the
Company 30% 35% 35% 35% 28% 28% 28%
of income and wealth. The equity 12% 12% 1 12%
Personal increase the level of savings and S+M+1
where
accordance 30% to pay35% capital
with the ability
Highest Rate 35%formation apart
35% from 24% 24% 24%
Source: Compiled from Central Bank Annual Report, various years.
1111
No.
25
9. Tax Base and Coverage

One of the important elements in quarter in 2009, Rs. 3 million per In this context, the 2016 Budget
securing a satisfactory level of quarter in 2013 and Rs. 3.75 has proposed a threshold limit of
tax revenue is the base and million per quarter or Rs. 15 Rs. 2.4 million for individuals and
coverage of the taxes. While million per annum in 2015 and in a flat rate thereafter which
certain steps to broaden the tax May 2016 to Rs. 3 million per however, due to its drastic
base and coverage have been quarter. The Nation Building Tax implications for revenue as well
taken such as the inclusion to (NBT) was Rs. 500,000 per as equitable considerations has
income tax of public servants quarter in 2011, Rs. 3 million in been suspended or put on hold.
hitherto exempt, and widening the 2013 and in 2015 Rs. 3.75 million The basic threshold for 2015/16 of
base of the VAT and NBT by per quarter, and in May 2016 Rs. Rs. 500,000 has therefore
adding the wholesale and retail 3 million per quarter. The remained for the year of
sectors, the base and coverage Economic Service Charge (ESC) assessment 2016/17 as well.
still need to be enlarged. was Rs. 50 million per quarter in
2015, an increase from the earlier 9.2 Deductible
One of the reasons for the Rs. 25 million in 2011. All these
declining tax revenue ratio has mean that persons below these
Expenses for
been the narrowing of the tax thresholds do not pay any tax Assessable Income
base resulting from ad hoc thus reducing the coverage of
increases in tax free allowances, taxpayers and reduction of tax Another area which has affected
liberalizing a whole range of revenue. the base is the calculation of
allowable deductions under assessable and taxable income in
Section 25 of the Inland Revenue There is no hard and fast rule relation to allowable expenses
Act, adjustments to qualifying regarding the appropriate level of under Section 25 of the Inland
payments under Section 34, basic tax free allowance for Revenue Act. Section 25(1)
among others individuals. One factor is the allows the deduction of “all
adequacy to relieve the minimum outgoings and expenses incurred
9.1 Tax Free subsistence need of an average by such persons in the
family from taxation. Other production” of such profits and
Allowances and factors include the per capita income. Though this concept is
Threshold income, equity consideration and narrower than the U.K. concept of
ease of administration. Some “wholly and exclusively incurred
Tax free allowances for
countries use the per capita for the purpose of the trade,” the
individuals have been periodically
income multiple (maximum up to various amendments made to
increased from Rs. 144,000 in
five times) as the basis but expand deductible expenses to
2001/02 to Rs. 240,000 in 2002/
others do not. In the be in line with commercial profits
03, to Rs. 300,000 in 2004/05 and
circumstances, it may be as well as to give various
in 2011/12 to Rs. 500,000. For
appropriate to consider a suitable concessions to trades and
employees or those with
measurement basis in the context businesses, have in practice
employment income, an extra
of Sri Lanka’s current tended to narrow the net income
allowance in excess of Rs.
circumstances and taxation on which the tax rates are
500,000 ranging from Rs. 100,000
policy. The current practice applied.
to Rs. 250,000 has been granted
recently introduced of tax free
in the form of a qualifying Recent tax legislation has
allowance to non-resident Sri
payment. The tax free allowance liberalized a whole lot of
Lankan citizens should also be
has been extended to non- expenses as well as allowable
reconsidered, limiting it to
resident Sri Lankan citizens as deductions in computing adjusted
resident individuals and charitable
well. The original tax free taxable profits and income.
institutions as in the original Tax
threshold for VAT in 2002 of Rs. These include enhanced
Act.
500,000 per quarter was depreciation allowances, 75%
increased to Rs. 650,000 per deduction of advertisement
12
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
expenses originally limited to advertisement expenses etc., enormous profits being made
50%, foreign travelling expenses, need re-examination and through information technology,
foreign training expenses, pre- limitation. For instance, very all of which are exempt under
commencement expenses, 300% often businesses tend to mix Section 13(ddd). All these have
A country’s
deduction fortaxation
Research system
& reports have
business been released
promotion expenses (Chairman
led H.S. Wanasinghe
to an artificial lowering of
and fiscal policy underlying
Development (R&D), maintenance it, from time to
which are allowable time since
with 1915 taxable income D.D.M.
and Secretary of trades and
is a management
and major determinant of other
expenses when Sri Lanka’s
advertisement, hence(thenthe Waidyasekera)
businesses and and the cause of
a major
macro-economic
among others. indices such Ceylon’s) tax system
necessity to limit the latter. consisted Presidential
declining tax Commission
revenue. on
as economic growth, public only of Import, Excise
Another section that appears and to Taxation of 2009 (Chairman
It is necessary therefore, to re-
debt,
All fiscal
these havedeficit
led toand inflation
a narrowing Stamp Duties followed
need re-examination is Section by Prof. W.D.the
examine Lakshman
validity ofandthese
as the
of welltaxable
as attaining a proper
base and reduction Export Duties,
13(ddd) of the Act IncomewhichTax and
exempts Secretary P.D.K.
enhanced deductions Fernando).
and base it
pattern
of of resource
the adjusted taxableallocation,
profits and a whole lot of other
services rendered to persons taxes such Apart
on from these,
accepted a number
principles and of
income of
income distribution
trades and and businesses as ProfitSriTax,
outside Excess
Lanka. Profits
While the other reports include
accounting standards subject the Woodsto
economic stability. Hence
for tax purposes. In the absence Duty, Estate Duty,
original intention was the Capital Commission (1926), Huxham
revenue considerations. Whatever
periodically,
of proper auditingthe fiscal policy
and monitoring Gains Tax,ofLand
promotion localTax, Wealth,
professional Report is
system (1929),
adoptedDowns Report
it should be
and
of the tax
these structure,
expenses including
by tax Expenditure and
services, it has now been Gift Taxes, (1955), Kaldor Report
applicable to individuals, (1960)
its administrative
officials, the enhanced mechanism
allowable etc. levied
misused forand
foreignabolished
business,from and Cox Report
companies (1986)
and all otheramong
entities
has been subject
expenditure such as tripleto time to time. Some
foreign contracts, etc. with of these others.
in the same manner.
examination
expenses for and
R & proposals
D, 75% for important commissions
10. Tax Rates

and objectives prevalent at the
time.
K.R.K. Menon and Secretary S.
Sittampalam), Taxation Inquiry
Commission of 1968 (Chairman
rational, consistent, efficient
and simple tax system in order
to achieve its objectives and
10.1 Corporate
In this connection a number of income less than Rs.
A.G. Jegasothy), 5 million is
Presidential companies from the
commissions, committees and aTaxation
concession for smallofand
Commission 1990 concessionary rate. The main
Tax rates in Sri Lanka have had a medium enterprises (SMEs) to argument against small company
chequered history with at one encourage their growth. There is relief however, is the

time in 1978 the corporate rate however no definition of a small administrative difficulty of drawing
going up to 60% and in 1964 the company in the Inland Revenue the boundary line between “large”
personal rate at 80%. With Act and taxable income of Rs. 5 and “small”; it necessarily
changing economic strategies million is not the sole criterion of involves arbitrary choices and
they have steadily
The functions of a decreased
tax systemto an SME. Further,
in similar circumstances, a company and (b) adds to the
cesses), complexity
Value Added Tax of the tax
(VAT)
45% in 1992/93, 40%
involve several aspects. in 1993/94,
First, the may be small
vertical equity,but thedifferent
i.e., owners structure.
and excises. Taxation is also
35% in 1994/95, 30%
primary function of a taxationin 2003/04 need not necessarily
treatment of persons be withpersons
different used as an instrument of demand
and subsequently
is to raise the standard
system
rate 28% in 2011.
revenue
There are
for the with low capacity.
taxable incomes and vice the
Thirdly, versa.
10.2
managementPersonal
to eliminate or
government for its public Affluent investors often
fiscal system is also employed invest in reduce inflationary or deflationary
however
expenditure a multiplicity
as well asoffor local small venture
for social companies,
purposes such as tendencies
The in in
reduction thetheeconomy.
rate structure
corporate
authorities and with
rates 28%
similar for
public whereas
discouraging shareholders of modest
certain activities Taxation
also reduces
applies the effect
to personal of the
income
companies
bodies. Its with taxable
efficiency is income
therefore means
which are often have theirundesirable.
considered share multiplier
tax and so can
of individuals be used to
(including
over Rs. 5 million, 12%
primarily judged by whether this where the investments, if any,
Excise duties on liquor and in large dampen upswings
professionals) in a trade
in relation to both
taxable
function is performed adequately5
income is less than Rs. companies
tobacco, the of Special
a less risky Excises nature.
on cycle. and rates. Currently, there
“slabs”
million (including venture
and satisfactorily. The secondcapital Moreover,
luxury andthe existence items,
semi-luxury of a the is a progressive tax structure with
companies)
function is to while a higher
reduce rate of
inequalities lower
Bettingrateandinvites
Gaming theLevy
artificial
are The size
special of the
lower multiplier
rates in an
and higher
40% is applied for liquor,
through a policy of redistribution tobacco, splitting up of corporate
examples of such taxes. rates
open for specificis activities and
economy
betting
of income andandgaming.
wealth. The equity enterprises into several tax sources of 1 income. The slabs
principle in taxation implies that The tax system
motivated is also usedwhich
small companies to have been enlarged with the rates
The multiplicity of rates however, increase
would, in the levelcontinue
reality, of savings to and S+M+1
taxes should be imposed in ranging from 4% and going up to
has its drawbacks in that it capital formation
operate as parts of apart from
the larger where
accordance with the ability to pay 8%, 12%, 16%, 20% and 24%
unnecessarily complicates and protecting local industries
enterprises. In order to prevent from S= marginal propensity to save
principle. This has two (maximum). The maximum rate
inhibits the smooth functioning of foreign
this, the competition
Act excludes through
holdinglevies M= marginal propensity to import
dimensions: (a) horizontal equity, of tax for employees including
the company tax system. The such as import
companies, duties (including
subsidiary or T= marginal rate of taxation
i.e., similar treatment of persons professionals however is limited
lower rate of 12% for taxable associate of any group of to 16%.
1311
No.
25
These changes to the personal

one time over 20% has remained any person may reach the highest
income tax structure apart from
consecutively at single digit rate of tax at a relatively low level
resulting in lowered tax revenue, figures and there is no of taxable income (above Rs. 3.5
have also raised a number of justification to widen the slabs million per annum or Rs. 300,000
contentious issues. Adjustments and reduce the rates, especially per month).
to “slabs” and rates are generally when the tax free personal
done periodically to counter what allowances have been increased. The table below gives the periodic
is known as the “bracket creep” in Further, the “slabs” in the current changes to the slabs and rates
time of rampant inflation. rate structure discourage the from year of assessment 2003/04
However, inflation which was at earning of higher income, since to 2016/17.
Table 6
Personal Tax Slabs and Rates 2003/04 - 2016/17
Y/A 2003/04 Tax Free Allowance Y/A 2004/05 Tax Free Allowance
Rs. 240,000 Rs. 300,000
Slabs Rs. Rate% SlabsRs. Rate%
First 180,000 10% First 240,000 10%
Next 180,000 20% Next 240,000 20%
Balance 30% Balance 30%
Income at which highest rate Income at which highest rate is
is reached – Rs. 600,000 reached – Rs. 780,000
Y/A 2006/07 -2008/09

Y/A 2005/-06Tax Free Allowance Tax Free Allowance Rs. 300,000
Rs. 300,000 Slabs Rs. Rate%
Slabs Rs. Rate% First 300,000 5%
First 300,000 5% Next 200,000 10%
Next 200,000 10% Next 200,000 15%
Next 200,000 15% Next 200,000 20%
Next 200,000 20% Next 200,000 25%
Next 200,000 25% Next 500,000 30%
Income at which highest rate is reached Income at which highest rate is reached
Rs. 1,400,000 Rs. 1,900,000
Y/A 2009/10 & 2010/2011

