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From left: Sumal Perera, Chairman/CEO, Access Group, Ravi Abeysuriya, CEO, Candor Group, MP Kabir Hashim; Hasitha Premarathne, CFO, Brandix Lanka Ltd.,
Mangala P.B. Yapa, Secretary General/CEO, Ceylon Chamber of Commerce; Suresh R.I. Perera, Principal Tax and Regulatory KPMG and Economist Dr. Anura Ekanayake.
Keynote speech: Taxation and economy
Hashim started the proceedings on a lighter note with the definition of a politician “is that a politician knows the art of obtaining the money from the rich and the votes of the poor on the pretext of protecting from one from the other”. Hashim pointed out that governments in general have the same view of the economy, i.e. if it moves, tax it; if it keeps moving, regulate it; and if it stops moving, subsidise it.
Hashim mentioned that in modern economy the five key desirable characteristics of taxation are efficiency, administrative simplicity, fairness, flexibility and political responsibility. He went on to explain the key functions of the countries tax system. 
The primary objective of taxation is to raise government revenue for public expenditure, reduce inequality through a policy of redistribution of income and wealth. Further the fiscal system is employed for social purposes, such as to discourage activities which are socially undesirable such as excise duties and levies on liquor, tobacco and betting and gaming.
Taxation is also an instrument to attract and channel private investment to desired areas of investment activities through regulation of tax rates and grant of tax incentive including incentives to attract Foreign Direct Investment.
Hashim mentioned that in Sri Lanka although an undesirable area, we have given concessions to betting and gaming. He explained further that taxation also assists in protecting local industries from foreign competition and encourage local production by imposing import duties, VAT, cess to transfer demand from imported to domestically produced goods. It also assists to stabilise national income by controlling demand management, where through tax we can control inflation.
He continued his speech further by mentioning that the fiscal policy of the country plays a vital role in the economy. The economy’s growth rate and national deficit have a correlation. High fiscal deficits have an impact on the growth. 80% of the Government’s revenue is from tax revenue. It is evident that there is a slowdown in the Government’s revenue. Budget deficits constitute a major fiscal indicator. In Sri Lanka revenue and expenditure is poles apart. Hence the Government should concentrate on improving the tax administration and introduce a broad base tax.
Hashim also explained that in order to reduce the budget deficit that the Government has resorted to reducing is capital investments and expenditure for public services which are essential as education, health.
Hashim ended his expressive speech by saying that taxation plays an important role in any country, irrespective of whether it is industrial, developed or developing country.
The Sri Lankan tax system and global trends
Suresh Perera initiated his presentation by providing a brief introduction on the history of taxation and how it has evolved over the years and introduced the fascinating web of Sri Lankan taxes, featuring almost 25 taxes.
With the aid of the global survey carried out by KPMG, Suresh explained the global trend in different geographies with regard to corporate (income) tax rates and indirect tax rates.
North America has the highest corporate average income tax rate (33%) and the lowest indirect tax rate (5%). Europe has the lowest corporate income tax rate of 20.6% and the indirect tax rate is approximately 20.1%. He pointed out that in the USA there is no VAT. Compared to North America and the Europe, in the Asian region the average corporate income tax rate is 22.49%, while the indirect tax rate is 12.39%,
He compared this statistics with the Sri Lankan standard tax rate which is at 28% and the concessionary rate of tax 12% while the main indirect taxes in Sri Lanka are the VAT rate of 12% and there is an NBT of 2% as well. He pointed out that as per the data presented by him the Oceania countries (Australia and New Zealand) the corporate income tax rates is 27% and average indirect tax rate is at 13%. He pointed out that North America and Oceania which includes highly-developed countries tend to rely on high direct tax rates.
In another analysis he pointed out in Sri Lanka, the revenue collection from corporate and individual income tax seems to be equal as per the 2012 performance reports of the Inland Revenue Department. He raised the question whether it is unusual for such revenue to be in equal proportion. Suresh pointed that there may be a disproportionate allocation of resources for corporate and individual income taxes.
The Commissioner General of Inland Revenue pointed out that in addition to the building at Jawatte road there are another 22 regional offices to collect individual and association. Perera further mentioned there should be a shift of scarce resources to corporates and transfer pricing in the context of the cost benefit analysis in order to department to obtain optimum solution.
Perera also referred to our current position in the ‘Doing Business Index’ complied by the World Bank. We are currently ranked 85th out of 189 countries in the overall ranking however in the ease of paying taxes criteria we stand at 171. He mentioned that it was not surprising that we were so behind in the ease of paying taxes as the total number of payments during a calendar would be around 98 payments, which creates the complicities of the tax system.
The panel discussion – diverse views and analytical outlook
Premarathne opened up the panel discussion stating the different countries or cultures have different ways of approaching taxes. He mentioned a personal experience where in a recent conversation with a US investor, who mentioned that paying taxes is a responsibility of a citizen and that there is no requirement to mitigate taxes. However Premarathne mentioned that in this part of the world (East), culturally we feel that tax should be should be minimised or avoided. Premarathne posed the question to Sumal Perera on what should be the way forward for Sri Lanka in relation to taxation.
