Main Changes in Tax Collection Administration in the Last 12 Years

2.3. Main Changes in Tax Collection Administration in the Last 12 Years

IR Act

VAT Act

IR special

New Income

Introduction Amendments

Legislative

Provision Act

Double Tax

Programme

Cancellation Agreements

Privilege Cards to good taxpayers

Digital/IT

General/

Taxpayer

Contextual

Service

CATA

Unit

Measuring Public-sector Productivity in Selected Asian Countries

2.3.1. Introduction of Value Added Tax (VAT)

Value Added Tax (VAT) was introduced by Act No. 14 of 2002 and has been in force from

1 August 2002. VAT replaced the Goods and Services Tax (GST) which was almost similar tax on the consumption of goods and services.

The goods imported into Sri Lanka and goods and services supplied within the territorial limits of Sri Lanka are the subject matter of this tax. It is a multi-stage tax levied on the incremental value at every stage in the production and distribution chain of goods and services. The tax is borne by the final or the ultimate consumer of goods or services. It is an indirect tax and the government will receive at the end, through all the intermediary suppliers in the chain of production and distribution, an amount equal to the amount paid by the final consumer. The purpose of replacing the GST in place of the VAT was to simplify the tax system and the major difference was that the VAT was not applied on certain imports and on retail and wholesale supply of goods. Although there were some implications at the introduction of the VAT, when considering the end result of these changes there was no such adverse effect on total tax revenue due to this new application.

2.3.2. Decentralization In order to avoid congestion in the head office and to provide better service to taxpayers

there around, arrangements have been made to shift metro branches and some service units currently located in the head office to two new premises taken over by the department. These new locations had more space and with other facilities like banks as well as post offices it would be much more convenient to taxpayers.

With a view to monitoring closely and comprehensively, a separate unit ‘The Banking and Insurance Services Unit’ was established. Further a Special Information Branch to strengthen the process of an expanding tax base, a research unit to study several sectors and a stamp duty branch was also established. Two new two regional offices were opened to concentrate closely on existing and potential taxpayers in those areas and also to facilitate the taxpayers in the respective areas in discharging their obligations. All these new initiatives were instrumental on smoothening the procedures and it obviously helped to increase the efficiency of the operational process and the collection of taxes which led to enhance the total factor productivity.

Sri Lanka

2.3.3. Business Promotion

Awareness programmes were conducted to convince and motivate the taxpayers with the aim of increasing the tax revenue. The programs were named the ‘Inland Revenue Walk’, ‘Payment of tax is your Responsibility’, and ‘Rata Venuwen Api’. In addition some programmes were introduced under this scheme like issuing privilege cards and tax concessions on the import of vehicles on encouraging business people to be taxpayers. It is noted that impacts on these programmes positively affected the revenue collection of the country.

The process of issuing privilege cards to good (individual) taxpayers to recognize their contribution to the government revenue and to make them entitled to certain moral benefits

such as preferential treatments at government agencies, continued with added modes. From the entrepreneurs’ point of view, these kinds of preferences were much more conve- nient for them to expedite their day to day activities and therefore it positively affected changing the mindset on the payment of taxes.

2.3.4. Taxpayer Service Unit

Introduction of the Taxpayer Service Unit facilitated the taxpayers and the public to access its services conveniently. The unit is equipped with offices to assist every person seeking help or information. Relevant enactments, departmental publications, paying slips, forms, etc., were available in this unit. To avoid possible delays and inconveniences, arrange- ments were made to issue Taxpayer Identification Numbers (TINs) and temporary VAT numbers. These people-friendly approaches were helping the attitude change in taxpayers and it was also helpful to develop a mutual understanding between taxpayers and the bureaucracy.

2.3.5. New Branch Network

Due to opening up of new branches and organizing the audit functions methodically, the Department of Inland Revenue was able to detect undisclosed income and undisclosed turnover. This program has also assisted to increase the total factor productivity on taxation.

