Top tax dodger

Sri Lanka has the dubious distinction of being among the countries with the lowest personal income tax contributions to central government revenue even among Asian nations, according to a new Asian Development Bank report. The weak contribution from income taxes underscores the need to broaden the tax base to enlarge state revenue that will enable building of better public infrastructure.

The ADB’s 2013 Outlook reveals Sri Lanka’s personal income tax contribution as a percentage of Gross Domestic Product is among the lowest among peers in a comparison of Asian countries. (see graph)
Although in Sri Lanka the share of income tax revenue in total revenue increased to 20.4% in 2012 from 19.4% in 2011, tax revenue as a percentage of GDP continued to decline to 11.1% in 2012 from 12.4% in 2011, according to the Central Bank’s 2012 annual report that was just released.
Income taxes account for only 17% of the government’s total tax revenue. Excise duties contributed 19%. “Revenue from income taxes as a percentage of GDP declined marginally to 2.3% in 2012, although in nominal terms, it increased by 9.7% to Rs. 172.6 billion from Rs. 157.3 billion in 2011.” That increase came largely from a notable increase in the collection of withholding taxes. The ADB called for urgent measures by Asian governments to widen the tax base to increase revenues that could fund badly-needed public infrastructure. Strengthening public infrastructure will improve their economies’ capacity to grow more quickly and inclusively. To ensure adequate financing for infrastructure priorities, the ADB said, governments need to allocate their budgets more efficiently, minimizing inefficient subsidies, especially those that encourage wasteful fuel consumption, and redirect funds to more productive public investments.
“In tandem, revenues must be mobilized more effectively to maintain a healthy fiscal balance and avert the build-up of public debt. As income tax typically contributes very little to government revenues in Asia, broadening the tax base is an urgent task for many countries in developing Asia, to effectively enlarge government’s capacity to generate future revenues,” the report said.
“Building human capital requires upgraded public physical infrastructure to improve connectivity, efficient spending on health care and education, and better-targeted social protection programmes.”