Govt. faces gigantic task of enhancing revenue with narrow tax base

The government’s failure to achieve its one million target on new tax files this year will make it difficult to raise Rs.1,080 billion in 2024 from taxes on income and profit, economic experts warned.

Sri Lanka’s tax base has narrowed to a very low level following the introduction of major changes in tax policy in December 2019, particularly the increase in thresholds for Value Added Tax (VAT) and the abolition of Pay as You Earn (PAYE) tax, they added.

According to Finance Ministry data from a total of 105,000 companies in the country, only 15,000 fulfil their tax obligations.

The number of personal tax files has decreased to 204,000 this year from 295,000 personal tax files in 2022.

The Inland Revenue Department’s task of collecting over Rs.1 trillion from taxes on income and profit of 219,000 individuals and companies next year will be a mission impossible, a former Treasury secretary who wished to remain anonymous told the Business Times.

The government will be taking several stringent measures including legal action against those who fail to file tax returns and make the Taxpayer Identification Number (TIN) mandatory for several transactions.

These transactions include the opening of a bank current account at any bank; obtaining approval for a building plan by the applicant, registering a motor vehicle or renew a licence by the owner and for registering a land or title to a land by the buyer.

A special penal provision will be introduced to prosecute persons who have failed to file tax returns and provide information required by the tax officials.

Nearly 90,000 companies in Sri Lanka do not pay taxes, the Sectoral Oversight Committee on National Economic and Physical Planning revealed.

Around 46,000 new tax files were opened in 2018, as at 31-12 -2019 the number of tax files were 1,705,233 (around 1.71million) and this has come down by 33.5 per cent to1,133,445 (1.13 million ) as at 31-12-2020.

There has been a 33.5 per cent decline in Sri Lanka's tax base between 2019 and 2020 in the number of registered taxpayers (corporate and individual) in the country.

This decline is most probably associated with the major changes in tax policy introduced in December 2019, particularly the increase in thresholds for Value Added Tax (VAT) and the abolition of Pay As You Earn (PAYE) tax, a senior finance ministry official said.