Tax Free Allowance Rs. 300,000 Y/A 2011/2012 – 2016/17
Slabs Rs. Rate% Tax Free Allowance Rs. 500,000
First 400,000 5% Slabs Rs. Rate%
Next 400,000 10% First 500,000 4%
Next 400,000 15% Next 500,000 8%
Next 500,000 20% Next 500,000 12%
Next 500,000 25% Next 500,000 16%
Next 500,000 30% Next 1,000,000 20%
Income at which highest rate is reached Income at which highest rate is reached
Rs. 3,000,000 Rs. 3,500,000
Source: Compiled from Inland Revenue Acts and Amendments.
14
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
10.3 Professionals
Another contentious issue is the
10.4 Flat Rate
A contentious issue is the
(b) Liquor, tobacco, lottery,
betting and gaming – 40%;
concessionary rate granted to a proposal in the 2016 Budget to (c) All other activities including
A country’s
class taxation system
of professionals under reports have
increase the taxbeen released
free threshold (Chairman H.S. Wanasinghe
manufacturing and services
and fiscal policy
Section 40C of the underlying
Inland it, from
from Rs. 600,000 to Rs.1915
time to time since 2.4 and Secretary D.D.M.
– 17.5%;
is a majorAct
Revenue determinant of other
under Amendment when
millionSri
perLanka’s
annum(thenand charge Waidyasekera) and the
macro-economic indices
No. 8 of 2014. A “professional” such Ceylon’s)
only a flattax ratesystem
of 15%consisted
on all Presidential Commission on
(d) Other sources such as
as economic growth,
under Section 40C(2) has been public only
incomeof Import,
above this Excise and
amount, Taxation of 2009 (Chairman
interest, royalty, dividends
debt, fiscal
defined anddeficit
if such and inflation
professional Stamp Dutiesof followed
irrespective the amount by of Prof. W.D. Lakshman and
etc., to continue on the
asemployed
is well as attaining
with effecta proper
from Export
income.Duties,
This isIncome
a radical Taxchange
and Secretary P.D.K. Fernando).
existing applicable rate
pattern of resource allocation,
1.4.2014, is taxed subject to a afrom
whole lot of other tax
a progressive taxes such
system Apart from these, a number of
depending on the source of
income distribution
maximum rate of 16% and(whereas as Profit
which has Tax, Excess
existed in SriProfits
Lanka other reports include the Woods
income.
the normal maximumHence
economic stability. rate is Duty, Estate Duty, Capital
since the introduction of income Commission (1926), Huxham
periodically,
24%). Further,theunder
fiscalSection
policy 59F Gains
tax in Tax,
1932Land to a Tax, Wealth,
regressive one. Report (1929), Downs Report
Personal Income Tax
and the tax structure, including
the professional services of these Expenditure
Apart from such and Gift
tax Taxes,
havens like (1955), Kaldor Report (1960)
its administrative
professionals mechanism
are taxed at etc. levied and
the Cayman abolished
Islands, Isle from
of Man, and Cox Report (1986) among
i) Current rate structure, tax
has been subject to
different “slabs” with the time to time. Some
Bahamas etc. where there is noof these others.
free allowance, rates etc.
examination
maximum rateandof proposals
tax being 16%.for important
income tax, commissions
most countries in the
2016/17 to continue –
modification in order to achieve consisted
world haveofathe Taxation income
progressive All these stressed the
maximum 24%;
its basic
The objectives
tax for in relation
professionals can be Commission
tax system with of 1955 (Chairman
relatively few importance of developing a
summarized as follows: policies K.R.K.
exceptions which have a flat S.
Menon and Secretary rate rational, consistent, efficient
ii) Employment income at
system. This isTaxation Inquiry
a controversial and simple tax system in order
current slabs and rate for
time. Commission
issue and has of been
1968 suspended
Income from Maximum employees with the
A.G. Ranasinha
with no amending and Secretaryas
legislation functions.
Profession Rate of Tax maximum rate of 16% to
yet, and the threshold and rate
Does not exceed continue;
commissions, committees and Taxation
structure Commission
for 2016/17 has of 1990
Rs. 25 million 12%
remained on the 2015/2016 basis,
iii) Income from any activity
subject to the changes

Exceeds Rs. 25 (other than financial, trading,
announced from 1.4.2016.
million but does not liquor, tobacco, lottery,
exceed Rs. 35 million 14% betting and gaming) –
10.5 Current Changes maximum rate 17.5%;
Exceeds Rs. 35ofmillion
The functions 16%
a tax system in similar circumstances, and (b) cesses), Value Added Tax (VAT)
involve several aspects. First, the Due to these
vertical factors,
equity, the basis of
i.e., different iv) Profits
and excises.from financial
Taxation is or
also
These concessions are available giving
primary function of a taxation treatment of persons with to
concessional rates small
different trading activity – maximum
used as an instrument of demand
only to those classified as and medium enterprises (SMEs) 24%;
“professionals” under the relevant on the system
basis ofistaxable income
government for its public fiscal also employed reduce inflationary or deflationary
section and includes registered (less
expenditure as well as for local for social purposes such as has
than Rs.5 million) alone, v) Profits from
tendencies in theliquor, tobacco,
economy.
lawyers, doctors, chartered apparently undergone a change to lottery, betting and gaming
engineers, chartered take into account the nature of activity limited to be
40%;
bodies. Its efficiency is therefore which are considered undesirable. multiplier and so can used to
accountants, software engineers, their activity
primarily judged by whether this Excise dutiesrather than and
on liquor the dampen upswings in a trade
licensed pilots, navigation taxable profit they make. Fromon1 vi) Income from Net Annual
function is performed adequately tobacco, the Special Excises cycle.
officers, researcher and senior April 2016 the rates are to be the Value (NAV) etc. – maximum
and satisfactorily. The second luxury and semi-luxury items,
academic recognized as an based both for corporate and The rate
size 24%.
of the multiplier in an
function is to reduce inequalities Betting and Gaming Levy are
accredited professional. Other personal
through a policy of redistribution examplesincome
of suchtaxtaxes.taking into
open economy is
professionals have been excluded consideration their nature and All these above changes would of
of income and wealth. The equity 1 to be legislated and
from these concessions as well type
The oftaxactivity
systemas is well.
also used to course, have
principle in taxation implies that
as other individuals earning increase theIncome
level of Tax
savings and S+M+1
passed for them to be legally
taxes should be imposed in Corporate
similar income. capital formation apart from effective.
where
protecting S= marginal propensity to save
principle. This has two (a) Bankinglocal
andindustries
financial from
dimensions: (a) horizontal equity, services, insurance industry
suchandas trading
import duties (including T= marginal rate of taxation
i.e., similar treatment of persons activities –
28%;
1511
No.
25
The above changes would involve

merely on their taxable income or 3. Whether having two separate
a number of complications:
tax. rates for the corporate sector
and individuals who have the
1) The small companies whose Concessions for SMEs for benefit of a high tax free
income is less than Rs. 5 manufacturers and service threshold, with a lower
million would now have to pay providers have been given on the maximum rate for the latter
at 17.5% from the current basis of turnover under Section who include traders,
concessionary rate of 12%. 59B of Amendment Act No. 8 of businessmen, professionals
This would increase the tax 2014 as follows: often earning very lucrative
burden of small and medium income, is again justifiable.
enterprises and a disincentive Year Turnover Rate Differentiation of maximum
for SMEs; 2011/12 – 13 < Rs. 300 million 10% marginal rates of tax for
individuals and companies can
2) The overall income tax rate on lead to unforeseen
2013/14 < Rs. 500 million 10%
most big businesses other distortions of economic
than those activities (finance, behaviour. Earlier the tax
insurance, trading etc.) would 2014/15 < Rs. 750 million 12% system had one rate of 35%
now decline from 28% to for all with a reasonable
17.5%. The corporate rate in Considering these factors in threshold for individuals.
India is 34% and in relation to the rate structure, the
Malaysia 24%. This would following issues need These are some of the issues
lead to a decline in corporate examination: that need examination and
income tax by a considerable remedial action in the present
amount, which would be 1. Whether the reduction in the context.
known only at the end of the tax rate from 35% prevailing
assessment year 2016/17; earlier is justifiable considering
the low tax/GDP ratio and the
3) For personal taxation, having need to raise tax revenue and
10.6 The Laffer Curve
different rates based on nature increase the direct tax ratio. The basic theory and principle
and activity and income would In this connection, it may be that underlies the advocacy of a
involve complication in relevant to mention that in the low tax regime and low rates of
calculation of tax payable by 1990 Presidential Taxation tax is based on supply side
individuals; Commission it was decided economics. While the Keynsian
not to lower the income tax policy of demand management is
4) For businesses it would rate below 35% and it was the based on the proposition that the
involve keeping separate IMF through its representative level of aggregate demand
accounting records on the and advisor that was determines the level of national
nature of activities carried vehemently opposed to any income i.e., that demand creates
on by a business, while for further reduction in the rate; supply, the supply side
the tax administration it would
economics on the other hand,
involve complicated auditing 2. Whether to have one standard
emphasizes the conditions
and monitoring processes. for the corporate sector
governing supply such as the
(except perhaps liquor,
Considering all these availability, cost and quality of
tobacco and gambling) instead
circumstances, there is a view resources which are considered
of multiple rates which
that it would be less complicated the long-term determinants of
complicate the system, leads
and more effective to have a national income and prices.
to reduction in revenue,
uniform rate of corporate tax encourages tax avoidance and A proposition that characterizes
rather than taxing them on size complicates the administrative supply side economics is that the
and form or the nature of their system. Any concessions for rates of direct taxation have a
activity, except in exceptional desirable institutions and major influence upon aggregate
cases. Relief for SMEs could be sectors should be given supply through their effects upon
given in other forms rather than through other tax provisions the incentive to work. According
and other means;
16
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
to supply side economists like
Arthur Laffer, Jude Wanniski and Chart 02 : The Laffer Curve
others, high taxation acts as a
disincentive to work because if
A country’s
marginal tax taxation
rates aresystem
high, the reports have been released (Chairman H.S. Wanasinghe
individual is likely underlying
and fiscal policy it,
to either forego from time to time since 1915 and Secretary D.D.M.
opportunities to increase of income
other when Sri Lanka’s (then Waidyasekera) and the
macro-economic
through additionalindices
effort orsuch
resort Ceylon’s) tax system consisted Presidential Commission on
as economic growth, public
to the informal sector (the “black only of Import, Excise and Taxation of 2009 (Chairman
debt, fiscal todeficit
economy”) avoidand inflation
paying taxes. Stamp Duties followed by Prof. W.D. Lakshman and
The Laffer
pattern Curve indicates
of resource the
allocation, a whole lot of other taxes such Apart from these, a number of
effect
income of distribution
tax rates onand government as Profit Tax, Excess Profits other reports include the Woods
revenue.
economic Briefly,
stability.theHence
proposition Duty, Estate Duty, Capital Commission (1926), Huxham
of
periodically, the fiscal its
the Laffer Curve as starting
policy Gains Tax, Land Tax, Wealth, Report (1929), Downs Report
point is the
and the tax simple
structure,notion that tax
including Expenditure and Gift Taxes, (1955), Kaldor Report (1960)
revenue is zero if the
its administrative tax rate is
mechanism etc. levied and abolished from and Cox Report (1986) among
either zero subject
has been or 100%, to with a time to time. Some of these others.
smooth relationship
examination and proposals betweenforthe important commissions
rates and taxinrevenues
modification order to achieve consisted of the Taxation All these stressed the
connecting these twoin polar
its basic objectives relation Commission of 1955 (Chairman importance of developing a
points. The existencepolicies
to the government’s of such a K.R.K. Menon and Secretary S. rational, consistent, efficient
relationship
and objectives suggests
prevalentthatatif the
tax Sittampalam), Taxation Inquiry and simple tax system in order
Studies of selected countries also
rates
time. are sufficiently high, the Commission of 1968 (Chairman
seemed to indicate that those
10.7 Relevant
to achieve its objectives Reforms
and
“prohibitive range”, then a A.G. Ranasinha and Secretary functions.
that imposed a lower effective Considering all the factors
In this connection
reduction in tax rates a number
could lead of A.G. Jegasothy), Presidential
average tax burden achieved discussed above in respect of
commissions,
to an increase committees
in tax revenues. and Taxation Commission of 1990
substantially higher rates of measures to reverse the declining
The Laffer Curve analysis leads to growth in GDP than did their more tax revenue/GDP ratio including
the followin conclusions:

highly taxed counterparts. measures relating to tax
incentives, broadening the tax
• High rates of taxation act as a The Laffer Curve, however, has base and coverage, revising the
disincentive to work and thus had its critics like Paul W. allowable expenses in computing
reduce output and McCraken, Paul Krugman, Robert adjusted assessable
The functions of a tax system in similar circumstances, and (b) cesses), Value Addedand Taxtaxable
(VAT)
employment; Lekachman and John Kenneth profit, qualifying payments, tax
Galbraith. They have questioned free allowances and tax rates, it
• An increase in tax rates does the assumptions and theory appears necessary to create
system is to raise revenue for the taxable capacity. Thirdly, the management to eliminate or a
not always necessarily lead to behind the Laffer Curve and new income tax code to generate
increased revenue. There is a proved that it is not as scientific
expenditure as well as for local for social purposes such as adequate
tendenciesincome
in the tax revenue. In
economy.
crucial point (point E in chart) as it appears. The supply side
authorities and similar public discouraging certain activities this
Taxation reduces the effectIMF
connection, the latest of the
beyond which an increase in cuts of the 1980s do not appear Mission
bodies. Its efficiency is therefore which are considered undesirable. multiplierinand
2016soled canbybe Todd
used to
tax rates leads to decreasing to have raised work efforts or
primarily judged by whether this Excise duties on liquor and Schneider has made
dampen upswings in an in-depth
a trade
revenue and national income. saving and they unquestionably
function is performed adequately tobacco, the Special Excises on analysis
cycle. of the entire situation
increased the deficit. Empirical including the increasingly difficult
• There
and satisfactorily.
are alwaysThetwosecond
rates luxury and semi-luxury items, the
studies carried out in two
function is to reduce inequalities Betting and Gaming Levy are external
The sizeenvironment,
of the multiplier the inimpact
an
available (A and B) which can countries (Jamaica and India)
through a policy of redistribution examples of such taxes. of domestic
open economy is policies including
produce the same total tax where tax changes relevant to the
of income and wealth. Theandequity fiscal deficits, public debt, and
revenue, one a higher Laffer Curve had isbeen 1
principle in taxation implies that The tax system also used to balance of payment position, real
another, a lower rate. implemented have also concluded S+M+1
taxes should be imposed in increase the level of savings and GDP growth, inflation and
Government, therefore need that the assertion that tax
capital formation apart from where administration and has
revenue
accordance with thechoose
not necessarily ability to pay
a high reduction
protectingwould
local lead to revenue
industries from S= marginal
made some farpropensity
reaching to save
rate to achieve the required increases should at best be
foreign competition through levies M= marginal propensity
recommendations to import
to improve the
dimensions:
quantum (a) horizontal equity,
of revenue. treated
such aswith caution
import (Ebrill,
duties 1987).
(including T= marginal
situation. rate of taxation
1711
No.
25
Key objectives underlying its

