Published on: August 17, 2023

Sri Lanka initiates urgent reforms to amend Inland Revenue Act for enhanced revenue collection – Former Minister Mahindananda Aluthgamage

In a bid to fortify Sri Lanka’s fiscal stability and streamline revenue collection by enhancing the state tax mechanism, Mr. Mahindananda Aluthgamage, Chairman of the Sectoral Oversight Committee on National Economic and Physical Planning, revealed that necessary measures have been initiated to promptly amend the Inland Revenue Ordinance.

Acknowledging certain officials’ underperformance within the Inland Revenue Department, Mr. Aluthgamage emphasized that the new Inland Revenue Ordinance will empower robust measures to address the issue. The objective is to make formidable decisions regarding officials not contributing effectively to the state’s tax revenue enhancement.

Addressing the news conference held at the Presidential Media Centre (PMC) today (17) under the theme “Collective path to a stable country” former Minister and the Chairman of the Sectoral Oversight Committee on National Economic and Physical Plans Mr. Mahindananda Aluthgamage drew attention to significant challenges inherent in Sri Lanka’s tax collection system. As a result, he stressed the urgent need for an immediate overhaul of the country’s tax policy. Mr. Aluthgamage’s statement underscores the gravity of the situation and signals a call for swift, comprehensive reforms to address the complexities within the current tax collection framework.

Mr. Mahindananda Aluthgamage further said:

In pursuit of these goals, the government has proactively engaged in amending the taxation framework, considering its critical role in the country’s economic stability. Notably, the government’s commitment to the International Monetary Fund (IMF) necessitates goals like reducing inflation to a single digit, increasing foreign reserves, and increasing state tax revenue.

Mr. Aluthgamage highlighted the pivotal role of three major revenue-generating entities – the Inland Revenue Department, Customs, and Excise Department – in achieving these goals. With an anticipated state tax revenue target of Rs. 3,105 billion for the current year, a rigorous assessment reveals that only Rs. 1,179 billion have been collected so far from these institutions.

He emphasized that these institutions’ restructuring is imperative and the IMF has conveyed to the government the need of achieving stipulated targets by December of the present year. In response to this, an evaluation report assessing the feasibility of these objectives across the three concerned institutions has been compiled. This report is slated for submission to the Parliament. The committee’s view is that without an essential restructuring of these three entities, the government’s capacity to realize its envisioned goals would be significantly impeded.

Mr. Mahindananda Aluthgamage stressed that the public inquiry often falls solely on politicians, yet it is important to acknowledge that certain officials within revenue-generating institutions also bear responsibility. Instances of corruption, irregularities, and purposeful actions have led to a troubling scenario where the government remains unable to successfully collect revenues from these entities. In contrast to global standards, where government revenue typically constitutes 20% of GDP, our nation’s revenue stands at 8.20% in the current year (2023). This wide disparity underscores the necessity to explore strategies for bridging this considerable gap. With a population of 22 million, the nation maintains only 500,000 personal tax files.

In the past year (2022), the count of personal files saw a decrease to 295,000. In the on-going year, this number has further reduced to 204,000. Surprisingly, a mere 29,000 individuals among the populace contribute a solitary rupee to the nation’s tax resources through their personal files. On the corporate front, our country hosts 105,000 companies, but merely 15,000 of them fulfil their tax obligations. These concerning statistics reveal significant complications within our nation’s tax collection framework.

In the global context, a trend towards simplification in tax policies has emerged. Contrarily, the intricacies present in our own tax system highlight a pressing need for reform. It’s worth noting that in our current framework, legal recourse against non-payment of taxes is limited.

Hence, an immediate overhaul of the nation’s tax policy is imperative. A substantial burden rests on the Inland Revenue Department, tasked with collecting Rs. 904 billion in taxes. An alarming individuality emerges in Sri Lanka’s tax landscape: it stands as the sole nation worldwide permitting the submission of four appeals without fulfilling tax obligations to the government. A staggering 15-year period is required to scrutinize these four appeals. This protracted timeframe casts doubt on the feasibility of tax collection in a timely manner.

This predicament raises pertinent questions about the public’s ability to meet their tax responsibilities given such constraints. The responsibility to collect Rs. 904 billion within a 15-year span is emblematic of a systemic issue. Notably, some officers within the Inland Revenue Department appear to intentionally fall short in their professional duties, further exacerbating the situation. Evidently, a significant loophole exists within the tax collection mechanism, demanding immediate rectification.

Efforts are underway in collaboration with the Ministry of Justice to promptly amend the Inland Revenue Act, addressing critical concerns in Sri Lanka’s tax collection system. Proposals to reduce the number of allowable appeals against tax payment from four to two have been put forth in Parliament, with the support of President Ranil Wickremesinghe. This move aims to streamline the tax collection process.

Simultaneously, there’s a determined push to accumulate the substantial tax sum of Rs. 904 billion. This endeavour is gaining momentum, as the government aims to enhance revenue generation in a timely manner. However, Revenue Administration Management Information System (RAMIS), an intriguing revelation surfaces concerning the Inland Revenue Department’s digital system. Despite a significant investment of Rs. 8 billion, the system remains unimplemented for over a decade, casting doubts on the efficiency of current procedures.

The digital system, spanning 42 institutions, has the potential to facilitate transparent and streamlined operations. Yet, its non-deployment hinders its effectiveness. Addressing this gap is essential, as implementing the system could mitigate irregularities and promote fairness. President Ranil Wickremesinghe’s introduction of digitization in government underscores a commitment to preventing malpractice.

In conclusion, a determined effort towards tax reform, legislative changes, and the adoption of digital systems reflects a resolute commitment to enhancing Sri Lanka’s tax collection efficiency and fiscal transparency.

Furthermore, a critical examination of tax audit firms is imperative. Noteworthy cases of significant fraud have been identified within the prominent auditing companies in the nation. The existing Acts do not effectively enable comprehensive auditing, leading to proposals for new legislative measures. It has become apparent that enhancing state tax revenue is unfeasible solely through the current Inland Revenue Department Act.

It’s pertinent to acknowledge that certain influential businessmen in the country remain non-compliant with tax obligations. The question arises: has the Inland Revenue Department conducted a comprehensive assessment of their tax contributions? Redirecting efforts towards ensuring compliance among these entities, rather than burdening the general populace, holds the potential to substantially augment the state’s tax revenue.

State subsidies, vital development initiatives, public sector salaries, and a host of governmental functions are sustained by state tax revenue, accounting for a substantial 90% of overall government income. Given this significant reliance, the Inland Revenue Department must revaluate strategies to bolster tax revenue generation. Decisive measures are imperative to address the existing shortcomings in tax collection systems.

The pressing need for a robust tax collection system is underscored by the fact that there are currently 16 Inland Revenue Department offices, with the Colombo district alone necessitating 15 such offices. This numerical incongruity illustrates a potential hurdle to achieving tax revenue targets. To overcome this challenge, a comprehensive approach that takes into account all relevant factors is indispensable.

Underscoring the urgency of systemic change, Mr. Aluthgamage stressed that the amendments to the Ordinances of the Customs and Excise Department are of paramount importance and require swift action. These changes are pivotal in modernizing and optimizing revenue collection processes. The country’s development, subsidies, and government operations depend heavily on tax revenue. Therefore, tackling these challenges is crucial for Sri Lanka’s sustainable growth.


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