Measuring Public-sector Productivity in Selected Asian Countries

2.3.6. Introduction of Nation Building Tax (NBT)

The Nation Building Tax (NBT) Bill, giving legal effect to the 2009 Budget Proposals relating to the imposition of NBT, was passed by Parliament on 7 January 2009. NBT Tax Act No. 9 came into operation on 1 February 2009. The objective was social contribution towards welfare of security forces and to rebuild communities and infrastructure facilities affected by terrorism. This tax will be levied on the turnover of importers, manufacturers, and service providers at a rate of 1%.

The Nation Building Tax (Amendment) Act No. 32 of 2009 increased NBT from 1-3%. Specify the date for the submission of tax returns to the Department of Inland Revenue. Exempt the receipts to an exporter, goods used for projects approved by the Minister of Finance, and services of sales agents registered under the Civil Aviation Act.

The collection of NBT for the year exceeded the target by 1.182 billion and contributed 12.05% to the total revenue collection. The total number of taxpayers registered for NBT as of 31 December 2011 was 60,370. Out of the persons registered for NBT, 18,102 are companies and the rest are individuals and partnerships. The scope of the Nation Building Tax was widened by adding wholesale and retail trade sectors, which were earlier under provincial councils Turnover Tax regime. One third of the total NBT revenue was transferred to provincial councils. These figure clearly reflect that this was one of the most successful initiatives in increasing the tax revenue of the country.

2.3.7. Major Amendments

Taking forward the reform initiatives proposed in the 2011 budget, as recommended by the Presidential Tax Commission, the government introduced appropriate amendments to bring the country’s taxation in line with other fast growing emerging economies. Amendments were made to the Nation Building Tax Act No. 9 of 2009, Inland Revenue Act No. 10 of 2006, Economic Service Charge Act No. 13 of 2006, and Value Added Tax Act No. 14 of 2002. Further, Finance Act No. 12 of 2012 was introduced.

Nation Building Tax and Provincial Turnover Tax were combined. Debit Tax, Social Responsibility Levy and Regional Infrastructure Levy, were removed, to simplify taxation. Corporate and personal tax rates were further rationalized and simplified.

Though it is too early to comment on the total impact of these new initiatives, policy makers are of the view that this kind of simplification will be beneficial on increasing positive impacts in the tax system.

Sri Lanka

2.3.8. Double Tax Avoidance Agreements

Countries enter into double tax treaties to eliminate or mitigate the incidence of juridical double taxation and fiscal evasions in international trade (or transactions). These treaties

are particularly important for developing countries as they play a great role in attracting foreign investments, expertise, and modern technology, etc. Sri Lanka has entered with 38 countries and the multilateral treaty into double tax avoidance treaties as of 31 December 2012.

Another five agreements have been signed with Luxemburg, Seychelles, Belarus, Palestine, and Bahrain which are to be entered into force in the near future. Further,

four agreements have been signed at official levels with Ukraine, Oman, Germany, and Singapore. A double taxation avoidance agreement secured the position that a taxpayer is not required to pay tax twice in respect to the same income for the same period although they are generally subject to tax their home country as well as in the country in which they make investments. The main objective of entering into the agreements for the avoidance

of double taxation is to encourage the inflow of capital, technology, and expertise into the country and thereby accelerate the economic development and remove the double taxation of the same income and obstacles incidental thereto. It is expected that these provisions will encourage investments and help to expand the trade and economic ties between all these countries, which will have positive results on improving economic growth in the long run.

2.3.9. Commonwealth Association of Tax Administrators (CATA)

CATA which was established in 1977 is the largest organization of the Tax Administrations in the world. The 32nd Annual Technical Conference of CATA was held in Colombo, Sri Lanka, during the period of 18–23 September 2011. Its current membership is 49 Commonwealth Countries. This Association was set up mainly for fostering improved effectiveness and efficiency of tax administrations within the commonwealth countries. Sri Lanka has been a member of CATA since 1978. Since there was an exposure of sharing experience with other counties, the efficiency and the effectiveness of the taxation has been enhanced and productivity has also increased concurrently.

Measuring Public-sector Productivity in Selected Asian Countries