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by a special correspondent

It is customary for taxpayers and taxpayer representative groups to send in numerous proposals for tax changes in the exigent circumstances of an imminent government budget. I take it that our present finances are in a parlous state, in the face of which, the task is to find ways of reducing expenditure without cutting down on essential development expenditure.

Of equal priority is the task to increase public revenue in the short term without hurting the public who already have to bear the direct as well as indirect taxes. I therefore do not think that the time is opportune for an examination of detailed micro proposals for tax changes that have been proposed by some.

I am of the view that the primary task is to carry through and accomplish the resolution of the goal of national re-integration. Tax reform must necessarily be subordinated to that task and not be treated as an item of national priority. My thought is that, just now, nothing should be done to rock the fiscal boat except to find ways of enlarging the tax base and improving the tax administration to bring about higher standards of taxpayer compliance.

Figures gleaned from the latest Administration Report of the Commissioner General of Inland Revenue for the year 2000 reveal the following.

1. There are 161697 income taxpayers (other than employees), 534 TT payers, 16908 GST payers, 18126 NSL payers and 6417 others paying miscellaneous taxes. Our population is in the region of 19 million. Admittedly, ours is a third world country. Still I ask without judging, whether and if so why, the tax authorities cannot bring in more persons into the tax net.

2. The contributions of tax revenue (Rs. 116.3 billion, were, in order of magnitude, GST 39%, NSL 29%, Income Tax 23%, Stamps 7% and others 1%. The income tax, which is a direct tax, is markedly lower than either of the main indirect taxes, GST and NSL.

In other words 161697 income taxpayers paid in 23% of the total tax take whereas the GST and NSL payers combined (35034) contributed 68%! In the combined total of 35034 there must be considerable overlap so that the effective number of persons who contributed the 68% is nearer the NSL taxpayers number, 18126. I ask, without judging, whether the administration of the income tax has been as productive as it ought to be.

Though it may be inappropriate to compare highly developed tax systems with a tax system such as ours, it is still arguable whether a direct tax such as the income tax can, if properly administered, yield so much less than the indirect taxes, the NSL and GST.

3. The contribution of tax collections as a fraction of GNP has declined from 11.99% in 1996 to 10.55% in 2000. Since 2000 was the third year of operation of the GST, which was supposed to be a more scientific indirect tax than the TT, the fall in tax collection is not easily explainable, even though one could attribute the fall partly to the general down-swing in business.

4. As at 31-12-2000 there were tax arrears collectible in an amount of Rs. 19.9 billion. We are not told how much of the arrears as at 31-12-99 were collected in Year 2000. Evidently there were no arrears of GST as at 31-12-2000? Can this be right. (Refer to page 25 of the Report). What can the ministry do to activate the Inland Revenue to collect the arrears expeditiously? Without a proper record of annual collection of tax arrears it is difficult to detect whether, and if so where, progress in the collection of tax arrears has failed.

5. Tax compliance in the areas of returns filing has been satisfactory for income tax - though there appear to have been a considerable number of late filers - and TT but in the areas of GST and NSL the percentage of compliance has not been more than 55%. Why should this be so?

6. As at the end of year 2000, 294 vacancies remained unfilled. This means that the department was operating at only about 85% of its strength. Did that shortfall in the cadre account in some measure, for the deficiencies in the achievements of the tax administration?

7. Investigation branch, which is specially manned by a Commissioner, Deputy Commissioner and Assessors has assessed additional taxes of Rs. 105 million in 74 cases at an average of Rs. 1.4 million per taxpayer whereas unit 6 has assessed additional taxes of Rs. 1546 million in 93 cases at an average of Rs. 16.6 million per taxpayer. (Refer to page 28 of the report). There is no justification for continuing with an investigation branch that is unproductive.

It is better to transfer the investigation files to unit 6 and utilise the "investigation" officers to collect the tax arrears of Rs. 19 billion referred to in paragraph 4 above, even assuming that only half of that amount is truly collectible.

8. The expeditious settlement of tax appeals promotes higher taxpayer compliance. The department's achievement in this area - at the level of agreements being reached with the Assessors - is not unsatisfactory. From a total number of unsettled tax appeals 4468 at 1-1-2000 the net total had reached 4624 as at 31-12-2000, an increase of 3.5%. The number of appeals settled during the year, 3449 was 42% of the total at the beginning of and the number of new appeals 3605 lodged during the year.

n stark contrast with the above performance of the Assessors in the settlement of appeals, it is shocking that the Board of Review - the members of which are appointed by the Minister - was able to conclude the issue Orders (or determinations) in only 9 appeals heard during the year!

The ministry should review immediately the composition and ability of the present members of the panel of the board. In the past, the board functioned with greater efficiency and ability with the assistance of only one Legal Advisor whereas now, with 3 Legal Advisors the board is stumbling on at a snail's pace. Disregarding the new appeals being lodged with the board, at the present rate of "progress" it will take over nine years to clear the present backlog of 83 appeals!

9. To increase the tax base and thereby the revenue, the following suggestions may be considered.

9.1. The continued grant of tax holidays - which entails 100% exemption of enterprise profits, even though for limited periods - is, overall, not in the best interests of the economy. Though the powerful and influential business lobbies keep asking for tax breaks, the government must learn to move out of the vicious circle of granting over-generous tax handouts.

A better and more effective method would be to link investment in specified areas - identified as vital to economic development - to a system of tax credits geared to the amount of equity capital invested in new projects. It has been established from findings at organised business and tax fora that what primarily induces investment - especially foreign investment - in a country are firstly, political stability and secondly, a good infrastructure.

The demand for tax holidays is not justified. We trust, believe and pray that the government will succeed in its efforts to bring about peace and political stability through its concerted efforts at rapprochement with the opposition and the LTTE. Business groups should aid and assist the government in this important endeavour and not seek tax privileges at a time when the plight of the less privileged who are in the majority, is of compelling concern to the government.

9.2. The GST tax base can be widened by bringing in merchants in the retail and wholesale sector into the registration net and reducing the present plethora of items in the Exemption Schedule which, to say the least, is uniquely inconsistent with the broad base that a GST ought to target. To mitigate the impact on sensitive consumer groups, of implementing these suggestions, it is appropriate that the single and zero rate system be modified with the addition of a low rate of 3% on a selected range of goods that are largely consumed by the lower income groups.

Whilst trusting the matters mentioned in this letter will receive the attention of government I think that a sub-committee of knowledgable persons could be appointed to receive and consider detailed proposals for the overhaul of the present tax structure and its administration.

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