Govt. revenue effort getting exhausted – Gajendran

A top tax expert recently emphasised that the Government’s revenue effort was getting exhausted though ambitious targets being set.

“In years 2005, 2006 and 2007 revenue targets were about Rs.200 billion, Rs.260 billion, and Rs.329 billion respectively and in 2008 it is going to be Rs.410 billion. Revenue targets were growing year by year 25% to 30% during last four years. In 2005 and 2006 revenue targets were achieved mainly due to arithmetical adjustments in policy making for revenue purposes like disallowing losses proportionately and input credits were not allowed for VAT. But this effort has been exhausted in 2007, revenue targets were fallen short by Rs.20 billion. Accordingly, about Rs.100 billion more is expected in 2008 budget and this 33% growth in revenue targets is not going to be easy in current economic environment,” said N.R. Gajendran, who is the Chairman of International Fiscal Association (Sri Lanka) branch.

In that context the first challenge is to achieve revenue targets set by the government, he added during his speech at the IFA Sri Lanka branch seminar on taxation held recently.

Gajendran pointed out that revenue administration has gone through most of the difficult and challenging periods. There were many issues facing the revenue administration like VAT scam, unfulfilled modernisation programme, upsurge on the revenue on the tax payers, withdrawal of amnesty law, unachieved revenue targets, complexities of law and complicity of administration. Though we have gone through difficult periods, expectations are running high, hopes and aspirations are growing with the emergence of unseen and unheard new Commissioner General of Inland Revenue (CGIR). However it is not going to be easy for him and he is going to face many challenges.

“Revenue targets are important not only for the administration but also for the tax payers since tax payers are the people who will have to pay tax targets. There are a few compelling issues such as high interest rate, growing inflation, exchange rates and artificial disallowances which might not help achieving revenue targets,” he said.

It was pointed out that because of the artificial disallowances such as restriction of input taxes to 85% of output tax for VAT, imports based companies must reduce their profits by the amount of unabsorbed input taxes in the accounts which is not going to be recovered. Importers, unless they have a margin of over 30%, are never going to recover unabsorbed VAT input taxes due to artificial restriction of input taxes to 85% of output tax.

“If revenue targets are not achieved so many critics will point their fingers at the CGIR and administration. Therefore, it is also the duty of the administration to inform the policy makers that every year targets cannot grow 25% to 30% over the previous year,” Mr. Gajendran pointed out.

Second challenge according to him is that the CGIR will face is to restore public trust and confidence. There are three sound principles in taxation namely tax laws have to be simple, tax laws should not distort economy and fairness. While the first and second principles are generally not in the hands of the CGIR, the third one fairness should be established by the CGIR. That is the decisions of the Department of Inland Revenue should be just and fair. Just and fairness is not requesting a favorable decision.

The CGIR performs quasi-judicial functions that are he is the judge, jury and the prosecutor. Respective faiths of religions show that the power of creator, provider and destroyer are not bestowed on a single God. Accordingly, the CGIR is a supernatural person.

Tax payers can only make earnest and emotional pleas to the revenue officers to be fair. Like revenue officers tax payers cannot go slow, threaten to strike or strike. Some time back, media was trying to find out whether tax payers should not pay taxes but a few professionals advised that while we are in a democratic environment and still believe in the rule of law, tax payers should follow the law.

Third challenge is to reactivate communication channel. Interactive process with the professional bodies, fiscal associations and chambers which is slowed down at present should be vehemently reactivated.

Further, the following thoughts were made to be considered in the process of law making.

· Not to make retrospective laws.

· Not to bring amendments which was not pronounced in the original budget proposal. For example, reduction of floor area for housing rent exemption which was in existence for so many years and making air line pilots liable for income tax at 20%.

· Overseas interest and dividend are exempted but there is a gazette notification issued under Exchange control Act issued in 1972 which states that residents cannot hold money outside Sri Lanka. This law has to be revisited to give full relief to the amendment.

· Being a country of principle based tax laws and should not go to rule based laws.

· Instruct the officers to write to tax payers who pay ESC stating that no longer they are subject to WHT.

Mr. S. Angammana, the new Commissioner General of Inland Revenue in his speech made it a point to introduce himself first since he was one of the least known officers in the Department of Inland Revenue.

He is an Honors Graduate in Physical Science in University of Ceylon, Postgraduate in Statistics in Vidyodaya, Degree of Law in Open University of Sri Lanka and Attorney at Law.

Speaking on integrity management he stated that integrity is not only being honest but going beyond being honest. “To manage integrity each country has its own set of rules which are codified and made known to their employees. In Sri Lanka, we have Establishment Code and Financial Regulations which controls the responsibilities of public sector employees and how they conduct transactions in relation to the state.

Further, Institutions have their own ethics of conducts. Department of Inland Revenue also introduced its Code of Ethics and Conduct in 2005. Then there is a document called Tax Payers Charter introduced in 2005 which gives the rights and obligations of tax payers,” Mr. Angammana said.

It was pointed out that whilst having only codes on booklets will not serve the purpose intended, he said employees should be educated and monitored. “Effective organization structure should be there to monitor. If there is a breach, there should be a mechanism to look into that,” he said.

Integrity management varies according to cultures of each country, he added. India has suggested some measures to ensure integrity management. One is transparency in tax administration. They have specially mentioned restriction of discretionary process. One way to achieve this is to interpret each and every grey area in statute by a ruling committee so that there would be some standardization and clarity in law. Other measures are to reduce interface with revenue officers by way of e-delivery of tax payer services, simplification of tax laws, right to information and regular training.

Integrity is expected not only from the revenue officer but also from professional advisor, the new Commissioner General emphasized.

Mr. Premaratne Banda, Commissioner of Department of Inland Revenue made presentation on recent amendments to Income Tax and Economic Service Charge, while Mrs. Lakmali Nanayakkara, Partner of Ernst and Young on overview of direct and indirect taxes in Sri Lanka and Mr. Suresh Perera, Director Tax and Regulatory, KPMG Ford Rhodes Thornton & Co on critical analysis of the fiscal amendments arising from Budget 2008.