EY Sri Lanka is taking measures to guide the island’s business community through an increasingly complex tax landscape. As a leading professional services firm that offers expertise in Assurance, Tax, Transactions and Consulting, it is uniquely positioned to provide support in this regard.
In a conversation with Echelon, Sulaiman Nishtar, Partner – Head of Tax at EY Sri Lanka & Maldives, explains that part of the problem lies in low tax literacy, and rebuilding trust in the system is necessary to promote voluntary tax compliance. Shehani Paranavitane, Partner – Tax at EY Sri Lanka, points out that inefficient implementation of reforms can lead to corporate taxpayers being penalised needlessly, and highlights the need for proactive risk management strategies. Shakthivel Velauthapillai – Partner/Principal Tax at EY Sri Lanka adds that the upcoming end of the Simplified VAT system (SVAT) could disproportionately impact SMEs and recommends investing in internal expertise or professional services to help navigate these changes.
In your experience, how well do Sir Lankans understand their tax obligations, and what gaps in tax literacy do you commonly observe?
Sulaiman: Tax literacy among Sri Lankans, on average, is very poor, and we can attribute this to several factors. To begin with, there is no formal method of educating the public on their tax obligations or the concessions that are at their disposal. Many remain unaware of the basic exemptions that they have the right to take advantage of, such as not having to pay tax for selling a house you have lived in for more than three years. Despite owing no tax, they may still try to hide the transaction.
This lack of understanding tends to have negative effects, such as making people less willing to engage with the tax system, avoid paying taxes where possible, or fall into a habit of non-compliance.
Unfortunately, this comes with a variety of consequences. An individual who misunderstands their tax obligations may still be exposed to legal risk, including criminal offences under the Inland Revenue Act. Offences such as not registering, failing to file returns, or evading tax can lead to a jail term in addition to fines.
It is important to understand the root cause of the issue in order to develop a practical solution. Along with minimal-to-zero tax education, there is relatively little communication and outreach done by the Inland Revenue Department (IRD) as well. The materials they publish rarely reach or benefit the general public.
To combat this, we need to rebuild public trust in the system. Some are discouraged from tax compliance because they fear they will be unfairly taxed. On the other hand, some knowingly avoid their obligations, so a cultural shift is needed that treats tax offences as seriously as traffic or criminal offences.
How does EY Sri Lanka contribute to educating both individuals and businesses about tax compliance?
Sulaiman: EY Sri Lanka works closely with its clients, so we invite them to discuss every budget or tax update with us. This tends to involve people who already work in finance- or business-adjacent fields, so our discussions can include a thorough analysis of every change and its impacts. We have also opened these discussions up to our social media channels on a few occasions.
While we don’t currently hold in-depth sessions for the wider public, we make it a point to share tax alerts across our online platforms. This helps bring the right information to a wider audience. We may expand our CSR initiatives in the future, such as holding tax literacy programmes in schools and universities.
We also ensure our clients are fully compliant with the law, which includes steering them clear of misconceptions as well as helping them identify lawful tax incentives. EY Sri Lanka itself maintains a zero-tolerance policy on bribery of any kind. What are the most critical compliance challenges businesses face with Sri Lanka’s corporate tax regulations? Shehani: Today’s tax challenges are more the result of practical and administrative challenges than problems with the wording or intent of the law.
For example, a taxpayer with a withholding tax certificate, issued by their bank, may still be denied a tax credit if the IRD cannot verify their certificate data. On the other hand, a bank may find it challenging to upload this data in a timely manner due to the sheer numbers involved. This results in the taxpayer being flagged for non-compliance, leading them to waste time and money appealing against assessments that were the direct result of IRD system inefficiencies.
The adoption of certain best practices can alleviate pressure on revenue authorities and taxpayers alike. We recommend risk profiling taxpayers, planning ahead for tax audits, and so on to reduce the number of frivolous assessments
How do global tax trends influence Sri Lanka’s corporate tax policies, and what lessons can businesses learn?
Shehani: The Inland Revenue Act and the VAT Act are conventional statutes that cater to businesses with a brickand-mortar location. Today’s businesses have a heavy digital footprint, but traditional tax statutes prioritise physical establishments, which led to a global shift to tax digital services. In line with this, a recent amendment in Sri Lanka’s VAT Act will see digital services being brought under the tax net from October 1st onwards.
Further, Sri Lanka is following the trend of moving away from tax holidays. Instead, alternative schemes like enhanced capital allowances are coming in, where an additional tax deduction is given for expansion or new undertakings that invest at least USD3mn in depreciable assets.
What advice would you give to businesses looking to proactively manage corporate tax compliance and avoid unnecessary penalties?
Shehani: With tax inquiries on the rise, revenue authorities are under increasing pressure to collect taxes. We are witnessing a growing number of tax audits and assessments, with authorities resorting to measures like bank seizures to ensure compliance.
In this context, corporations are placing a strong emphasis on tax risk management as part of their overall strategy. This includes re-examining and updating their internal controls, procedures, and protocols related to tax compliance as well as the protocols in relation to IRD correspondence and appeals to make sure there are no lapses. Further, they are reassessing their tax positions on interpretative matters and adopting sustainability tax positions.
Additionally, there is an interest cost of 1.5% per month on late and delayed payments, which can accumulate to about 48% of any additional tax assessed, as assessments typically occur two years after the return filing. Consequently, cash flow management has become increasingly important, especially given the significant tax payments due each month. Exporters are also preparing for substantial cash outflows with the removal of VAT deferment on purchases under the SVAT scheme, starting October 1st.
How does VAT impact different sectors in Sri Lanka, particularly SMEs?
Shakthivel: In basic terms, VAT is a consumption tax, charged at import and at local supply points. A business whose tax-liable turnover exceeds Rs.15 million per quarter or Rs.60 million annually must register for VAT, but certain types of businesses will be exempt. Under the current system, exporters are zero-rated, so they can claim input VAT as refunds or settle through credit vouchers under the Simplified VAT (SVAT) scheme, which avoided cash flow issues.
However, the SVAT scheme will end in October, reverting to the cash refund model of 14 years ago. This is expected to affect exporters, especially SMEs, since refunds will now be granted based on their risk profile.
With the new rules, VAT registration is now mandatory for all commercial imports or exports, which may again affect SMEs when competing with similar businesses which are not required to obtain VAT registrations in the absence of having any imports or exports. Competitors are below the VAT. Compounding matters, all VAT returns must be filed electronically, which can be a logistical challenge, and the IRD’s Revenue Administration Management Information System (RAMIS) can deny input claims over minor invoice mismatches.
Overall, recent VAT changes could significantly impact SMEs through compliance burdens, cash flow pressures, and competitive disadvantages.
What best practices can companies adopt to streamline VAT reporting and compliance?
Shakthivel: The best way a company can help itself stay tax compliant is to maintain transaction-level documentation as per official VAT record-keeping regulations. Incorrect or incomplete records can lead to input claims being rejected. If a business submits VAT returns without proper reconciliation with Customs data and financial statements, the verification process would fail.
Successful VAT filing involves more than submitting output and input amounts. It requires systematic, regulation-compliant documentation. To manage this, businesses ought to invest in a capable in-house VAT compliance team or engage third party professionals to keep their records in order. This way, they can avoid any issues that may arise from a lack of awareness about regulatory requirements or changes.