It has also recommended the 5) Inland Revenue Act No. 38 of
reform agenda include:
D. D. M. WAIDYASEKERA introduction of a new Inland 2000 which had 6 mendments;
Revenue Act. The introduction of and
i) Improving revenue Income Tax was made under the 6) Inland Revenue Act No. 10 of
administration and tax policy; Income Tax Ordinance No. 2 of 2006 which up to now had 8
1932 which was amended 17 amendments and one more
ii) Strengthening public financial times between 1932 and 1949. pending on the 2016 Budget
management; Succeeding legislation include: proposals.
iii) State enterprise reforms; 1) Act No. 1 of 1949 which was As Todd Schneider
amended 6 times; recommended, it is time to
iv) Standard reforms to enable a
2) Act No. 3 of 1956; introduce a new Inland Revenue
more outward-looking
3) The Inland Revenue Act No. 4 Act incorporating the necessary
economy, deeper foreign
of 1963 which has 12 revisions and changes needed to
exchange markets and
amendments; improve tax collection and tax
strengthen financial sector
4) Inland Revenue Act No. 28 of revenue in the context of current
supervision.
1979 which was amended 19 fiscal and economic policy.
times;
11. Provincial and Local Government Revenue

Recent tax and fiscal changes of List I of the Ninth Schedule. the Central Government consist-
have had an impact not only on They account for only 4% of the ing basically of three types, Block
national but also on provincial and country’s total revenue and less Grants, Criteria Based Grants and
local taxation as well. The than 3% of tax revenue or 0.6% Province Specific Development
revenue sources devolved on of GDP. Expenditure however is Grants (PSDG) apart from grants
Provincial Councils under the around 11% of Central Govern- for special projects.
Thirteenth Amendment are ment expenditure or 2.6% of GDP.
contained in items 36.1 to 36.20 The deficit is met by grants from
Table 7
Budget Outturn for Provincial Councils 2012 - 2015, Rs. Million
Item 2012 2013 2014 2015
Total Revenue 49,235 49,648 59,133 66,082
Tax Revenue 41,657 42,569 52,569 59,482
Non Tax Revenue 7,578 7,079 6,564 6,600
Total Expenditure 161,341 185,241 216,824 267,696
Recurrent Expenditure 139,121 156,066 172,131 215,836
o/w Personal Emoluments 108,246 117,806 131,162 168,760
Capital Expenditure 22,220 29,175 44,693 52,310
Central Government Transfer 112,106 135,593 157,691 201,614
Block Grants 91,892 108,801 126,144 167,551
Criteria Based Grants 2,861 2,264 3,392 3,753
Province Specific Development Grants 5,901 6,429 8,343 13,345
Foreign Grants for Special Projects 11,452 18,100 19,812 16,965
18
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
Of the revenue sources, the most This abolition has led to a number Appendix in the Salgado Report
important was the provincial of problems. The turnover tax of on “Financial Devolution to the
turnover tax on wholesale and the Provincial Councils had Provinces”.
retail sales which produced legally no threshold for its
A country’s
around 55% taxation system
of provincial revenue reports have been
implementation while released
the (Chairman
In respect ofH.S. localWanasinghe
government,
and was
fiscalthepolicy
mainstay of theit,
underlying coverage of the NBT (1/31915
from time to time since of andrecent
the Secretary
fiscalD.D.M.
and tax changes
is a major revenue
provincial determinant of other
system. This when is
which Srinow
Lanka’s (then to the
transferred Waidyasekera)
have however had andlittle
the impact on
macro-economic
was abolished from indices
1 Januarysuch Ceylon’s) Councils)
Provincial tax systemis consisted
Rs. 3.75 Presidential
local government Commission
revenue.onThe
as
2011 economic
by Fiscalgrowth,
Policy public
Circular No. only ofper
million Import,
quarter.ExciseThisand
has also Taxation
local of 2009 (Chairman
government system
debt, fiscal deficit and
01/2010 resulting in a drastic inflation Stamp Duties followed
had an adverse administrative by Prof. W.D. Lakshman
constitutes 335 institutionsand
as well asofattaining
reduction provinciala proper
revenue. It ExportonDuties,
effect Income Tax
the provincial and
revenue Secretary of
consisting P.D.K. Fernando).
23 Municipal
pattern of resource
was replaced allocation,
by a system of a whole lotwhere
manpower of other overtaxes such
400 are Apart from
Councils, 41these,
UrbanaCouncils
number of and
income
transfersdistribution and
from the centre as Profit Tax,
employed in the Excess
revenue Profits otherPradesheeya
271 reports include the Woods
Sabhas.
economic
consisting stability.
of 100% Hence
Stamp Duty Duty, Estate Duty,
departments with their work Capital Commission
Overall 60% of (1926), Huxhamis
their revenue
periodically,
collection, 70% the of
fiscal
motor policy
vehicle Gains Tax,diminished
drastically Land Tax, Wealth,
and a loss Report (1929), sources
self-generated Downs Reportconsisting
and the tax fees
registration structure,
and 33including
1/3
% of Expenditure
of morale all and round. Gift Taxes, (1955),ofKaldor
mainly such Report
items as (1960)
property
its
the administrative
Nation Buildingmechanism
Tax (NBT). etc. levied and abolished from and acreage
tax, Cox Report tax, (1986)
rents, among
trade and
has
The been subject
abolition of theto turnover tax Another issue Some
time to time. is the legality
of theseof its others. licences, refund of
business
examination
has narrowedand the proposals
base and for abolition
important commissionstransfer of
as well as the stamp duty and court fees from
modification
coverage of in theorder to achieve
provincial other revenue
consisted of theto the provinces. It
Taxation All these Councils
Provincial stressed the and fees for
its basic This
system. objectives in relation
is enhanced by the has been abolished
Commission of 1955by(Chairman
a Fiscal importanceRecent
services. of developing a
fiscal changes
fact that under Section 4.3 of the Policy
K.R.K.Circular
Menon (No. and 01/2010)
SecretarybyS. rational,
have had consistent,
little impactefficient
on local
and
Ninthobjectives
Schedule,prevalent
the stamp at duties
the the Treasury while
Sittampalam), any changes
Taxation Inquiry to and simple
revenue thoughtax system in order
their revenue
time.
on immovable property levied provisions
Commission in of
the1968Thirteenth
(Chairman to achieve
system mayits objectives
undergo and
changes
under Section 36.5 of the Amendment
A.G. Ranasinha is a andconstitutional
Secretary functions.
with the implementation of the
In this connection
Provincial a number
List as well as court of process involving Presidential
A.G. Jegasothy), parliamentary Grama Rajjaya concept involving
commissions, committees
fees, have legally to be and approval
Taxation (by probably aof2/3
Commission 1990 the creation of 2500 new units at
transferred to the local majority). This issue has been grass roots level now being
government authorities and hence examined in the Attorney planned and considered by the

not a revenue resource for the
Provincial Council.
General’s Ruling dated 08 August
1989 as appearing in the
government.
12. Capital Gains Taxation

Taxation
governmentofforcapital
its publicgains was 1979
fiscal in addition
system included
is also employed such capital
reduce gains shouldorbedeflationary
inflationary treated
introduced
expenditure in as Sri
wellLanka in 1959
as for local transactions as the such
for social purposes surrender
as or differently
tendenciesfrom other
in the forms of
economy.
giving effectand
authorities to a similar
tax reform proposal
public relinquishment of any activities
discouraging certain right in any income.
Taxation They
reducesgenerally accrue
the effect to
of the
of Prof. Nicholas
bodies. Kaldor,
Its efficiency but since
is therefore property
which are and the redemption
considered of any
undesirable. the property
multiplier andowning
so canclass in to
be used
then has undergone
primarily judged by several
whetherchanges
this shares, debentures
Excise duties on liquor andor other society
dampenand is concentrated
upswings in a trade
with capital
function gains on death
is performed or on gift
adequately obligations
tobacco, the as Special
giving rise to capital
Excises on largely
cycle. in higher income brackets.
being abolished inThe
and satisfactorily. 1977.secondCapital gains.
luxury and semi-luxury items, the Capital gains taxation also tends
gains
functionbyisdefinition
to reducearise upon the
inequalities Betting and Gaming Levy are The
to size of the
minimize the multiplier in anfor
opportunities
sale,
throughexchange
a policyorofother disposition
redistribution The rationale
examples underlying
of such taxes.the tax
openavoidance.
economy is
of
of a capitaland
income asset for more
wealth. The than
equityits imposition of capital gains tax is
1
purchase price or
principle in taxation value
implies that on that
The realized gains
tax system is are
alsoequivalent
used to Capital gains can be taxed either
to incomethe
increase andlevel
provide the
of savings and S+M+1
on an accrual basis or on a
acquisition,
taxes should be less any costs
imposed in of
buying and selling andability
of improving recipient with just apart
capital formation as muchfrom where
realization basis. They are
accordance with the to pay
such asset.ThisCapital assets include economic
protectingpower over goodsfrom
local industries and S= marginal
normally taxedpropensity to save
on the latter basis.
principle. has two
land and buildings, machinery and services as any other
foreign competition form oflevies
through M= marginal propensity to
In Sri Lanka capital gains haveimport
equipment income. Under this
such as import dutiesperspective,
(including T= marginal
been ratetheir
taxed upon of taxation
realization
i.e., similar and stocks ofand
treatment shares.
persons
The Inland Revenue Act No. 28 of there is no compelling reason why as from 1 April 1977. In respect of
1911
No.
25
immovable property acquired

personal or company rate. Where Inland Revenue Department for
before that date, the value for
the property was held for more valuation, valuation problems
purposes of capital gains taxation than 2 years, the rates varied both in respect of capital gains
was deemed to be the value as at from 25% to 5%, with properties and stamp duty are referred to the
31 March 1977. Section 14 of the over 25 years being nil. The Valuation Department for a
Inland Revenue Act No. 28 of differential rate structure was realistic valuation. The Valuation
1979 also provided exemptions on intended to distinguish between Department however was not fully
capital gains arising from certain short-term gains and long-term equipped to meet these
transactions of which the most nominal gains due to inflation. requirements speedily especially
important related to the sale of at regional level outside Colombo,
residential houses. With regard to There are however a number of leading to both revenue and
share transactions, capital gains problems in relation to capital administrative problems.
were exempted from November gains taxation. Issues such as Improvements have been made in
1979 for a period of 7 years with “bunching”, lock-in effect, part the Valuation Department since
the intention of broad-basing disposal, etc. can arise in capital but further improvements are
companies. gains taxation apart from needed if capital gains taxation is
distortions caused by inflation. to be reinstated. In these
Capital losses were deductible Capital gains should be circumstances, taxation of capital
only against capital gains with formulated in such a way that it gains was abolished in 2002
provisions for allowing any would have a minimal impact on under Section 3 of the
unabsorbed losses to be carried investment and business. Amendment Act No. 10 of 2002
forward for set off against future However, the main issue is and there has been no capital
gains. administrative arising in respect gains taxation since. However,
of valuation such as over- the government has in June 2016
The rates of tax on capital gains
valuation at time of purchase and again decided to re-introduce
varied with the period of under-valuation at time of sale, capital gains tax at 10% and
ownership of property. Where the
leading to the increase in the legislation in this respect is
property was held for not more
number of tax appeals. Since expected to be introduced shortly.
than 2 years the gains was there is no separate unit in the
subject to tax at the normal
13. Tax Evasion

