Sri Lanka has been struggling with a number of economic complications pertaining to the country’s tax system. However, this characteristic of taxation has been challenging as it does not deliver the potential tax revenue while maintaining a satisfactory level of tax compliance. In recent years, this issue in taxation has been focused on with much debate among politicians, academic researchers, policymakers and practitioners. Yet, every government has been compelled to experience this challenge that is detrimental to the fiscal operation of the government, fairness of income distribution, efficiency, smooth economic stability and transparency.

It’s said that still there are only a few taxpayers registered in Sri Lanka, which is a minimum percentage of the entire population. This is actually a disaster. It indicates the government is now dealing only with a few individual taxpayers whilst imposing and increasing the tax rates to that very limited section. Someone could argue that the problem does not relate to the tax rates whereas it relates to tax administration. Of course, the government is supposed to rescrutinize the composition of the Inland Revenue Department (IRD) and whether they are capable of administering the tax files or whether they have enough resources to accommodate the requirements.

Normally people are reluctant to pay taxes. It’s an inherent limitation in any tax system. Especially with these adverse economic conditions in Sri Lanka, the power of purchasing has dramatically deteriorated. It also doesn’t provide a good sign or indication even for the active taxpayers.

How should the government raise the tax base? The answer for this will not be a popular decision for any government. However as per the provisions of the Inland Revenue Act No. 24 of 2017, every person who has a taxable income shall file a ‘return of income’. Nevertheless, a resident individual who only has income from employment that is subject to PAYE will not be required to file a return for that year of assessment (section 94(1)(a)(ii).

Here the tax law is talking about filling a return of income. Not about registering a person as a taxpayer. The government should focus on registering more people as taxpayers whilst giving them Taxpayer Identification (TIN) numbers the way people are given National Identity Card (NIC) numbers. That’s very important at this juncture where Sri Lanka is at a critical stage. Then only the Inland Revenue Department will be able to keep a track record of the taxpayers and follow them up for getting the expected tax revenue.

At the same time, as we know in the case of a person who is employed either in the private or public sector, it is compulsory for the employer to get their employees registered for the Employee Provident Fund (EPF) and Employee Trust Fund (ETF). As such, the new regulations can be introduced to make it mandatory to register the employees in IRD by granting them Taxpayer Identification Numbers. However, the government has taken a huge step and imposed the rule stating that ‘With effect from January 01, 2024, any individual who is at the age 18 years or more, or who attains the age of 18 years on or after January 01, 2024, it is mandatory to register with the Inland Revenue Department and obtain a TIN (Taxpayer Identification Number)’.

Then again, the government should simultaneously rethink developing the infrastructure for the IRD by providing them with adequate resources to cater to this additional requirement. Of course, Information Technology (IT) plays a major role at this stage. For example; the QR code system has recently been introduced by the government for delivering fuel supply throughout the country in an efficient way. That was indeed successful and many people have been benefited. If so, why cannot the government introduce the same mechanism to the country’s tax system?

During the economic recession if a vehicle was given a QR code then why cannot a person be given a QR code? Just think about it. Through a QR code, the IRD is able to check the tax history of the taxpayers, their assets or liability base, other income sources, tax payment patterns and default amounts, etc. This paves the way for curtailing the cost of printing the returns of income, tax payment slips and other corresponding letters by saving millions of rupees. That’s the next level where the government is supposed to extend its strategies to widen the government income through income tax.

Moreover, in July 2014, to revolutionize the tax culture in Sri Lanka, the Inland Revenue Department introduced a system called ‘RAMIS’ (Revenue Administration Management Information System) as their one-stop tax management platform by addressing the aforementioned facts up to a certain extent. But simultaneously IRD has been sending the printed returns of income and the printed payment slips to the taxpayers via post even though this system provides the same features to do so via online. That’s indeed a waste of government money.

At the inception a proper marketing strategy should have been launched for promoting the newly introduced system among the general public as to how they should get the maximum benefits when they make the tax payments or submit the return of income through this system. Unfortunately, it has been eight years since the induction of RAMIS but there are many people who still don’t know how to get access or operate this system.

Therefore, IRD should introduce continuous awareness programs/training to the general public as to how this system works and the benefits of using it. In fact, what’s the meaning of having a system which was supposed to be utilized by a large section of the people but is actually being utilized by a small number of persons? These problems should be immediately addressed by IRD to increase the tax revenue whilst letting the taxpayers avoid a maze of taxes, forms and filing requirements. A simple and transparent tax system helps taxpayers better understand the system and reduces the costs of compliance while letting them know who is being taxed, how much they are paying, what is being done with the money and who benefits from tax exemptions, deductions, and tax credits, etc.

Motivating taxpayers 

The government should introduce strategies, schemes or motivational campaigns and certain monetary and non-monetary encouragements to the taxpayers. It’s obvious that people are making rational decisions when spending their own money such as doing a cost-benefit analysis. So that a person who is liable to pay tax may be thinking of the benefits that are being received in lieu of the tax payment. That’s obvious. The question is; has the government properly introduced such a mechanism or a system for it?

In April 2016, IRD introduced some annual privilege cards for the taxpayers based on the income tax paid in the immediately preceding year of assessment. As per the official website of IRD, ‘the individuals who paid income tax more than Rs. 500,000 and submitted the return on or before the due date are eligible for this scheme’. And it has mentioned certain benefits for having these privilege cards. But the problem here is; this section has not been updated for six years. It was last updated in 2016.

Another thing is; these mentioned benefits are mainly given through the banks. That’s not sufficient at all. The IRD should introduce more benefits for the taxpayers by expanding its relationships with other stakeholders such as food city chains, hospitals, educational institutions, etc. With these comprehensive strategies, IRD can attract more non-tax payers to the tax system and increase the tax base of the country.

Moreover, migration and brain drain are severe issues to any country. At the moment Sri Lanka has come to the top of this issue. Lots of professionals, academics and young generation are leaving Sri Lanka for their future betterment. The core reason behind their decision is this unbearable tax system. In Sri Lanka, most of the salaries are not on par with industry norms compared to the international level. Even from lowest salaries government takes proportionally a huge part. Then the purchasing power will drastically deteriorate. Will that motivate the tax payers?

Due to the recent WHT scandal lots of senior citizens have faced a huge inconvenience. Many of them are waiting in the queues expecting their turn to go in to the bank. Some of them do not have any literacy to fill the required forms and any awareness about these new regulations. Some people are not in a position to travel due to sickness and some are living in areas where banks are located far from the residence. As tax practitioners we have been experiencing these challenges faced by the innocent general public.

Has the Inland Revenue Department demonstrated any comprehensive video or conducted any awareness campaigns or official dialogues for educating people on these new regulations? At least any fruitful conversation on these tax matters in the television media? Is this how they motivate the tax payers? These burning issues must be addressed soon. If not, the repercussions will be unmeasurable.

By Indrajith Karunarathna ✍️

MBA (Sri J’), BSc. Business Administration (Special) Hons,
FCA, FCMA, FMAAT, FIPA (Australia), FFA (UK), ACCA (UK),
ACIM (UK), MCPM, ADCN