With already rampant tax evasion, abolishing taxes Sri Lankan Govt lost billions in revenue!

In fact the tax revenue to GDP ratio was just about 11.6 percent in 2018, which is one of the lowest rates among the upper-middle income earning countries. 

Sri Lankan Government mainly imposes two types of taxes mainly direct taxes and indirect taxes. But taxes are the most important revenue source for the government, contributing 89% of the revenue.

With the expenditures exceeding the tax revenue the government is facing major challenges regarding the continuous budget deficits. Yet the tax regime witnessed major changes following the presidential election that took place on 16 November 2019. For the newly elected President approved mandate was to abolish taxes such as PAYE, NBT, Withholding tax, Capital Gain tax, Bank Debit tax and to reduce VAT tax rate from 15% to 8%.

Although the government has made all efforts to make life much easier for tax payers and investors providing tax breaks and concessions with the easing of compliances and procedures, such as extension of tax holidays, tax exemption for investment in start–ups and concessions given to agriculture and tourism sectors.

Thus with already rampant tax evasion, abolishing of taxes at a time of unprecedented economic stress, the Government lost billions of rupees in revenue; and the Inland Revenue Department (IRD) has been deprived of around Rs. 144.5 billion in revenue last year owing to tax evasion that goes unabated in the country.

Under this sinario, the government has announced that after the upcoming budget, a separate tax file will be opened for everyone above the age of 18 living in Sri Lanka, something that should have been done when the civil-war was brought to finish in 2009. Due to the ignorance of many irresponsible political parties they portray this as an act of the government to please International Monetary Fund (IMF). No doubt many protests are expected when the government adopt such a tax system in the current economic downturn.

On hindsight, opening a separate tax file for those above 18 years of age and bringing them into the tax-paying net is the right decision. However, it would have helped if at the same time, the government had re-examined many indirect taxes; either reduced them or eliminated them altogether. Life is not going to be easy for the ruled, no matter where they live in the country!