There is no doubt that the large declaration or under-declaration of no legal definition of “tax evasion”
incidence of tax evasion in Sri income and assets, over- in any tax statute. While Section
Lanka is a cause of great statement of expenditure or 163 of the Inland Revenue Act No.
concern. While the most exemptions, fictitious expenses, 10 of 2006 permits the Assessor
immediate concern is the loss of transfer pricing, concealment of to make assessments or
revenue, in the long run such sales, stocks and debtors, additional assessments on
evasion tends to reduce the built- fictitious creditors, etc. Other grounds of fraud, evasion or wilful
in elasticity of the tax system methods resorted to include the neglect, the Interpretation Section
and to the extent that the evaded formation of private companies, 217 does not define any of these
income is spent on goods and fictitious partnerships, formation concepts. Recourse to judicial
services, generates inflationary of private trusts and family trusts, dicta do not provide an
pressure and raises the prices of leading to non-declaration or acceptable definition either.
real property. It also distorts the limited declaration of dividends,
fundamental objectives of a fair over-stated cash in hand, bank Tax evasion is not confined to
and equitable tax system. overdrafts and bank loans, fraud alone, it also includes Wilful
drawings, etc. Default as well as Wilful
Tax evasion can take diverse Negligence. However, a
forms. These include non- All these involve a number of distinction has to be made
issues. In the first place, there is
20
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction 13.2 Withholding

between a Fraudulent Return and In this connection, a number of
an Incorrect Return where tax measures have been taken to
evasion as such is attributable curb or reduce the incidence of Taxes
only to the former. Mere omission tax evasion. Statutorily a number The Withholding Tax system in
A country’s
due taxation
to oversight system a
or construing reports
of have have
provisions been been released (Chairman H.S. Wanasinghe
particular is an effective
tax statute in a particular way it, is from time to time
incorporated in the tax Acts since 1915such and Secretary D.D.M.
administrative method of helping
is aan
not major determinant
offence. It must of
beother when
as Sri Lanka’s
provisions relating(thento transfer Waidyasekera) and the
to minimize tax evasion and is a
macro-economic
deliberately made indices
to avoidsuch
tax or Ceylon’s)
pricing andtax thinsystem consisted
capitalization, Presidential Commission on
path to effective tax
as economic growth,
mislead a tax officer. public only of Import, Excise
improving filing and reporting and Taxation of 2009 (Chairman
administration. It is especially
debt, fiscal deficit and inflation Stamp Duties
compliance, extension offollowed bythe Prof. W.D. Lakshman and
effective in areas where it is
as well as attaining a proper Export Duties, TaxIncome
System,Tax and Secretary P.D.K. Fernando).
13.1 Tax Avoidance
pattern of resource allocation,
Withholding
a whole lot of otherparticularly
more
taxes such of
difficult or uneconomic to detect
Apart from these, a number of
extensive auditing, evasion if payments were not
income distribution and as Profit
large Tax, Excess
taxpayers, Profits
and information other reports include the Woods
Tax Evasion has also to be taxed at source.
economic stability. Hence Duty, Estate Duty,
reporting among other provisions.Capital Commission (1926), Huxham
distinguished from Tax Avoidance.
periodically, the fiscal policy Gains Tax,while
However, Landcombating
Tax, Wealth, tax Report (1929), Downs Report
Tax avoidance has been defined Withholding tax on dividends and
and the tax structure, including Expenditure
evasion and Gift
provisions likeTaxes,
transfer (1955), Kaldor Report (1960)
as the “art of dodging without on certain payments to persons
its administrative mechanism etc. levied
pricing, thinand abolished from
capitalization, etc., and Cox Report (1986) among
actually breaking the law”. The outside Sri Lanka on interest,
has been subject to time to time.
have been incorporated Some of these
in the others.
legal definition between the two rent, ground rent, royalty or
examination and proposals for important
taxing statute,commissions
actual effective annuity existed in the tax statute
has been enumerated in the
modification in order to achieve consisted of theofTaxation
implementation these All these stressed the
classic tax case of the Duke of from early times. These were
its basic objectives in relation Commission of
provisions seems wanting. 1955 (Chairman importance of developing a
Westminster v CIR 19 TC 490, subsequently expanded to
where Lord Tomlins in his deduction under the PAYE
and objectives prevalent at the Further, there has
Sittampalam), to be Inquiry
Taxation a more and simple tax system in order
judgement made the celebrated scheme, interest on deposits
time. stepped
Commission up effort
of 1968 to deter tax
dictum “Every man is entitled if paid by banks and financial
evasion such as and
A.G. Ranasinha increasing
Secretary the functions.
he can to order his affairs so that institutions, payments to foreign
In this connection a number of audit
A.G. frequency
Jegasothy), and audit
Presidential
the tax attaching under the entertainers and artistes, profits
commissions, committees and thoroughness
Taxation Commission for upperoftax 1990
appropriate Acts is less than it on sale of gems, payments as
bracket taxpayers to ensure that rewards or share of fines to
otherwise would be”. However, with
most of the tax evaders incur informants, lottery prizes and

ingenious tax avoidance
some risk of being discovered. It winnings from gambling and
proliferating, distinctions were
also includes implementing an betting.
subsequently made between (a)
effective programme to detect
Evasion; (b) Abusive or Blatant
new taxpayers with the focus on A further important provision was
Tax
The Avoidance;
functions of(c)a Tax
tax Avoidance;
system in similar circumstances, andto (b) cesses), Value ofAdded Tax (VAT)
areas where there is reason the application withholding tax
and (d) Mitigation.
involve several aspects. First, the vertical equity, i.e.,
believe that significant net different on “specified fees” paidisbyalso
and excises. Taxation
primary function of a taxation treatmentcould
revenues of persons
be gained. with different
This used as an
“specified instrument
persons” underof Chapter
demand
It is difficult to estimate the
system is to raise revenue for the
extent of tax evasion or black
taxable capacity.
involves a more effective systemThirdly, the XVII of the Inland RevenueorAct
management to eliminate
government for its public fiscal
of system
securing andis analyzing
also employed reduce
No. 10 ofinflationary or deflationary
2006. “Specified fees”
money in Sri Lanka. In 1970 the
expenditure as well as for local for social purposes
information from various such sources,
as tendencies in the economy.
were defined under Section 153
Wanchoo Committee estimated it
authorities and similar public discouraging certain
sharing of such information with activities Taxation
as amounts reduces the 50,000
over Rs. effect ofper
the
at 16.3% of GDP while in 1987
bodies. Its efficiency is therefore which
the are considered
relevant units and undesirable.
branches multiplier and so can be
month or Rs. 500,000 per annum used to
the National Institute of Public
primarily judged by whether this Excisethe
within duties
IRD on as liquor
well asand co- dampen
and upswings
included in a trade
any commission,
Finance and Policy estimated the
function is performed adequately ordination with other revenue on
tobacco, the Special Excises cycle.
brokerage or other sums of like
figure of Black Money at Rs.
departments. nature paid in the course of any
367,785 crore or 21% of GDP. In The size of the multiplier in an
function is to reduce inequalities Betting and Gaming Levy are business, profession or vocation,
1995 Dr. H.N.S. Karunatilake a
through a policy of redistribution examples of such taxes.
All these processes appear to be openpaid
fees economy is
on construction work or
former Governor of the Central
of income and wealth. The equity inadequate in the current set-up. articles on 1a contract basis
Bank estimated it at around 10% The tax theresystem is also
principle in taxation implies that Further, should alsoused
be ato through tender
of GNP. There is a great variance S+M+1or quotation. It
taxes should be imposed in more vigorous application of and
increase the level of savings
also included rent, lease rent or
between estimates and there are capital formation apart from where
accordance with the ability to pay pecuniary penalties combined other paymentpropensity
for the usetoorsave
no verifiable data bases to S= marginal
principle. This has two with prosecutions in a givenfrom
protecting local industries
occupation of any specified land
provide a reliable estimate. foreign competition through M= marginal propensity to import
dimensions: (a) horizontal equity, number of cases each year inlevies or building.
However, there is no doubt that such as import duties (including T= marginal rate of taxation
i.e., similar treatment of persons view of their deterrent effect.
tax evasion and black money is
rampant in the country.
2111
No.
25
Administratively, these provisions

effectiveness of tax from 1964 to 2002. However, all
constituted a very effective
administration and should be re- these amnesties have not
method wide in scope in detecting incorporated in the new Tax Act. produced the expected results.
tax evaders, increasing the The following Table gives the
coverage of taxpayers and tax 13.3 Tax Amnesties results of the tax amnesties from
revenue, and combating tax 1964 to 2002.
Another policy response that has
evasion. However, from 1 April
been used in reducing tax Apart from the above tax
2011 these provisions were
evasion and black money is the amnesties there was the
removed thereby diluting the
grant of tax and foreign exchange demonetization exercise of 1970.
administrative means and
amnesties. In Sri Lanka, 11 such Even this was a relative failure
tax amnesties have been granted where although an additional tax
Table 8 collection of Rs. 100 million was
Results of Tax Amnesties since 1964 expected, the actual collection
was only Rs. 13 million. (ESCAP,
Year No. of Declarants Amount Recovered
1983).
(Rs. Million)
1964 78 21
1965 595 38
1978 160 30
1989 9 4
1990 n-a 0.96
1992 n-a n-a
1993 n-a n-a
1997 100 285
1998 7 223
2002 592 n-a

Source: Compiled from Minister of Finance K.N. Choksy’s statement in Parliament,
Hansard 19 February 2003, and keynote address to the International Fiscal Association
(Sri Lanka Branch), 29 May 2003.
14. The VAT Debate

In the early days, consumption under the NSL Act No. 52 of 1991 transparent, thereby enabling the
taxes in Sri Lanka consisted which was a turnover tax levied tax content of a price to be
mainly of customs duties and on gross sales. These two levies known. Above all, a VAT system
excises. In 1963 the Business were amalgamated in August eliminates the cascading effects
Turnover Tax (BTT) was 2002 and termed a VAT under the of a turnover tax and through its
introduced by the Finance Act No. VAT Act No. 14 of 2002. in-built, self-enforcing and cross-
11 of 1963 and implemented from checking mechanism is more
1.1.1964. In 1981 the BTT was There is no doubt that in principle, suitable for administrative
revised by the Turnover Tax Act a VAT system is superior to other purposes. For these reasons,
No. 69 of 1981 which was virtually forms of sales taxation. It over 160 countries have a VAT
a partial VAT. The GST Act No. 34 achieves neutrality between system in some form or other.
of 1996 introduced a more fuller methods of production and
value added system but was between propensities to save and In spite of these advantages
implemented only from 1.4.1998 consume. It permits lower and however, the VAT has also
along with another tax called the few rates, minimizes distortion in several weaknesses and defects.
National Security Levy (NSL), resource allocation and is Some of these are inherent in the
22
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
VAT system itself, such as its of its estimates, the only was Rs. 500,000 per quarter or
design, base, coverage and rates. exception being in 2010 where the Rs. 1.8 million per annum. This
Others are associated with collection was Rs. 219 billion in has increased from 1.1.2009 to
practical and administrative relation to the estimate of Rs. 206 Rs. 650,000 per quarter or Rs. 2.5
A country’s
problems, andtaxation system
still others with the reportsInhave
billion. 2014been released was
the estimate (Chairman
million H.S. Wanasinghe
per annum. From 1.1.2013 it
and fiscal policy
context in which VAT was underlying it, Rs. 303 billion while the 1915
from time to time since actual and Secretary D.D.M.
was increased to Rs. 3 million per
implemented, its timing of other
and when Sri was
collection Lanka’s
Rs. (then
275 billion, and Waidyasekera)
quarter or Rs. 12and the per
million
macro-economic
effectiveness and indices such
its relationship Ceylon’s)
in 2015 thetax systemwas
estimate consisted
Rs. 296 Presidential
annum, and wasCommission on
further increased
as economic
with budgetarygrowth,
goals andpublic
medium only ofand
billion Import, Excisecollection
the actual and Taxation
from 1.1.2016of 2009
under (Chairman
the VAT
debt, strategy
term fiscal deficit and inflation
of governments. Stamp
only Rs.Duties followed by
219 billion. Prof. W.D. Lakshman
Amendment Act No. 11and of 2015 to
as well as attaining a proper Export Duties, Income Tax and Secretary P.D.K.
Rs. 3.75 million per Fernando).
quarter or Rs.
In terms of revenue productivity
In termsofofresource
pattern revenue,allocation,
the VAT has a whole lot of other taxes such 15Apart from
million these,
per year. aFrom
number of
2 May
where the standard rate is 1
not shown
income much improvement
distribution and as Profit Tax, Excess Profits otherit reports
2016 include
was revised to the
Rs. Woods
3
(perfect productivity) i.e., what
economic stability. Hence Duty, Estate Duty, Capital Commission
million (1926),This
per quarter. Huxham
regular
periodically,
Table 9 the fiscal policy Gains Tax, Land Tax, Wealth, Report (1929), Downs
increase of the threshold Report
has
and Revenue
VAT the tax structure,
Performanceincluding Expenditure and Gift Taxes,
2002 - 2015 (1955), Kaldor
reduced Report and
the coverage (1960)
number
its administrative mechanism etc. levied and abolished from ofand Cox Report
taxpayers (1986)in among
resulting a decline
Year Estimate Rs. Actual Rs. Shortfall Rs.
has been subject to time to time. Some of these inothers.
revenue.
examination and proposals Billion
for Billion
important commissions Billion
modification
2002 in order
87 to achieve consisted of the Taxation
66 -21 All these stressed the
its basic objectives in relation Commission of 1955 (Chairman 14.2 Exemptions
importance of developing a
2003 120 97 -23
to the government’s policies K.R.K. Menon and Secretary S. rational,
Unlike consistent,like
in countries efficient
New
2004 124 120 -4 and simple tax system in order
and objectives prevalent at the Sittampalam), Taxation Inquiry Zealand, Singapore, Canada etc.
2005
time. 142 138 -4
Commission of 1968 (Chairman to achieve its objectives
where the base of the tax is veryand
2006 174 A.G. Ranasinha and -10
164 Secretary functions.
broad with few exemptions, in Sri
In this connection a number of A.G. Jegasothy), Presidential Lanka under the First Schedule of
2007 202 187 -15
commissions, committees and Taxation Commission of 1990 the VAT Act, a large number of
2008 248 203 -45
goods and commodities as well
2009 185 171 -14
as services have been exempted