Direct tax vs. indirect taxes – what is the way forward
Sumal Perera pointed out that the greatest challenge facing the country is increasing the tax base and without increasing the tax base, it is difficult to increase the value of collecting direct taxes. Therefore the policymakers have no other choice but to rely on indirect taxes to ensure higher level of compliance. He also pointed out that it is not appropriate to shift to a direct tax regime as it is not practical and Sri Lanka does not have the infrastructure available to enforce direct taxes. Collection of indirect taxes is administratively convenient; hence it would be easier to collect the indirect tax on the short to medium term.
Ravi Abeysuriya too was in favour of indirect taxes, as Sri Lanka yet does not have sophisticated systems to enforce tax compliance equitably on every resident. He stated that developed countries such as USA collect most of their taxes from direct taxes on income as the country is equipped with the necessary infrastructure to collect such taxes whereas developing countries are still heavily reliant on indirect taxes on expenditure.
Dr. Anura Ekanayake explained that Sri Lanka has a regressive tax regime where indirect taxes add up to around 80% of the total tax revenue. This results in the poor making a disproportionate contribution towards tax relative to their income and that the contributions made by the rich on indirect taxes are low relative to their income. He was of the view that the tax culture should head towards broadening the direct tax base and there should not be any more indirect taxes.
Tax administration and the road to a new tax culture
Hashim’s trajectory for a better tax culture was different. Hashim mentioned that ‘paying taxes’ is a responsibility to be borne by every person. An attitude shift is a must, taxpayers cannot expect good governance and better allocation of the revenue if tax payments are not made. Tax payers should fulfil their responsibility by making timely tax payments and complying with tax regulation given and the authorities should make use of the revenue collection for the right purposes. An individual cannot expect government to be accountable for social welfare if they don’t fulfil their part in this equation.
Mangala Yapa highlighted the importance of ‘simplicity and consistency in taxation’ and that this plays a major role in tax payers making prompt tax payments. He emphasised the fact that in a situation where taxes keep changing constantly or ad hoc policies are made, one would find it hard to comply and often leads to find various means to evasion.
Dr. Ekanayake also mentioned that a lack of confidence in the accountability of authorities by the tax payers, would force the tax payers to evade tax as opposed to complying. Therefore it is vital to address the fundamentals of taxation than making changes to the layout of taxes. He stated that the revenue authorities should concentrate on widening the tax base and to look at the structure in a holistic manner.
Incentives by way of tax holiday
The audience posed a question on the future of tax holidays and whether the policy of granting tax holidays is favourable for an economy.
In response to this question, Hashim pointed out that he was against the granting of tax holidays to attract casinos. Hashim stated that one can do away with tax holidays once an economy matures. He referred to the World Bank indicators of ‘doing business’ and stated if these indicators are high and if Sri Lanka are in a position to attract Foreign Direct Investments (FDIs) without relentlessly giving tax holidays, then one must do away with tax holidays.
However with regard to the statistics, though Sri Lanka shows a significant increase in FDI this is insignificant when looking at it from a regional perspective. He also mentioned that even though many foreigners come here to invest, a majority brings only a limited amount of foreign currency and the rest is raised from local authorities in the form of loans, etc.
He also suggested that a tax holiday should be granted post a careful analysis on a case by case scenario of factors such as local development, foreign currency brought in, the sustainability and the environmental impact and the process should be independent and transparent.
In response to the same question regarding tax holidays, Yapa also stated that ‘tax concessions’ is only one aspect for attracting FDIs and an investor in making an investment decision takes a more comprehensive and a holistic view. Hence a rational investor would not necessarily invest in Sri Lanka only considering the tax holidays granted.
He also went on to explain that in giving a tax holiday it must be coherent, consistent, systematic and transparent. However the current methodology of granting tax holidays is complex.
Sumal Perera pointed out that there is no clear framework in granting of tax holidays and it is done on an individual case by case basis. Therefore potential investors cannot get a clear understanding of the Government tax policy for investors through the BOI website. Furthermore, investors should never be asked to pay any new taxes direct or indirect after they have made investments.
Dr. Ekanayake also mentioned that there is no level playing field for Sri Lankan companies as the foreign companies are given tax incentives while the local companies in the same industry are taxed. Accordingly tax concessions should be granted if at all to foreign investments which will have highly significant benefits at large to the economy such as technology and market access.
Land transfer restriction for foreigners
Another question was raised by the audience regarding the recent amendments made to the Land Bill.
Ravi Abeysuriya emphasised that land in a small island nation such as Sri Lanka is a scarce resource and hence needs to be restricted, However, if the envisaged Land (Restrictions on Alienation) Bill is implemented, ease of doing business for foreign-owned companies could become quite challenging. Specifically if lease tax applies when any foreign-owned company rent or lease a few sqft of office space in a building even above 4th floor for short periods with a lease tax payable for the entire period of the lease upfront.
Similarly, commercial viability of several large shopping malls, office development, apartment complexes and other developments which are aimed at making Sri Lanka a premier tourist destination and regional commercial hub through the attraction of international brands and other world renowned organisations, tourist facilities and attractions will be significantly eroded if the Land bill is implemented as proposed.
Closing comments
The panel discussion evince that there is no firm consensus with regard to whether Sri Lanka focus should be in the direction of collecting direct or indirect taxes, in the exercise of the achievement of the desired revenue collection and closing the revenue gap.
Premarathne summed up the session proceeding and emphasised that the expectations of the tax payers are the fundamentals of the tax systems such as certainty, consistency, transparency and easy collection of taxes through use of technology.
