Tax Week woes

Tuesday, 6 November 2012 00:00 - - {{hitsCtrl.values.hits}}

SRI Lanka’s corruption is a serious bane on the economy. The Tax Week that was launched at the start of this month is one example of how weak policing, political interference, and burdensome bureaucracy can harm revenue collection of a government.

The Tax Week was ostensibly established to increase awareness on taxes and inspire confidence in people with the eventual goal of encouraging the public to do their civic duty in paying their taxes. The program, launched by the Inland Revenue Department (IRD), has much credit because it also acknowledges that tax collection officials also need to work harder to do their duty properly.

VAT scams in Sri Lanka’s recent history are frequent and sadly, despite many instances of illegal activity, there has been no positive result. It was reported over the weekend that numerous instances of VAT fraud have been perpetrated in the IRD, but no officials have as yet been held legally responsible.

The list begins with the recent reportage of Rs. 180 million VAT fraud and is sprinkled with instances when companies have managed to wheedle themselves out of paying the proper taxes. Hiring of tax consultants to find loopholes in the system so that companies can fraudulently reduce the amount of taxes that they have to pay is a frequently used ploy.

In 2010, investigations were held into a Rs. 500 million VAT fraud, resulting in six cases being filed against 20 suspects, but no substantial legal action was taken. Reports also indicate that nothing had come out of the CID probe in the large-scale fraud in which VAT fraudsters had used forged documentation and in some instances several fake identity cards to claim refunds.

The CID had also probed a previous VAT scam amounting to Rs. 60 million and the report containing evidence was handed over to the Attorney General’s Department. The investigation is related to a textile factory owner from Padukka, but little progress has been made to date.

The Rs. 3.9 billion VAT fraud that came to light in 2004 is still fresh in the public’s mind and the local law enforcement authorities’ failure to bring the main offender to justice still contributes to the lack of confidence among the public.

Even though the IRD has assured that steps have been taken to tighten the VAT refund system, subsequent frauds have done little to bolster this claim. Ultimately what has happened is that the complicated systems make it more inconvenient for honest companies that pay their taxes. In addition, the Government’s decision to gradually roll back the VAT refund system means that export companies are denied much-needed support.

In the 2012 Budget, the Government made much-praised steps to move towards a simplified tax system. It can only be hoped that the process continues next year. Nonetheless, the Government must trim its wasteful expenditure, which can be seen in everything from unnecessary elections to exhibitions, if it seriously means to gain the trust of the taxpayers.

The basic sentiment that the hard-earned money of the taxpayers is being misused by officials or allowed to be stolen with impunity will continue, with the Tax Week ultimately not accomplishing its larger goal of increasing Sri Lanka’s tax net.