Tax turmoil

Friday, 23 July 2021 00:00 - - {{hitsCtrl.values.hits}}

A week after the tax amnesty bill was gazetted, Opposition parties have finally found their voice in condemning it. SJP MP Eran Wickramaratne has filed a petition in the Supreme Court challenging the bill, while the JVP have intimated that they, too, would go to court over a bill they say would facilitate crooked businessmen and money laundering.

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 would 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.

Incidentally, tax reforms were being implemented under the now-abandoned Extended Fund Facility (EFF) arrangement with the International Monetary Fund (IMF). The new Inland Revenue Act was launched in 2018, and the Inland Revenue Department continued to ensure new tax rules and incentives were clearly understood. But most such tax reforms were abandoned due to the suspension of the EFF in 2019.

The solution, therefore, although not particularly palatable, is clear. The Government needs to revamp their tax policy and increase the efficiency of their tax collection system – they essentially need to undo the disastrous tax-related policy decisions taken upon coming into power.