Sri Lanka’s Auditor General says the Inland Revenue Department (IRD) has not collected default taxes and penalties amounting to more than Rs3.3 trillion as at end June 2019. An incredible figure, given the total collected tax revenue for 2019 amounting to Rs1.7 trillion.
The AG’s office had pored over taxpayer files, payment records and additional assessments issued by the tax department stored in IRD’s RAMIS (Revenue Administration and Management Information System) and its legacy systems for audit culminating in a July 2020 report. “A gradual increase in the taxes and penalties in default was observed with respect to both legacy and RAMIS software.
Although there are legal provisions to recover them, it was observed that the total of the taxes in default was increasing annually,” Sri Lanka’s Auditor General Chulantha Wickramaratne said. According to information gleaned from RAMIS, taxes in default and penalties totalled Rs3 trillion as at 30 June 2019 with only 4% shown as recoverable, with the balance 96% held over for no known reason.
“The analysis of several years of information relating to theholdover balances of taxes and penalties has shown that the IRD had not taken timely measures to identify the reasons for the significant holdovers, the Attorney General said. There was Rs310 billion worth of taxes in default including penalties according to IRD’s legacy system which RAMIS replaced in January 2016. Of this, only 41% were recoverable. Over 90% of the default taxes are consumption (VAT) and income taxes and the IRD had no explanation as to why recoverable taxes remained in default. The audit also found that Rs3.5 billion in default taxes had been due to accounting errors, but the IRD had not recovered these either.
Taxpayers submit self-assessments on a monthly or quarterly basis and the IRD has to resolve any disputes within 60 days and collect the state’s dues. Sri Lanka continues to struggle with a perennial problem: low taxes. The IRD introduced the cloud-based RAMIS application to improve the tax collection mechanism. During the years between 1950 to 1989, tax collection averaged 21% of GDP and had declined over the years to 12.6% in 2019, lagging behind all its developing country peers: Georgia 24%, Samoa 23%, Ukraine 18%, Armenia 17.5% and Tunisia 21%, according to IMF data. As a percentage of GDP, Sri Lanka collects fewer taxes than even sub-Saharan African countries which averaged 15% in 2018.
Sri Lanka’s problem is that income tax evasion is far too high. Sri Lanka’s income tax-to-GDP, at 2.8% is much lower than that of some peers in the middle-income group: Georgia and Mongolia have 9%, Bhutan 7.7%, Samoa 5.6% and even Egypt had 6%.
This limits the government’s ability to finance development and compounds macroeconomic challenges too. For instance, Sri Lanka’s covid-19 relief allocation is less than 0.5% of GDP and pales in comparison its regional peers like India 10%, Thailand 9.6%, Vietnam 3.5% and the Philippines 3.1%, according to Publicfinance.lk, a portal developed by Verite Research, a think tank. In 2019, the government announced several tax cuts to revive the economy resulting in a revenue loss estimated to be a fourth of the Rs1.9 trillion total revenue collected in 2018.
The government spent Rs500 billion as interest payments on treasury bonds alone in 2018: that’s equal to the revenue loss from the 2019 tax cuts! And this was before the coronavirus which now severely limits the government’s ability to stimulate the economy out of this crisis.
The income tax to consumption tax ratio must improve from 25:75 in 2019 to 40:60, which is widely regarded as a comfortable level for equitable growth. There are three reasons for Sri Lanka’s low income tax collection: First, income tax evasion here is widespread for an economy in Sri Lanka’s state of development.
“If tax evaders are brought into the net we could collect an additional 1.5% of GDP,” a former Inland Revenue Department (IRD) Chief and a member of the 2009 Presidential Taxation Commission, R. P. L. Weerasinghe has said. Second, the tax code has too many loopholes, making it easy to avoid taxes (without committing a criminal offence).
Third, Sri Lanka’s revenue department is not an autonomous agency. RAMIS was a step in this direction. In 2010, the IRD set up a special unit to clear default taxes as part of a broad campaign to reform the tax administration. The Default Tax Recovery Unit had to collect Rs22 billion worth of default taxes and Rs12 billion worth of outstanding penalties.
“Action had not been taken to recover these even after a period of eight years,” the Wickramaratne said. The AG has recommended tough measures including investigating lapses at the IRD and taking action against tax officials for not carrying out their duties and functions vested with them by the laws governing the IRD.