2010
2011
206
238
219
215
+13
-23
from the tax. These include items
of mass consumption as well as
2012 264 229 -35 services and items considered as
incentives for several socio-
2013functions of283
The a tax system 250 -33 and (b)
in similar circumstances, cesses), Value Added Tax (VAT)
economic sectors. This has
involve
2014 several 303 aspects. First, the 275vertical equity, i.e., different
-28 and excises. Taxation is also
considerably narrowed the base
2015 296 219 -77 and scope of VAT, retained the
Source : Central Bank Annual Reports 2015 and various years. cascading effect on such goods
and led to the necessity to
over the Turnover Tax or GST. The every 1% raise of VAT rate in impose higher rates.
turnover tax has been a regular terms of VAT revenue or GDP, Sri
bodies. Its efficiency is therefore which are considered undesirable. multiplieradand
Further, hocsochanges
can be used have to
and reliable source of income Lanka’s Productivity Rate is
primarily judged by whether this Excise duties on liquor and dampen
been madeupswings in aoftrade
in respect
without much complexity or need 0.315. This may be compared
exempted items and services
for manipulation. The VAT has not with countries such as Vietnam
and satisfactorily. The second luxury and semi-luxury items, the from time to time. For instance,
shown such regularity and has (0.562), Nepal (0.398), Indonesia
been characterized by volatility (0.353) and Singapore under Amendment Act No. 11 of
through a policy of redistribution examples of such taxes. open VAT
2015, economy is on certain
liability
and the need for complex (0.415).There are a number of
of income and wealth. The equity motor vehicles
1 imported and
manipulation to prevent revenue reasons for the low performance
erosion in the form of input credit of the VAT in Sri Lanka. locally manufactured
S+M+1 was
and refunds. An analysis of the removed from October 25, 2014,
accordance with the ability to pay cigarettes and liquor from October
VAT performance from its S= marginal propensity to save
protecting local industries from
inception in 2002 to 2015 from the 14.1 Threshold 25, 2014 and ethyl alcohol from 1
M= marginal propensity to import
dimensions: (a) horizontal equity, foreign competition through levies
Central Bank Annual Reports, January 2015. These however
suchthreshold
The as importforduties (including
registration of a T= marginal rate of taxation
i.e., similar treatment of persons again changed in June 2016 when
shows that every year the actual
person liable to VAT from 1.8.2002 certain exempted sectors have
revenue collected has fallen short
2311
No.
25
been made liable to VAT such as

of services consumed outside Sri It will be seen that in the early
the telecommunication sector,
Lanka. Further, it has years, refunds averaged around
health care services (with some incorporated a key clause called 6% of gross VAT collection and in
exemptions), etc. Such ad hoc “international transportation the manufacturing sector about
changes and lack of consistency (including trans-shipment) of 1/3 of gross manufacturing
lead to confusion among goods and passengers” whose receipts went out as refunds.
taxpayers and the general public interpretation is in fact very wide. Steps have been taken to
apart from variations in tax All these zero rated items have minimize these refunds through
revenue. led to a large refund element stricter administrative monitoring
which has adversely affected net and controls such as by the
14.3 Zero Rating revenue collection. implementation of the Deferment
Scheme and in 2011 by the
Zero rating is a mechanism Of the gross receipts, a Simplified VAT scheme (SVAT).
adopted in a VAT system to considerable element goes out as This scheme minimizes VAT
relieve certain goods and refunds especially in sectors refunds for VAT registered
services from the incidence of such as leasing, construction, persons who are engaged in
VAT. Unlike exemptions however, exports, garments, manufacturing exports and special projects by
zero rating enables a supplier of and the hotel sector. Table 10 the system of issuing credit
zero rated goods to reclaim all the gives the amount of refunds in vouchers. Refunds both overall
input taxes he paid on his relation to gross collection and and in manufacturing have since
purchases. Section 7 of the VAT manufacturing for a selected been reduced from 2011 onwards
Act includes not only exports number of years. as the figures above indicate.
which are normally so in a
destination principled VAT However, refunds under a VAT
system, but also includes a host system cannot be entirely
eliminated and the tax
administration has to manage it in
a proper and effective manner.
Table 10 Moreover, refunds have to be paid
VAT Refunds 2005 - 2014 (Rs. Million)
within one month and interest at
Year VAT Collection Refunds % 1% every month is due thereafter.
Zero rating and refunds have
2005 Gross 154,199 12,321 8%
therefore to be controlled carefully
Manufacturing 31,504 12,279 40% to prevent fraudulent requests for
2006 Gross 175,247 11,176 6% refunds.
Manufacturing 33,389 11,171 33%
2009 Gross 179,518 8,400 5%
2010 Gross 228,432 8,869 4% 14.4 Rates
Manufacturing 39,282 7,577 19% When the VAT system was first
introduced in 1998 in the form of a
2011 Gross 221,768 6,348 3%
GST, it was characterized by a
Manufacturing 37,423 4,598 12% single uniform rate of 12.5%. A
2012 Gross 207,805 3,149 1.5% single rate is best both from a
compliance and administrative
Manufacturing 39,789 1,302 3%
point of view. Multiple rates
2013 Gross 218,146 459 0.2% distort both producer and
2014 Gross 239,028 1,112 0.4% consumer choices and
complicates the system.
Manufacturing 46,174 732 1.6%
Source: Compiled from IRD Performance Reports, various years. In Sri Lanka, VAT rates have been
subject to ad hoc changes from
time to time. While the VAT Act
No. 14 of 2002 had originally two
24
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
positive rates of 10% and 20%, it leading to cost of credit and context of the crucial need to
was soon unified into a single rate affecting investment. enhance tax revenue and reverse
of 15% from January 2004. There the declining tax/GDP ratio.
was again a modification of rates 14.6 Wholesale and However, reducing the threshold
A country’s
whereby fromtaxation system
19.11.2004 there reports have been released (Chairman H.S. Wanasinghe
was a basic rate of 5%, a luxury it,
Retail Trade
from time to time since 1915
of small and medium wholesale
and Secretary D.D.M.
and retail traders creates many
is
ratea major
of 18%determinant
and a standard of other
rate of when Sri Lanka’s (then Waidyasekera) and the
practical problems for taxpayers
macro-economic indices
2005 such Ceylon’s) tax system Presidential Commission on
15% which were in Under Section 3 of theconsisted
VAT Act in keeping and maintaining
as economic growth,changedpublic only of Import, Excise Taxation of 2009 (Chairman
subsequently to 5%, No. 14 of 2002, VAT wasand not records of sales and purchases in
20% and 15%, respectively. and inflation In Stamp Duties followed by Prof. W.D. Lakshman and
charged on the wholesale and terms of VAT liable and exempt
as
2009 wellthe
assystem
attaining a proper
was again Export Duties, Income Tax and Secretary P.D.K. Fernando).
retail trading sector (unless they goods, zero rated goods etc. It
pattern
changedoftoresource
a singleallocation,
rate system a whole lot of other taxes such Apart from these, a number of
were manufacturers or importers also creates problems of
income distribution
of 12% which in 2015 was and assuch
Profitgoods)
Tax, Excess Profits other reports include the Woods
of and they were monitoring, inspections, auditing
economic
reduced tostability.
11% andHence from 2 May Duty, Estate Duty, Capital Commission (1926), Huxham
liable only to Business Turnover etc. for the tax administration as
periodically, the tofiscal
15%.policy Gains Tax,toLand Report (1929), Downs Report
2016 increased However, Tax (BTT) the Tax, Wealth,
Provincial well. In this context, it may have
and the taxtostructure,
according including
IMF estimates, in Expenditure and Gift Taxes, (1955), Kaldor Report (1960)
Councils under Section 36.1 of been more practical to have
its administrative mechanism etc.Ninth
leviedSchedule
and abolished and Cox Report (1986) among
order to be revenue neutral, the the of the from increased the tax rates while
has
VAT been
rate insubject
Sri Lankato should be time to time. Some of and
these others.
Thirteenth Amendment keeping the threshold intact
examination
around 17%. and proposals for important commissions
subsequently in 2011 to the NBT. without reducing it to too low
levels. In fact, even as early as
its basic objectives in relation Commission
With of 1955
the abolition (Chairman
of the provincial importance of developing a
14.5 Financial
to the government’s policies turnover tax in 2011, wholesaleS.
K.R.K. Menon and Secretary
1985, the IMF Mission headed by
rational, consistent, efficient
Carlos A. Aguirre when
Services
and retail tradeTaxation
was made Inquiry
liable and simple tax system in order
considering the introduction of
time. Commission
to VAT under of VAT 1968 (ChairmanAct
Amendment to achieve its objectives and
Due to the difficulty of computing VAT to Sri Lanka, recommended
A.G.17Ranasinha
No. of 2013. The andquarterly
Secretary functions.
value
In this added in theacase
connection number of of that “Small retail traders who
A.G. Jegasothy), Presidential
turnover applicable to VAT on
financial services
commissions, committees andsuch as usually keep inadequate or no
Taxation Commission
wholesale and retail trade of 1990
banking and insurance, most records of their activities could be
originally in 2013 was Rs. 500 excluded from the tax net” (IMF
countries exclude financial
million and in the process of

services from VAT. Such Report October 25, 1985, p. 15).
enlarging the VAT base and It is on this basis that Section 3
problems include disentangling
coverage, was reduced to Rs. 250 of the VAT Act No. 14 of 2002
the costs of intermediation, the
million in 2014 and Rs. 100 million excluded wholesale and retail
sensitivity of the sector to fine
per quarter in 2015. On 2 May trade (other thanAdded
thoseTax
of (VAT)
margins,
The the likelihood
functions of
of a tax system in similar circumstances, and (b) cesses), Value
2016 the threshold was manufacturers and importers)
encouraging offshore provision
involve several aspects. First, the of vertical equity, i.e., different and excises. Taxation is also
administratively reduced to Rs. 3 from
financial services and
primary function of a taxation the treatment of persons with different used VAT.
as an instrument of demand
million per quarter or Rs. 1 million
important
system role
is to finance
raise revenueplaysforin the taxable capacity. Thirdly, the management to eliminate or
per month which meant that VAT
the economy. In
government for its public 2014 leasing of fiscal system is also employed
was payable on liable goods and 14.7
reduce VAT Frauds
inflationary or deflationary
movable properties after
services on turnover over Rs. VAT is a tax that is susceptible to
25.10.2014 and
authorities was similar
included as
public discouraging certain activities Taxation reduces the effect of the
33,000 per day. Such frequent ad fraud and is common in many
financial Its
bodies. services
efficiencysubject to VAT.
is therefore which are considered undesirable. multiplier and so can be used to
hoc changes to the threshold as VAT countries. For instance, in
In Sri Lanka, financial services well as rates, lead to problems 2005 in Germany the “VAT
were exempted till 31.12.2002 but both to the taxpayers as well as carousel fraud” or “missing trader
from 1.1.2003 were included the tax administration. The latest intra-community fraud” amounted
under Chapter 111 A of the VAT proposal is to revise the threshold to 17.6 million Euros or 11% of
Act. However, the method of from Rs. 12 million to Rs. 50 Germany’s annual VAT revenue.
of income and wealth. The equity
computing was not the normal million per annum i.e., from Rs. In 2006 the1VAT fraud across
Output minus Input used in other 33,000 a day to Rs. 138,000 a Europe was
S+M+1estimated at a
sectors but the additive method day. Enlarging the coverage of massive
where Euro 23 billion. Frauds
accordance with the ability to pay capital formation apart from
of Net Profit plus Wages, under taxpayers including VAT payers have also been reported to
S= marginal propensity from
save
principle. This has two protecting local industries from
which method there is no and the base of the tax including Poland, Canada, Italy, New
M= marginal propensity to import
dimensions: (a) horizontal equity, foreign competition through levies
deduction for input taxes paid. VAT is a necessary ingredient in Zealand, UK rate
T= marginal etc. From goods it
of taxation
i.e., similar treatment of persons such as import duties (including
Hence, most banks tend to pass creating a more effective tax has recently moved into services
on the VAT to their borrowers system, particularly in the as well.
2511
No.
25
There are three leading

