Sri Lanka’s revenue administration has long been marred by corruption and collusion, with both insiders and external stakeholders acknowledging the worsening situation in recent years. Also, the three revenue collection departments under the Ministry of Finance—Inland Revenue, Customs, and Excise—operate separately with little interaction, creating opportunities for corruption to flourish, according to the IMF’s Governance Diagnostic Assessment.
“Exposure to corruption in customs and tax administration is substantial, given the absence of effective systems for performance monitoring and detecting and sanctioning officials for improper behaviour,” the IMF says.
Citizens and businesses engage in tax avoidance schemes, and tax evasion, or resort to bribing officials, especially Customs, often to avoid harassment and hefty losses from uncleared goods, which is why public trust in our revenue institutions has eroded to non-existence.
Corruption at Sri Lanka Customs is notorious. In February 2016, three senior Customs officers were arrested for accepting a Rs125 million bribe, with the help of an importer linked to Steel Impex. Subsequently, two more superintendents were arrested for their involvement in the same scheme. The importer who tipped off the bribery commission reported that two Customs directors arbitrarily investigated Steel Impex, an Indian company supplying duty-free spare parts to the Sri Lanka Transport Board (SLTB). They summoned him ten times, harassed him and Steel Impex partners, and proposed a bribe of Rs150 million to settle the matter unofficially.
The Customs Ordinance gives officers extensive powers, allowing them to act as judge and jury without judicial oversight, denying fair trials. Section 127 permits arrest and remand without bail for suspected offences, with officers imposing penalties far exceeding those a magistrate can levy. Suspects are denied access to evidence against them, violating their constitutional right to a fair trial. Customs officers financially benefit from the penalties they impose, compromising impartiality. This power has led to abuses.
According to the IMF report, corruption vulnerabilities arise at points of interaction between revenue officials and the public. When officials exercise discretion without adequate safeguards, they can exploit opportunities to assess income or expenses, classify goods and tax rates, or grant concessions.
Cumbersome procedures and collusion between officials create strong incentives for taxpayers to offer and revenue officials to solicit bribes, benefiting the corrupt parties at the expense of the government and society. This problem is further exacerbated by the lack of accountability within these departments.
There is little accountability or consequence for corrupt actions. The culture of integrity is virtually non-existent, with corruption allegedly present at every level, including top management. Promotions are seniority-based. “Merit or performance have little relevance, and indeed, poor performance including integrity suspicions (are) not an impediment to advancement,” the report points out. This lack of a merit-based system undermines the overall efficiency and integrity of the departments. Internationally, Customs and tax administrations usually have small dedicated Internal Affairs units to investigate alleged cases of staff malpractices. In Sri Lanka’s case, a Revenue Taskforce that reports directly to the Customs Director General investigates certain staff integrity cases, including some of the 45 active cases under consideration when the IMF released the governance diagnostic report in 2023.
The revenue departments are predominantly closed institutions with little employment mobility, leading to inward-looking institutions reluctant to change. The revenue departments set their own incentive schemes and staff rotation policies, which is a big problem.
“For example, Customs remuneration is augmented by the proceeds of seizures, and IRD operates a complex and likely counter-productive incentive scheme that supplements base salaries for meeting revenue and other operational targets,” the IMF diagnostic report says. Additionally, leadership issues plague these departments.
The Customs Department is currently led by senior government executives from outside Customs, while the Inland Revenue Department (IRD) Commissioners General are internally appointed from the next most senior official, typically with an average tenure of around one year. This lack of stability hinders the ability to tackle complex multi-year reforms and modernization.
Both Customs and IRD officials who spoke to the IMF acknowledge the rampant state of corruption in their institutions, but there are few if any consequences when corruption allegations are made. In recent years, no cases against corrupt tax officials have been made or reported, the report notes.
According to the IMF, the 2021 Customs Department report noted 11 preliminary disciplinary cases being investigated but not concluded and two formal cases still under investigation. The Commission to Investigate Allegations of Bribery or Corruption (CIABOC) acknowledges that revenue-related cases are relatively rare, the diagnostic report says. This highlights the lack of effective mechanisms to address and resolve corruption allegations.
