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Tax Structure in Sri Lanka

Sri Lanka is on the verge of entering a new era of growth. As the country moves from a war economy to a peace economy, its development challenges will be many. As the government continues to invest in the reconstruction of the conflict-affected regions, raising government revenue without stifling the business environment will surely be a challenging task.
From 20.4% in 1995, Sri Lanka’s revenue to Gross Domestic Product (GDP) ratio has steadily declined to a low 14.9% in 2008.Revenue consists of tax and non-tax revenue. Tax revenue in particular has seen a decline in the last few years, 14.2% in 2007 and down to 13.3% in 2008.
The contribution from direct taxes to total tax revenue, as well as a percentage of GDP, is low, and has largely been because the tax base has remained narrow. Several legal and administrative measures have already been instituted to widen the tax base and encourage and reward voluntary compliance, for example the issuing of privilege cards to compliant tax payers and discounts for speedy compliance.
Anomalies in the tax structure and deficiencies in tax administration have not only led to a steady decline in tax revenues, but also to a poor public perception of tax authorities. Compliance levels are unsatisfactory, as tax evaders assign a very low value to the cost of non-compliance. Repeated tax amnesties have weakened existing deterrents, and did not result in the expected gains. 
VAT is in use in over 160 countries around the world, and largely involves paying a tax on a firm’s sales, net of any tax paid on inputs of goods and services purchased for production.
Sri Lanka graduated from a turnover tax to a GST in 1998, and subsequently graduated to a VAT in 2002.However, it is widely believed that the administrative mechanism did not evolve sufficiently and the current system is not fully capable of effectively administering a VAT. 
Effective VAT administration requires proper processing of tax returns and processing refund claims while also providing guidance and advice to enterprises. The current refund mechanism is fraught with gaps and leakages.
There is increasing agreement that all export sales ought to be zero-rated, to avoid lengthy refund procedures, so long as exporters receive full credits on input VAT paid.
A growing need is to broaden the income tax base, as a means of raising revenue to finance this new growth phase of the country. In this context, the government in Sri Lanka  needs to closely look at areas which have caused a narrowing of the tax base, for instance the exemptions of particular groups of individuals (i.e. public employees), as well as companies (Board of Investment enterprises) and poor compliance by firms and professionals.
As Sri Lanka integrates more and more with global business systems, her tax structure and tax rules must also closely mirror globally-accepted concepts and modern principles.

Last Updated on: 19-05-2010

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