By: Staff Writer
January 06, Colombo (LNW): Despite government efforts to position taxation as a social responsibility, policy missteps have undermined public confidence in the tax system. A core principle of taxation—fairness based on the ability to pay—has often been overlooked.
Former Deputy Commissioner General of the Inland Revenue Department (IRD), N.M.M. Milfy highlighted the adverse effects of recent tax policies, especially during a period of severe economic instability.
When inflation surged from 9% to 70% in 2022, the purchasing power of citizens drastically declined. Conventional tax policy dictates offering relief measures—such as higher thresholds, reduced rates, and targeted exemptions—during such crises to mitigate economic contraction.
Instead, the government reduced tax thresholds and increased rates for both income tax and VAT. While this led to a temporary rise in revenue, it contravened fundamental tax principles and eroded public trust, with many citizens viewing taxation as “legalized robbery.”
The long-term repercussions of such policies are significant. Excessive tax burdens can drive capital flight, disincentivize investment and savings, and prompt skilled professionals to leave the country. Additionally, tax evasion and avoidance increase, further straining public confidence and economic efficiency.
Milfy and other tax experts suggest that expanding the tax base and curbing evasion are more effective strategies to enhance revenue.
Alarmingly, over 70% of Sri Lanka’s tax revenue comes from fewer than 600 tax files, representing less than 1% of the total files maintained by the IRD.
The unequal contribution to revenue highlights inefficiencies in enforcement and the narrow scope of tax collection.
Global trends further exacerbate the problem. According to the Tax Justice Network, countries lose $480 billion annually to cross-border tax evasion by multinational enterprises (MNEs) and wealthy individuals. Sri Lanka alone forfeits $413.25 million (approximately LKR 125 billion) annually to such practices
Of this, $406.56 million is attributed to MNEs, while $6.69 million is linked to high-net-worth individuals. Notably, this loss exceeds the LKR 69 billion collected in 2022 from individual taxpayers through income taxes, including PAYE.
Experts argue that digitalization of the IRD’s processes could significantly address these issues. Tax expert N.R. Gajendran, speaking on a current affairs program, noted that Sri Lanka has consistently struggled to meet its tax revenue targets despite multiple hikes.
He attributed this failure to systemic inefficiencies, corruption, and evasion among top taxpayers. While Sri Lanka’s tax-to-GDP ratio stood at 22% in the early 1990s, it has fallen to below 15% in recent years—well below the 28%-30% ratio required for macroeconomic stability in developed nations.
Tax Consultant Suresh Perera echoed these concerns, emphasizing that enforcement gaps primarily allow high-income individuals and corporations to evade taxes.
He criticized the disproportionate focus on small taxpayers in policy discussions and urged policymakers to target large corporations, which contribute the bulk of revenue.
Addressing tax leakages, combating evasion, and implementing equitable policies are critical for Sri Lanka’s economic recovery. Without these reforms, the country risks undermining public trust and failing to meet its revenue potential, further deepening its fiscal challenges.
