Talking tax

As the tax amnesty bill was pushed through Parliament this past week, many have once more pointed out the potential pitfalls of a bill that many believe opens the door for money laundering and facilitates crooked businessmen.

Their concerns, to be clear, are not unfounded. On the surface, the idea seems to track, as it looks to repurpose previously undisclosed taxable monies into investments and deposits in the country – thereby alleviating some of Sri Lanka’s financial concerns.

However, it does come across as very much a band-aid to-a-bullet-wound-type solution. The annual revenue lost last year, somewhere in the region of Rs. 500 billion, was down to haphazard tax cuts imposed in 2020, and this bill will likely not come close to covering that loss.

Further, offering tax amnesties has, in the long run, the potential to do much more harm than good. While developed countries use such amnesties to raise revenue collection and improve tax compliance, they also have the potential to encourage corruption and money laundering. And more to the point, the much-sought-after investment that such amnesties would possibly attract could just as easily find its way out of the country once the tax evaders ‘clean’ their black money.

Tax amnesties also punish honest taxpayers; regular taxpayers might see tax amnesty as a penalty for them and a reward for tax defaulters. Hence, an amnesty leads to law-abiding taxpayers not paying taxes at all in anticipation of future amnesty periods wherein they could profit from tax evasion.

The Government, therefore, needs to be particularly watchful of the pitfalls of repeated amnesties, lest they fall into a disastrous cycle.

Not to mention, the direct cost of administering the amnesty, which includes administrative resources and advertising, might offset the additional revenue collected. The foregone tax revenue on account of waived penalties and interest levies might be quite high. Hence, the net benefit of tax amnesty could be marginal, if anything.

What the Government needs to understand is that the carrot of tax concessions is not essential if the investment environment is efficient and corruption-free, but rather than addressing these concerns, policymakers prefer to heap more misery on the masses. Strengthening direct taxation and implementing a simplified and equitable tax policy is undoubtedly the way forward.

But short of complete tax reform, with this tax amnesty bill now passed in Parliament, Transparency International Sri Lanka (TISL) this past weekend put forward three recommendations in this regard, which were first suggested by the Financial Action Task Force (FATF) in 2012.

The first is the implementation of Anti Money Laundering (AML) and Counter Terrorist Financing (CTF) preventive measures, which, according to TISL, would “ensure that individuals with legitimate sources of money would be able to bring it into the country without hindrance while it makes it increasingly difficult for money generated through illicit means to enter the country”.

The second is to ensure cooperation between the Central Bank (CBSL) and the Financial Intelligence Unit, so that banks and other financial institutions are kept abreast of any potential risk of money laundering through new investments brought in via the tax amnesty bill.

And finally, to facilitate international cooperation, so as to “empower authorities to track individuals suspected of having brought black money into the country”.

While it is understandable that the Government is keen to bring in foreign exchange into the country, as has been made clear above, this can only work if regulatory authorities take all adequate measures to counter attempts to launder money – and most importantly keep the public informed of the measures put in place.