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Inland Revenue Department goes for a short term revenue revival 

The Inland Revenue Department’s (IRD) vastly experienced top management team wants the new administration to immediately implement a short term revenue revival plan after the catastrophic two years of COVID-19 pandemic and mindless tax cuts resulted in a loss of over Rs 1 trillion.

“Given the multiplicity of taxes and the complexity of the current tax system as a whole, rationalising taxes and expanding the tax base is necessary to improve revenue collection for the rest of the year with eyes wide open for a positive change,” Chairman of the Inland Revenue Commissioners Association and senior commissioner Sarath Abeyratne said.

The revenue generation from the budget 2022 presented by former Finance Minister Basil Rajapaksa has become unrealistic and the new administration is compelled to present an alternative budget reinstating the 2019 taxation system to raise the revenue, he disclosed.

The IRD official administrators spearheaded by commissioners will present their suggestions through the Commissioner General of the department at the upcoming official budgetary meetings, he pointed out.

The new administration should widen the tax base, simplify the tax rates and the tax laws reducing the number of taxes, facilitating voluntary compliance, avoiding politically motivated tax amnesties and tax concessions, and avoiding political interferences and influences on tax administration to enhance tax revenue, he said.

Digitisation of tax administration will be one of the key initiatives for the IRD in the coming years following the resurgence of the economy, with a major shift to a digital economy tax regime, he said claiming that it will have a major impact on the way the Finance Ministry levies tax on digital firms.

Improving tax compliance and preventing tax evasion making use of loopholes in the present system as well as the increase in the number of tax payers should be given immediate priority as there was a loss of around one million tax payers within the last two years following the removal of certain taxes and tax cuts imposed in 2019, he added.

The IRD has collected Rs. 349.4 billion in January to (mid) May this year from the total target of Rs.1067.8 billion, compared to Rs. 575 billion for the whole of last year and Rs. 523 billion in 2020, official data shows.

The decline in revenue of 50 per cent of the total tax collection in the last two years was 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.

The then government has slashed the value added tax (VAT) to 8 per cent from 15 per cent and also abolished seven other taxes.

Mr. Abeyratne, with wide experience of around 30 years service in the department, disclosed that it will be gigantic task for the department to collect at least Rs. 700 billion for financial year 2022.

Sri Lanka needs to resume and overhaul current tax system to achieve economic recovery in the face of the present unprecedented and complex economic crisis via the new alternative budget soon, he said.

He added that a proposal will be made to reduce the VAT threshold – which was increased to Rs. 300 million per annum from Rs. 12 million per annum in early 2020 – to at least around Rs. 150 million per annum.

Additionally, it will be proposed to reduce personal income tax threshold to a lower level, which was increased to Rs. 3 million per annum in early 2020.

Another suggestion will be made to reintroduce PAYE, which will be a useful measure in terms of tax administration, releasing the IRD from having to focus on the entire employee population.

It has also been proposed to increase the tax rate on alcohol and tobacco in accordance with the growth rate of nominal GDP ensuring a steady stream of tax enhancements regularly.

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