Given these pervasive issues, strengthening revenue administration integrity requires proactive measures instituted by the individual revenue departments. This includes a strongly articulated internal campaign to emphasize strict staff integrity expectations and zero tolerance for corrupt behaviour.
Departmental codes of conduct need to be simplified and updated, and staff should be compelled to attend integrity/ethics training every two to three years and make an annual affirmation of familiarity and compliance with the code. Moreover, effective digitization can reduce corruption vulnerabilities.
The Automated System for Customs Data (ASYCUDA) has demonstrated this through supported import clearance processes, with all entries and payments made electronically. Conversely, Excise operations are entirely based on antiquated and vulnerable manual processes. The Revenue Administration Management Information System (RAMIS) has been developed by IRD but is plagued by delays and problems.
Rent-seeking vulnerabilities are magnified by cumbersome tax return and refund assessment processes that entail unnecessary interactions between taxpayers and IRD officials.
Principles of self-assessment are undermined by time-consuming manual verification and cross-checking processes by IRD officials when tax returns are filed and refunds are requested. Excessive transactional data must be submitted with tax returns, which are subject to detailed manual cross-matching regardless of materiality. Improvements to online tax return filing can reduce human interaction between taxpayers and tax officials and reduce corruption vulnerabilities.
Tax returns can be electronically filed via an Internet portal and are mandated for corporate income tax and all large taxpayers. However, the current user interface for online filing onerously replicates complex tax return design features rather than being re-engineered and simplified from the perspective of the majority of users. This shift towards digital solutions could significantly streamline processes and reduce opportunities for corruption.
Tax expenditure (exemptions, tax holidays, concessions) management is fragmented, prone to misuse, and with little oversight. IRD advises that they are not informed of exemptions approved by the Ministry of Finance, but the Ministry has advised that all exemptions are communicated to the IRD via the Board of Investment (BoI) and gazette publishing, suggesting there is no clarity or process for information.
IRD has no apparent system to record and track exemptions, per se, other than within individual taxpayer files. This lack of coordination and oversight significantly hampers effective fiscal analysis and tax policy formulation. Effective fiscal analysis and tax policy formulation is undermined by unnecessary restrictions on the sharing of anonymized taxpayer data by IRD with the Ministry of Finance Fiscal Policy Department.
Evidence-based monitoring of the outcomes resulting from the implementation of tax policy measures is macro-critical to ensure delivery of the revenue-driven fiscal adjustment commitments under the IMF Extended Fund Facility agreement. The ability to fine-tune and adjust tax policies in response to changing economic circumstances is predicated on reliable and timely taxpayer data.
To address these pervasive issues, the Inland Revenue Department should be accountable to and subject to robust government oversight. It is evident that IRD operates autonomously and is subject to insufficient scrutiny for the revenues it collects (or doesn’t collect). The revenue departments must be accountable to the Ministry and Minister of Finance, the relevant parliamentary oversight committees, and external scrutiny from the Auditor-General.
The private sector is also calling for measures to improve accountability, transparency, and a voice in tax administration, including the creation of a Tax Ombudsperson and the development of a Taxpayer Charter, the IMF’s Governance Diagnostic Assessment suggests. Strengthening these oversight mechanisms could play a crucial role in curbing corruption and enhancing the efficiency of Sri Lanka’s revenue administration. However, measures also must be in place to prevent and punish tax avoidance and evasion and discourage rent-seeking for unfair gains.
The gravity of Sri Lanka’s tax problem is intensifying. Sharmini Cooray, an advisor to the Government and former IMF official at a recent forum organized by the Advocata Institute, a think tank, said that Sri Lanka needs to raise tax revenue from 9.2% of GDP now to 14% of GDP by 2028 to cover loan interest after restructuring, with 45% allocated to debt servicing. Efficient tax administration aside, reforming state enterprises, and making public sector workers more productive will be critical issues to deal with in the short term to avoid again having to languish in endless queues in torrid weather, or deal with the darkness at night, or fret endlessly about finding essentials, food and life-saving drugs.
If there’s ever a time to heed a philosopher’s percept, it is probably now. Taxes are a part of life. There is a cost to everything we do, and as the Stoic Seneca wrote, “All the things which cause complaint or dread are like the taxes of life—things from which, you should never hope for exemption or seek escape.”