the problems connected with the practice, been found to be
technology based solutions to
tax administration. VAT types of wanting. Various attempts have
this problem. (1) the Real Time taxes are not easy to administer since been made to rectify the
VAT (RT VAT); (2) the VAT and the much vaunted self- shortcomings, improve the
Location Number (VLN) system; checking and self-policing feature system and streamline the VAT
and (3) the Digital VAT (D-VAT). of the VAT has been found to be administration. These include:
The RT VAT focuses on securing wanting in the Sri Lankan
the tax, the VLN focuses on experience. • The provision of adequate
securely tracing the supply and resources;
the D-VAT certifies that the Some of the basic requirements
• Development of skills and
correct tax is charged, collected for the successful administration
training;
and remitted. of the VAT include:
• An extended computerization
In Sri Lanka, the massive VAT • A simple VAT return and a and EDP system;
fraud during the years 2002 to taxpayer identification
2004 amounted to around Rs. 4 number (TIN); • Advance Tax scheme and
billion making it one of the VAT deferment scheme;
biggest in South Asia. It was • An effective taxpayer
based on fraudulent invoices of assistance programme; • Optional VAT;
companies some of which were
• A reliable computerized • Simplified VAT system
non-existent. There are many
system providing accurate (SVAT);
reasons for VAT being easily
susceptible to fraud in Sri Lanka. and timely information;
• Mechanism to cross-check
The refund due to overpaid input input credit;
• An effective system of audit,
tax, zero rating, eligiblility to full
supervision, monitoring and • Streamlining regulations
refunds, the relatively large sector
control; relating to refunds such as
being put in the zero rated list are
some legal provisions in the Act. • A coordinated information the establishment of a VAT
Others are administrative such as system for cross-checking Refund Fund and the system
weak administration, lack of a information, invoices, of releasing funds based on
fool proof audit system and vouchers etc. in the VAT a Bank Guarantee from the
verification of invoices, lack of return with information from exporter;
co-ordination of information within other sources to detect • Streamlining appeal
as well as between revenue under-reporting or fraud; procedures and arrears
departments, and corrupt officials
• A sound and effective collection.
are other main reasons.
penalty system.
14.8 Administration In most of these issues, the
experience of Sri Lanka’s VAT
One of the most important factors administrative system has, in
in the inadequate performance of
the VAT system in Sri Lanka, are
26
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
15. Customs Duties, Excises and Miscellaneous

Introduction
Taxes and Levies
A country’s taxation system
and fiscal policy underlying it,
reports have been released
from time to time since 1915
(Chairman H.S. Wanasinghe
and Secretary D.D.M.
15.1 Tarrifsindices such
macro-economic Agreement
Ceylon’s) tax (PSFTA),
system apart from
consisted of revenue, Excise
Presidential duty produced
Commission on
as economic growth, public multilateral
only of Import, Excise and like
trade agreements 34% of tax revenue in 2015.
Taxation of 2009 (Chairman
The Mission statement of the Sri SAFTA
Lanka Customs is “to andenforce
inflationthe Stamp as well followed
Duties as the WTO.by From Prof. W.D. Lakshman and
January 2005 there wereTax5 bands Excise duties if properly
as well as attaining a properand Export Duties, Income and Secretary P.D.K. Fernando).
customs laws and revenue which administered could therefore be
pattern of resource
social protection laws allocation,
while a whole lot of other taxesreduced
were subsequently such Apart from these, a number of
to utilized to further expand
income distribution and
facilitating trade and industry with as4Profit
bands, Tax, zero, 7.5%,Profits
Excess 15% and other reports include the Woods
25% and in 2015 were simplified government tax revenues without
economic stability. Hence to the Duty, Estate Duty, Capital Commission (1926), Huxham
the objective of contributing to a three affecting incentives for savings,
periodically,
national effortthe
andfiscal
in duepolicy Gains Tax,bandLandstructure of zero,
Tax, Wealth, Report (1929), Downs Report
15% and 30%. investment and production.
recognition thereof”. However, its ultimate
From a revenue point of view, the effectiveness would depend on
hasrespect
In been subject to export duties
of tariffs, time to time. Some of these others.
import duties brought in Rs. 81 several factors like the
examination
have and proposals
been abolished for
since 1993 important commissions
billion or 0.8% of GDP in 2014 identification of excisable items,
modification
(except in order
on scrap iron toandachieve
a few consisted of the Taxation All these stressed the
and Rs. 132 billion or 1.2% of an appropriate rate structure, a
its basic
other items)objectives
and importin relation
duties Commission of 1955 (Chairman importance of developing a
GDP in 2015 which was 9% share rational system of classification
under the current fiscal policies
system K.R.K. Menon and Secretary S. rational, consistent, efficient
of revenue. and valuation, and last but not
andused
are objectives
not soprevalent
much for at the
revenue Sittampalam), Taxation Inquiry and simple tax system in order
least, a properly organized
time.
as for protective purposes. They Commission of 1968 (Chairman to achieve its objectives and
15.2 Excise Duties
A.G. Ranasinha and Secretary
effective administrative network.
functions.
are based on the Harmonized
In this connection
System a number of
of goods classification A.G. Jegasothy), Presidential
commissions, committees andthe
and the valuation is based on
Excise Duty is an old levy having
Taxation Commission of 1990 15.3 Miscellaneous
been introduced by the Excise
“Brussels Definition of Value”
Ordinance No. 8 of 1912 and Taxes and Levies
(BDV).

recently broadened by the Excise
Apart from the taxes and levies
A number of steps have been (Special Provisions) Act No. 13 of
discussed above in the national,
1989. They are based partly on a
taken to simplify and harmonize provincial and local level, are a
specific basis and partly on an ad
customs procedure and practices number of other miscellaneous
valorem
in similarbasis. Excise duties cesses),
The functions
such of a tax system
as the widespread use of circumstances, and (b) taxes andValue
leviesAdded Tax (VAT)
that constitute
involve several aspects. First, have a large potential for and excises. Taxation is also
Information Technology (IT), thethe vertical equity, i.e., different Sri Lanka’s taxation system.
increased revenue duewith
to the
primary function
Harmonized Commodity of a taxation treatment of persons different They include such taxesof as
used as an instrument demand
the
increase of demand for items
the like
system is toand
Description raise revenue
coding for the
system, taxable capacity. Thirdly, Nation Building Tax (NBT),or
management to eliminate
government for itsDeclaration
public liquor and cigarettes
fiscal system is also which
employed is reduce inflationary or deflationary
Uniform Customs Economic Service Charge (ESC),
expenditure as well as for local++ generally inelastic
for social purposes such asand hence tendencies in the economy.
(CUSDEC) and the ASYCUDA Betting and Gaming Levy, Share
have been subject to activities
frequent Taxation reduces
automated data processing public discouraging certain Transaction Levy, the effectMobile
Cellular of the
rate
whichincreases to generate
bodies. Its efficiency
system. The Tariff Commission is therefore are considered undesirable. Telephone Subscribers Levy, to
multiplier and so can be used
primarily judged government
Excise duties on liquorThere
revenue. and is dampen Commodity
upswings inLevy,
a trade
as early as 1985 by whether this
recommended Special Port
function is performed adequately also considerable scope
tobacco, the Special Excises for on cycle.
simplifying and rationalizing the and Airport Levy (PAL), Stamp
and satisfactorily. The second enlarging
luxury andthe Special Excises
semi-luxury items, the
rate structure by reducing the Duty, Telecommunication Levy
function of is duty
to reduce which
Bettingareandlevied on the sale
areof The size of the multiplier in an
number bands,inequalities
based on Gaming Levy and Cess Levy (SCL). They
through aintended
policy oflevels
redistribution certain luxury and
examples of such taxes. semi-luxury open economy is
reducing of brought in a considerable amount
of income and wealth. The equity items on an ad valorem basis and
effective protection. of revenue in1 2014 at Rs. 239
principle in taxation implies that The
to tax system
increase is also
the rate usedasto
of duty
billion or S+M+1
2.3% of GDP and in
taxesrationalization
The should be imposed in
of the tariff increase the level of savings and
well.
2015 Rs. 243 billion or 2.2% of
accordance
structure with the ability
is however to pay
complicated GDP. These other taxes
In 2014 Excise
protecting local duties brought
industries fromin S= marginal propensity to save
principle.
due This has two
to international agreements constituted 17% as share of
Rs. 256 billion or 2.5% of
foreign competition through levies GDP M= marginal propensity to import
dimensions:
like the Indo-Sri (a) Lanka
horizontalFreeequity,
Trade revenue for 2015 as shown in
while
such as in 2015
import it brought in Rs. 497
duties (including T= marginal rate of taxation
i.e., similar treatment
Agreement (ISFTA) and the of persons Chart 1.
billion or 4.4% of GDP. As a share
Pakistan-Sri Lanka Free Trade
2711
No.
25

Table 11
Tariffs, Excise Duties and Miscellaneous Taxes 2010 -2015 (Rs. Million)
Year 2010 2011 2012 2013 2014 2015

Import Duties 64,163 79,811 80,155 83,123 81,108 132,189
Excise Duties 129,864 204,822 223,960 250,700 256,691 497,652
Liquor 36,654 55,286 60,086 66,008 69,100 105,264
Tobacco/Cigarettes 40,675 49,623 53,563 58,567 57,240 80,015
Petroleum 28,038 22,470 28,466 27,131 28,732 45,092
Motor vehicles & others 24,497 77,444 81,845 98,994 101,618 267,282
Miscellaneous Levies
PAL/RIDL/SCL/other 66,585 82,260 104,479 108,692 117,375 112,042
License Fees 5,512 6,078 4,254 5,449 6,983 6,929
Stamp Duty/Cess Levy
SRL/NBT DL/TL 92,165 85,326 93,898 101,508 114,742 124,683
Note: PAL - Ports and Airports Development Levy

RIDL- Regional Infrastructure Development Levy
SCL - Special Commodity Levy
SRL - Social Responsibility Levy
NBT - Nation Building Tax
DL - Defence Levy
TL - Telecommunications Levy
15.4 Simplification
Such a complex system creates process of this complex system, Simplification however does not
difficulties for the revenue a number of taxes were abolished depend on legislative measures
administration and leads to such as Debits Tax, Social alone but also on administrative
confusion both among investors Responsibility Levy, Regional procedures and regulations.
and taxpayers. The simplification Infrastructure Development Levy, While various procedural
of this complex system is an Construction Industry Guarantee guidelines have been issued to
urgent necessity. At one time, Fund Levy and the BTT at clarify and simplify matters, it has
there were 22 taxes and levies at provincial level. However the not been as effective as
national level (apart from the one- number is still large and the expected.
off taxes in 2015), 20 at provincial system needs further
level and 5 at local government simplification.
level. As part of the simplification
28
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
16. Revenue Administration

