New tax system to reduce dependence on cigarette, liquor duties

In a prompt response to President Maithripala Sirisena’s call to deviate from the over dependence on alcohol and tobacco taxes to raise revenue for state coffers, the Treasury is considering the option of further broadbasing and simplifying the tax base while minimising tax exemptions, government officials said.

Although the Treasury was not in a position to scrap alcohol and tobacco tax in the short run, it is to introduce indirect taxes on goods and services and restructure import duties in the November 2016 budget to bridge the deficit, they revealed.

If the use of tobacco and liquor comes down significantly, the Treasury will have a widening deficit at their hands with no option but to strengthen indirect taxes on all goods and services. Among proposed changes are reducing the large number of tax exemptions granted to various sectors, a senior state official said, adding that Inland Revenue Act contains over 50 pages of exemptions from income tax.

This was not an easy task as those exemptions were given under political pressure, he said, adding that bold decisions need to be taken when introducing new tax reforms.

Dependence on cigarette and tobacco revenue is high. Duties from cigarettes and tobacco increased by 45 per cent to Rs. 25.49 billion during the first four months of 2015 from Rs. 17.52 billion in the same period last year benefiting from the increase in excise duty on cigarettes coupled with enhanced production of tobacco by 12 per cent, Finance Ministry data showed.

Total excise revenue from liquor increased by 48.9 percent to Rs.33.505 million during the first quarter of this year from Rs.22,504 million during the same period last year.