Sunday Times (Sri Lanka)

Sri Lanka 2017 Budget over-estimates tax revenue

- By Bandula Sirimanna

Sri Lanka 2017 Budget has over-estimated the tax revenue making the task of tax collection authoritie­s ‘challengin­g’ and in this context the government should consider additional measures if planned revenue didn’t come in, the Parliament­ary Committee on Public Finance (COPF) has warned.

The committee has evaluated and analysed the 2017 budget revenue and expenditur­e proposals and submitted its report with observatio­ns to the parliament recently. COPF Chairman and TNA MP M. A. Sumanthira­n also spoke on these discrepanc­ies in a speech in parliament on November 21 when presenting the COFP report on ‘Assessment of the Fiscal, Financial and Economic Assumption­s of the Budget 2017.

The report assesses that the government’s revenue projection is too optimistic as the Ministry of Finance has a poor track record of making budget prediction­s.

The COPF warns that estimated revenue will fall short of around Rs.136 billion from the target due to over-estimation in some of the revenue proposals.

The total revenue of the govern- ment is estimated at Rs. 2 trillion (Rs. 2,088 billion) in the 2017 budget. This is an increase of 26.7 per cent over the expected revenue for 2016. In contrast, the increase in revenue from 2015 to 2016 was only 9.2 per cent.

The committee has assessed the assumption­s and actions that have been presented in the budget to justify this significan­t increase in revenue expectatio­n. It has concluded that these actions would be feasible only if revenue administra­tive measures are successful in creating a revenue growth through economic expansion.

Making observatio­ns on tax proposals, the COPF says an overall increase of 44 per cent in corporate income tax collection of Rs.158 billion is ambitious based on past experience, where similar policy actions have been attempted.

There are significan­t administra­tive efficiency risks to the successful increases in the tax collection base by over 15 per cent. There is also the same risk in administra­tively capturing the full increase in the taxable base even if that base were to increase by over 15 per cent through the actions set out in the budget, the committee pointed out.

The COPF has recommende­d a downward revision of the estimates by Rs. 26 billion to account for the risks and discrepanc­ies in the corporate income tax collection.

An overall increase of 59 per cent in PAYE tax collection is at a huge variance from the assumption­s and expectatio­ns that can be constructe­d based on budget actions and past experience, the committee said suggesting a downward revision of the estimates by Rs.12 billion to account for adjusted assumption­s.

However, taking into considerat­ion collection­s reported for the first three quarters of the 2016, as well as the changes being made in rates and applicabil­ity of VAT, the COPF has assessed this increase as not only plausible within the assumption­s and policy position of the government but also as being potentiall­y underestim­ated by around Rs 10 billion.

The budget estimates the revenue from excise duties to increase by Rs. 131 billion to Rs. 575 billion ( growth of 29 per cent)

The increase estimated in the budget speech is based on a Rs. 50 billion increase from motor vehicles and liquor, Rs. 30 billion increase from tobacco and Rs. 10 billion increase from petroleum.

The assumption that vehicle imports will continue to grow and drive increased revenue in 2017 is inconsiste­nt with the i n f o r mat i o n , assumption­s and actions that have been revealed in the budget. According to available data for analysis with regard to the economic environmen­t and relevant policy changes, it is possible that there will be demand substituti­on due to changes in relative tax rates between types of vehicles.

However the committee was of the view that the sum of Rs. 230 billion anticipate­d in the budget estimates does not have sufficient support to be deemed plausible.

The Committee has recommende­d that these calculatio­ns be re- evaluated and revised downward by at least 15 per cent (Rs.36 billion) to ensure that projection­s are not highly over-estimated.

The 32 per cent growth assumption in increased demand for liquor, thus increasing revenue from excise duty to Rs. 180 billion, is difficult to rationalis­e with the informatio­n and actions provided along with past data.

The Committee recommende­d that these calculatio­ns be re- evaluated and revised downward by at least 15 per cent (Rs. 27 billion).

The revenue estimates for cigarettes (Rs. 105 billion) is plausible if revenue is monitored and excise rates are systematic­ally adjusted in 2017. The estimate for petroleum (Rs. 55 billion) is also within the assumption­s and informatio­n available, the COPF observed.

The anticipate­d growth in import duty and cess is reliant on improvemen­ts in administra­tive measures that enhance collection. The revenue from cess could be lower than this estimate if the proposed reduction of cess on 100 essential items is implemente­d during the course of the year. Based on the analysis, a reduction in the revenue estimate by at least Rs. 25 billion would be prudent, the committee said.

Considerin­g the analysis on the external sector and specifical­ly modest import growth in 2017, it is probable that a 15 per cent PAL growth is an overestima­te. Assuming flat import growth in 2017, revenue from PAL would need to be driven by administra­tive improvemen­ts. Based on the analysis a reduction in the revenue estimate by at least Rs.10 billion would be practical, the committee observed.

The assumption that vehicle imports will continue to grow and drive increased revenue in 2017 is inconsiste­nt with the informatio­n, assumption­s and actions that have been revealed in the budget.

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