Introduction
In the final analysis,
A country’s taxation itsystemis the level iv) Attitude
reports haveofbeen
tax released Unregistered
(Chairman H.S.taxpayers, stopfiling
Wanasinghe
of efficiency of the revenue
and fiscal policy underlying it, administrators towards
from time to time since 1915 taxpayers, tax evaders
and Secretary D.D.M. and
administration
is a major determinant which determines
of other taxpayers and
when Sri Lanka’s (theninsufficient delinquent taxpayers
Waidyasekera) are however
and the
the effectiveness
macro-economic indices of any revenue
such public tax
Ceylon’s) education;
system consisted the key factors in judging
Presidential Commission on the
system.
as economic In the current
growth, context,
public only of Import, Excise and effectiveness of a tax
Taxation of 2009 (Chairman
with v) Inadequate coordination
debt,the declining
fiscal deficit tax
andratio and the
inflation Stamp Duties followed by administration.
Prof. W.D. Lakshman and
urgent between different tax
as well need to increase
as attaining a proper Export Duties, Income Tax and Secretary P.D.K. Fernando).
government revenue, the administering departments Apart from these, a number of
pattern of resource allocation, a whole lot of other taxes such
effectiveness of
income distribution and the tax such as between Inland
as Profit Tax, Excess Profits
16.2 Compliance
other reports include the Woods
administration, its structures, Revenue, Customs, Excise
economic stability. Hence Duty, Estate Duty, Capital Voluntary compliance Huxham
Commission (1926), is the goal
systems and processes need and other revenue Report (1929), Downs Report
periodically, the fiscal policy Gains Tax, Land Tax, Wealth, and cornerstone of a tax
thorough examination, its authorities including (1955), Kaldorand
Report
and the tax structure, including Expenditure and Gift Taxes, administration the (1960)
most
weaknesses identified and provincial and local and Cox Report (1986) amongtax.
its administrative mechanism etc. levied and abolished from economical way of collecting
measures taken to rectify these authorities; others.
has been subject to time to time. Some of these It is more so under a system of
weaknesses
examination and and proposals
make the tax for important commissions
vi) Shortcomings in the self-assessment. It may be said
administrative
modification in order toan
system efficient All these stressed
achieve consisted of the Taxation
operation of tax that the main tasks the
of tax
and effective
its basic instrument
objectives of tax
in relation Commission of 1955 (Chairman importance of developing a
administration including administration are facilitating
collection.
audits, inspections, default compliance, monitoring
and objectives prevalent at the Sittampalam), Taxation Inquiry and simple and
compliance tax system
dealing in order
with non-
The problems and gaps in taxes, combating tax
time. Commission of 1968 (Chairman to achieve its objectives
compliance. The IRD has taken aand
revenue administration relate both evasion, etc.
number of measures to improve
to
In the
this level of policy
connection formulation
a number of A.G. Jegasothy), Presidential compliance such as providing
as well as at the
commissions, committees andimplementation 16.1
TaxationNumber
Commissionofof 1990 benefits to individual taxpayers in
level. At the policy formulation
level, the gaps relate to (i) lack of Taxpayers and Files the form of awarding Privilege
Cards (Gold and Silver), grant of

effective institutional structures; According to the Inland Revenue
(ii) absence of adequate and tax concessions on importation of
Department Performance Report motor vehicles, discounts on
effective processes for public 2014, the total number of
participation in policy formulation; early tax payments among others.
taxpayers as at 31.12.2014 was However, the return compliance
(iii)
Theinadequacy
functions ofofamonitoring
tax systemand in similarcomprising
625,376 circumstances,
3% ofand the (b) cesses), Value Added Tax (VAT)
evaluation of policy for income tax on due date
involve several aspects. First, the vertical equity,
population. Thei.e.,
totaldifferent
number of and excises. Taxation is also
implementation; appears inadequate as shown in
primary function (iv) of alack of
taxation treatment files
corporate of persons with different
was 39,535 though used as an instrument of demand
sufficiently Table 13 below.
system is totrained personnelforforthe
raise revenue the number of functioning the
taxable capacity. Thirdly, management to eliminate or
tax policy analysis
government for its public and research; fiscal system
companies is also
under the employed
Companies reduce inflationary or deflationary
Nevertheless, it should also be
and
expenditure as well ascollection
(v) unification of for local for social
Act No. 7 of purposes
2007 was such at as
October tendencies in the economy.
noted that the return forms are
techniques.
authorities and At the implementation
similar public discouraging certain activities
2011, 48,658 including listed Taxation reduces theinto
effect of the
complicated running several
level,
bodies.theItsweaknesses
efficiency isinclude:therefore which are considered
companies in the Stock undesirable. multiplier and so can be used to
pages. Taxpayers find it difficult
primarily judged by whether this Excise duties
Exchange 296.on liquor and dampen
to completeupswings in aoften
them and tradehave
i) The relatively low number of
to take recourse to accountants
taxpayers and level of
and satisfactorily. The second luxury
The andnumber
total semi-luxury items, the
of income or tax practitioners thereby
compliance; The size of the multiplier in an
function is to reduce inequalities taxpayers was 559,360 are
Betting and Gaming Levy increasing costs and leading to
through a policy of redistribution examples ofofsuch
comprising taxes.
148,720 individuals open economy
personal is
complications. Tax
ii) Improvement of work
of income and wealth. The equity and PAYE employees 354,758. 1 be re-designed and
returns should
systems and methods; The registered
tax systempersons
is also used to
principle in taxation implies that VAT amounted made simpler and preferably
taxes should be imposed in to 15,530, NBT 22,381, limited
iii) Insufficiently trained personnel
capital formation apart from where to a single sheet.
accordance with the ability to pay Employers registered under the
and modernizing of tax S= marginal propensity to save
principle. This has two protecting
PAYE scheme local12,104
industries
and from
administration; M= marginal propensity to import
dimensions: (a) horizontal equity, foreign competition
Economic through3515.
Service Charge levies
i.e., similar treatment of persons The total number of Betting and
Gaming files was only 1072.
2911
No.
25

Table 12
Number of Taxpayers and Tax Files as at 31.12. 2014
Income Tax
Corporate
Resident Companies 38,502
Non Resident Companies 969
State Corporations, Statutory Boards and State Owned Institutions 64 39,535
Non Corporate
Individuals 148,720
Partnerships 14,515
Bodies of persons etc. 1,832
Employees paying income tax under Pay-As-You-Earn (PAYE) Scheme
(as at 31.03.2014)* 354,758 519,825
Total Income Taxpayers 559,360
Other Taxpayers
Persons and Partnerships registered for Economic Service Charge (ESC) 3,515
Persons registered for Value Added Tax (VAT) 15,330
Persons registered for Value Added Tax on Financial Services 176
Persons registered for Optional VAT 74
Persons registered for Nation Building Tax (NBT) 22,381
Persons registered for Nation Building Tax on Financial Services 175
Betting Levy Files 1067
Gaming Levy Files 5
Total Other Taxpayers 42,723
Employers registered under PAYE Scheme 12,104
Withholding Tax on Interest (withholding Agents) 2,628
Withholding Tax on Specified fees (Regular Monthly Schedules Senders) 84
Construction Industry Guarantee Fund Levy 304
Stamp Duty (Regular Monthly Schedules Senders) 8,173 23,293
Total Number of Tax Files/Taxpayers as at 31.12.2014 625,376
*Include 45,778 Government employees but does not include employees in the incomplete declarations furnished by employers.
Source: IRD Performance Report 2014.
30
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
Table 13
Tax Return Compliance 2012 to 2014
16.4 Default Taxes
Total taxes in default as at
Tax taxation system Year 31.12.2014 stood at Rs. 128
A country’s reports Sector Compliance
have been released on (Chairman H.S. Wanasinghe
billion, which is relatively high.
and fiscal policy underlying it, Due Date
from time to time since 1915 % and Secretary D.D.M.
This includes some taxes which
Income Tax of2012/2013
other when Sri Lanka’s (then
Corporate 56%
Waidyasekera) and the
have been repealed, abolished or
Non-Corporate 41% uncollectible like Debit Tax,
Turnover Tax, GST, Wealth Tax,
2013/2014
debt, fiscal deficit and inflation Corporate
Stamp 53%
Duties followed by Prof. W.D. Lakshman and
Gift Tax etc. Steps should be
as well as attaining a proper Export Duties, Income
Non-Corporate 42%Tax and Secretary P.D.K. Fernando).
taken to write off these obsolete
PAYE 2011/12 52% taxes from the books and
effective steps taken to collect
economic stability. Hence2012/13 53%
Duty, Estate Duty, Capital Commission (1926), Huxham
the balance in a planned and
periodically, the fiscal policy
2013/14 Gains Tax, Land Tax,55%Wealth, Report (1929), Downs Report
speedy manner, as provided in
VAT 2012 89% the Default Taxes (Special
2013
Provisions) Act No. 16 of 2010
has been subject to time to time. Some 78%
of these others.
which stipulates that arrears
examination and proposals for2014 important commissions49% should be maintained at less than
modification All these stressed the
ESCin order to achieve 2012 consisted of the Taxation
80% 3% of taxes levied in the
immediately preceding year.
to the government’s policies 2013 93%
K.R.K. Menon and Secretary S. rational, consistent, efficient
and objectives prevalent at the 2014 71%Inquiry
Sittampalam), Taxation and simple tax system in order
time. NBT 2012 Commission of 196879% (Chairman 16.5 Appeals
to achieve its objectives and
2013 77% The speedy and effective
settlement of appeals is an
commissions, committees and 2014 Taxation Commission84% of 1990
important element in improving
Source: Inland Revenue Department, Performance Report 2014.
the administrative system. There

are a number of problems in
appellate procedure which is
16.3 Audits and Investigations lopsided and heavily weighted
against the taxpayer, largely due
Under the existing self- However, considering the extent
The functionssystem of a tax system in under-reporting
similar circumstances, to the absence
cesses), of a vociferous
Value Added Tax (VAT)
assessment prevalent, of of profitsand and(b)
involve several aspects. First, the vertical equity, i.e., by
different taxpaying public.
and excises. Taxation The failure
is alsoto
96% of tax collection is through income, particularly large
primary function of a taxation treatment oftraders
persons with different follow proper procedure
used as an instrument of has often
demand
self-assessment and only 4% by companies, and
system is to raise revenue for the led to protracted delay
management to eliminate or in the
way of official assessment. businesses, professionals the
taxable capacity. Thirdly, and
government forauditing its public fiscal system settlement of appeals.
reduce inflationary In this
or deflationary
Nevertheless, and others, whetheris thealsoextent
employed
and
expenditure as well as andfor local for social purposesinvestigation
such as respect, the earlier
tendencies in the economy.Board of
examination of returns scope of auditing,
authorities and similar public discouraging Review
Taxation reduces the effect by
has been replaced of the
the
accounts is an integral part of and additional certain activities
tax collected is
bodies. Its efficiency independent Tax Appeals
multiplier and so can be used to
assessment procedure.is The therefore
audit sufficient is debatable. undesirable.
which are considered For
primarilyshould
judgedbe by evaluated
whether this Excise duties Commission
dampen upswings through in the Tax
a trade
function in instance, as aton liquor and
October 2011 the
function Appeals
cycle. Commission Act No. 23
terms of is
theperformed
quantity and adequately
quality tobacco,
total number the of
Special Excises on
functioning
and satisfactorily. of 2011 which covers Customs
of audits carried outThe andsecond
the luxury and was
companies semi-luxury items,the
48,658 while the
function is to reduce inequalities Betting and Gaming Levy are appeals
The sizeas of well. However,inthere
the multiplier an
revenue “voluntarily” paid. Audits number of resident company files
through a policy of redistribution examples of such taxes. are a number
open economy is of issues which has
have been undertaken on as at 31.12.2014 was 38,502. In
of income particularly
and wealth.inThe cropped up including the
taxpayers the equity
Large 2014 the total additional income 1
Theassessed
tax system necessity to make a 25% deposit
principle in taxation
Taxpayer Unit (LTU) in terms ofimplies that tax andisagreed
also used in theto
S+M+1
of the amount of tax and penalty
taxes should
business be imposed
activity, entity typein and Corporate Large Taxpayer Unitand
increase the level of savings
capitalafter
formation apart where
in dispute in order to validate an
accordance
business size.withIt the
hasability
been to pay
found (LTU) audit was Rs.from
10 billion
protecting local industries fromtax S= marginal
appeal, propensity
a provision whichtohas save
principle.
that the most Thisproductive
has two use of or about 8% of total additional
foreign competition M= marginal
drawn severepropensity
criticism. to import
dimensions: (a)
investigation horizontal
resources hasequity,
paid assessed and agreedthrough
for thelevies
year.
i.e., similar treatment
dividends in respect of the of persons
largest
taxpayers.
3111
32
25
No.
Table 14
Analysis of Default Taxes 2014

Type of Tax Gross Tax in Penalty (Rs)Defaulted Taxes Ex- Penalty Related to Collectible Tax Collectible
Default (Rs) cluding Penalty (Rs) Disputed Taxes (Rs) (Rs) Penalty (Rs)
Income Tax 56,899,485,469 37,253,768,193 48,386,379,832 33,389,149,188 8,513,105,637 3,864,619,005
Surcharge on Income Tax 406,775,534 269,440,138 404,387,151 268,245,948 2,388,383 1,194,190
Income Tax (WHT on interest) 1,390,837,523 635,829,057 1,356,563,354 592,897,671 34,274,169 42,931,386
Value Added Tax 44,497,939,944 29,802,383,798 39,717,299,223 25,770,072,800 4,780,640,721 4,032,310,998
Value Added Tax
(Financial Services) 8,593,768,538 4,842,592,562 8,550,240,806 4,830,389,132 43,527,732 12,203,430
Economic Service Charge 7,117,628,614 3,141,589,723 4,335,790,517 2,210,143,380 2,781,838,.097 931,446,343
Nation Building Tax 2,727,620,407 1,920,389,170 1,614,856,989 1,217,591,210 1,112,763,418 702,797,960
Stamp Duty 9,732,724 3,773,302 - - 9,732,724 3,773,302
Debit Tax 2,215,581,368 - 2,215,581,368 - - -
Turnover Tax 2,611,068,311 1,271,691,854 2,611,068,311 1,271,691,854 - -
Goods & Services Tax 945,024,420 1,038,025,892 945,024,420 1,038,025,892 - -
National Security Levy 1,538,591,036 627,138,614 1,538,591,036 627,138,614 - -
Save the Nation Contribution 22,443,029 6,561,055 22,443,029 6,561,055 - -
Wealth Tax 851,542 473,924 851,542 473,924 - -
Gift Tax 2,409 1,204 2,409 1,204 - -
Social Responsibility Levy 2,111,474 154,110 1,864,758 147,171 246,716 6,939
Compounding Penalty - 283,067,976 - 115,718,169 - 167,349,807
Total 128,979,462,342 81,096,880,572 111,700,944,745 71,338,247,212 17,278,517,597 9,758,633,360
Source: IRD Performance Report 2014.

Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
Introduction
16.6 Coordination 16.7 Cost of vehicle running charts, pay
sheets, annual board of survey
between Revenue Admninistration reports and bank reconciliation
Departments apart from other actions such as
A country’s taxation system reports
As per thehave been released
Performance Report of (Chairman amounts
recovering H.S. Wanasinghe due to
and fiscal policy underlying it, from time to time
the IRD for 2014, the since
total1915 and Secretary
dishonoured Cheques,, D.D.M. refunds
One of the determinant
is a major principal defects of otherof the when Sri Lanka’s Waidyasekera) and theaccounts.
expenditure of the (then Department and checking imprest
tax
macro-economic indices suchSri
administration system in Ceylon’s) tax system consisted Presidential Commission on
was Rs. 3,087 million (includes
Lanka
as economicis the lack of coordination
growth, public only of Import, Excise and Taxation of 2009 (Chairman
capital expenditure for RAMIS) The Economic Research and
between the revenue
debt, fiscal deficit and inflation Stamp Duties followed by was Prof. W.D. Lakshman and
and the revenue collected Planning Unit carries out different
departments,
as well as attaining and ona the policy
proper Export Secretary P.D.K. Fernando).
Rs. 514 Duties,
billion. In Income
2013 the Tax and types of researches by analyzing
side the present fractured and Apartreceived
from these,
pattern of resource allocation, a whole lot was
expenditure of other Rs. taxes
1,876 suchmillion. data froma various
number of
isolated character of the activity other reports
income distribution and as Profit Tax, Excess Profits
The productivity ratio is 166:1 i.e., sources such include the Woods
as the Central
of policy formulation.
economic stability. Hence As regards Duty, Estate Duty, Capital Commission (1926), Huxham
the cost of collection for Rs. 100 Bank, Census and Statistics
these, the previous Taxpolicy Report (1929),
periodically, the fiscal Gains
was 60Tax,
cents Land Tax, Wealth,
or 0.6% which Department etc.Downs Report
The Training
Commissions have recommended (1955), Kaldor
and the tax structure, including Expenditure
could and Giftas
be considered Taxes, Branch vital forReport
training (1960)
of tax
the constitution of a Board of and CoxtoReport (1986)
its administrative mechanism etc. levied and abolished from
reasonable. officers perform their among
duties
Revenue
has beenorsubject Revenue to Authority time to time. Some of these others.
effectively, while organizing
and the creation
examination and of a permanent
proposals for important commissions awareness programs for
National
modification in order to achieveas
Taxation Commission 16.8 Measures Taken
consisted of the Taxation All these stressed
taxpayers, also provided the
aitsremedy.
basic objectives in relation for Improvement
Commission of 1955 (Chairman importance
overseas of developing
training a
for tax officers,
to the government’s policies K.R.K. Menon and Secretary S. rational, consistent,
participation in overseas efficient
In respect of the former, the lack
and objectives prevalent at the Sittampalam), Taxation Inquiry and simple
seminars andtaxworkshops
system in to order
learn
of coordination between the
time. Commission the
Considering of 1968 (Chairman
weaknesses in to achieve
the its objectives
best practices in otherand
Inland Revenue, Customs, Excise
A.G. Ranasinha
revenue administrationand Secretary
and the functions.in order to maintain a
countries
and
In thisprovincial
connection and alocal revenue
number of A.G. Jegasothy),
necessity to remedy Presidential
these high level of professionalism as
authorities
commissions, committeesFiscal
as well as the and Taxation Commission
weaknesses and improve of 1990
the tax administrators. Locally, it
Policy Division at the Treasury,
efficiency of revenue conducted several programs to
affects policy formulation,
administration, a number of provide specialized knowledge on

information exchange, and the
measures have been taken at all application of tax statutes and
monitoring of the implementation
revenue departments including other relevant technical areas
of taxes. They all tend to operate
Inland Revenue, Customs and apart from in-house training,
in isolation. In order to remedy
Excise. particularly in taxation and
this,
The the establishment
functions of a tax of a Board
system in similar circumstances, and (b) cesses), Value Added Tax (VAT)
accountancy.
of Revenue or Revenue
involve several aspects. First, the Authority vertical and excises. Taxation is also
In Inlandequity,
Revenue, i.e.,thedifferent
Tax
vested
primarywith the overall
function authority
of a taxation used as aanCommittee
instrumentforof demand
Service Unit established different
treatment of persons with In 2011
for revenue is toadministration
raise revenue has management
system for the taxable capacity.
facilitated taxpayers Thirdly,
and the the Interpretation to of eliminate
Tax Laws or was
been recommended in order to reduce inflationary
government for its public fiscal system
public to access is also
the employed appointed which is or deflationary
responsible for
coordinate and improve
expenditure as well as for local the for social purposes tendencies in the economy.
Department’s servicesuch as the issuance of interpretations,
overall tax andadministration system Taxation reduces the effect
authorities similar public discouraging In
conveniently. certain
2014 activities
the Unit clarifications, guidelines etc.ofon
the
of the country.
bodies. Such aisRevenue
Its efficiency therefore which are considered undesirable. multiplier and so can be used to
issued 6,054 TIN certificates and the provisions of the various Acts
Authority is not expected
primarily judged by whether to bethisa Excisetemporary
duties onVAT liquor and dampen upswings in Department.
a trade
7908 applications administered by the
tax collector but to
function is performed adequatelyreorganize the tobacco, theofSpecial Excises cycle.
for opening new files as wellon The objective of this is to ensure
administration of the
and satisfactorily. The second three luxury and semi-luxury items,for the
as 321 clearance certificates uniformity with regard to
departments,
function is to eliminate
reduce inequalities Betting and Gaming Levy are The size of the multiplier in an
non-taxpayers. Consultancy interpretations and procedures in
overlapping functions
through a policy of redistribution and effect exampleswere of such
services madetaxes. to the public open economy and
tax legislation is administration.
coordination where
of income and wealth. The it is possible,
equity through the “One Stop Service A total of 73 1 interpretations have
so as to cater for less
principle in taxation implies that The taxwhilesystem is also used to
Centre” 14 awareness been given in 2014.
bureaucracy, S+M+1
taxes should expeditionbe imposedand in increase the level
programs were organized of savings and
during
increased collection of legitimate capital formation apart from where
accordance with the ability to pay the year. Internationally, in order to
revenue. protecting local industries from S= marginal propensity to save
principle. This has two eliminate or mitigate the
dimensions: (a) horizontal equity, The Internal Audit Branch incidence of juridical double
T= marginal rate of taxation
i.e., similar treatment of persons examines all payments,(including
such as import duties daily taxation and fiscal evasion in
3311
No.
25
international transactions, Sri

At Inland Revenue, the However, it may also be stated
Lanka has entered into a number
automation process involves the that in many instances the
of double taxation agreements. implementation of the Revenue expectation of greater
The avoidance of double taxation Administration and Management effectiveness from
is important for attracting foreign Information System (RAMIS) computerization has not
investments, obtaining expertise, aimed at further simplifying the materialized. Computerization is
modern technology, employment tax administration and tax for a necessary but not a sufficient
opportunities etc. Sri Lanka taxpayers. RAMIS is also condition to improve the
currently has 42 such Double Tax envisioned to support in effectiveness of tax
Treaties and one multilateral increasing the revenue collection administration. Whilst computer
treaty (SAARC). by enabling IRD to reach out to technology helps perform routine
taxpayers in a more efficient and tasks more rapidly, there is no
Finally, the ongoing effective way. It is expected to guarantee that it would
improvements in tax compliance meet the requirement of automatically increase revenue
administration include the infrastructure facilities such as collections substantially.
automation of revenue agencies, end user hardware, computers, Computer technology facilitates
introducing the Single Window printers and scanners that are and improves tax administration
System (SWS) at Sri Lanka necessary to perform the but unless accompanied by
Customs linking all stakeholders activities of the Department. effective enforcement activities,
and incorporating into the may help in increasing revenue
ASYCUDA World system, RAMIS is expected to widen the only marginally. Successful
automating of the activities of the tax net and improve compliance, computerization must be
Ministry of Finance under the enhancing the efficiency of the accompanied by a fundamental
Integrated Treasury Management revenue collection process, reorganization of both systems
System (ITMIS), introducing the increasing the quality of the work and procedures and cannot be
zero based budgeting system by environment to generate higher used by itself to side-step much
the Finance Ministry and setting productivity and provide better needed reform.
up of Budget Implementation and service to taxpayers with a view
Monitoring Unit (BIMU) to ensure to increasing voluntary
close monitoring of expenditure compliance. It is expected to be
programmes. completed by end 2016.
17. Concluding Remarks

Sri Lanka’s fiscal and taxation decline and measures necessary administration, its weaknesses
system is at a critical juncture. to reverse the trend and make the and measures necessary to
With the end of the 30 year old tax system into an effective strengthen the administration in
insurgency, Sri Lanka has entered instrument of economic growth. order to make it an effective
a new era of growth, reconciliation Relevant issues discussed mechanism of collecting much
and reconstruction. Development include the direct and indirect needed revenue.
challenges are many both in the taxes, the pros and cons of the
international and national Value Added Tax system and its
contexts. problems, tax evasion, capital
gains taxation, elasticity and
The current taxation and fiscal buoyancy of the fiscal system,
policy issues discussed are of the tariff structure, simplification
crucial importance especially the of the tax system and last but not
recent declining growth in tax least, the problems of the tax
revenue ratio, the reasons for the
34
Taxation
Taxation In
In Sri
Sri Lanka
Lanka :: Current
Current Trends
Trends and
and Perspectives
Perspectives
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theEconomy
Economy1998
1998(October
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•• AAStrategy
Strategyfor
forNature
NatureTourism IPS
TourismManagement
Management ininPublications
Sri
SriLanka
Lanka(November
(November1998)
1998)
•• Effective
EffectiveLocal
LocalGovernance
Governance- -The
TheFoundation
Foundationfor foraaFunctioning
FunctioningDemocracy
DemocracyininSriSriLanka
Lanka(May
(May1999)
1999)
• Sri Lanka: State Legislation
•• Labour
Labour of the Economy
Legislation and 1998 (October
andFemale
Female 1998) ininSri
Employment
Employment SriLanka’s
Lanka’sManufacturing
ManufacturingSector
Sector(July
(July1999)
1999)
• A Strategy for Nature
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Monitoring theTourism
the 20/20 Management
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Compact on in Sri
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and
and Aid (November
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RestructuringininSri
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Lanka(August
(August1999)
1999)
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Governance on Small
Small&&Medium
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for a FunctioningIndustries(SMIs)
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in Sri SriLankas
Lanka (May(September
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1999)
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(October
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1999)
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Samurdhi’sSavingsAid Restructuring
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CreditProgramme
Programme (August
inin 1999)
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thePoor
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(November1999)
1999)
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2000)
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andApplication
Application Reduction
totoSri
SriLanka (December
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(February2000)
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1999)•• South Asia Economic Journal (March
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• The •Economic
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ininSri Sri Lanka
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theEconomy
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2000 Adjustment
(October
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•• Policies
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Land SectorAccounting
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Characteristics,
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andImplications
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LandPolicy
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• Devolution Revisited:
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CivilSociety
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2006)
• Utilization of Preferential Trade Arrangements: Sri Lanka’s Experience with the EU and US GSP Schemes (January 2007)
• Beyond Twenty Million: Projecting the Population of Sri Lanka 2001-2081 (March 2007)
• Disaster Management Policy and Practice in Sri Lanka: Sharing Lessons among Government, Civil Society

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Taxation in Sri Lanka

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INSTITUTE OF POLICY STUDIES OF SRI LANKA

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