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The Government will set up the Revenue Authority by the end of this year in order to ensure proper tax administration, Finance Minister K.N. Choksy said. He was addressing a seminar on Taxation organised by the International Fiscal Association (Sri Lanka Branch) in Colombo last week.

He said that the government is actively at work in estabishing a unified Revenue authority in the area of de-regulation and simplification of tax administration, considering the fact that legitimate revenue targets are not met and the legitimate tax base has not spread but remained static for many years.

"The function of the Authority is to reorganise the administration of the three main revenue collecting organisations of the Government including the Departments of Customs, Excise and Inland Revenue.

Overlapping of functions burdensome to the trading sector and the taxpayer is much in evidence and the Revenue Authority will focus on eliminating of overlapping functions, and effect coordination where it is possible, so as to cater for less bureaucracy, expedition and increased collection of legitimate revenue," the Minister said.

He said the amendments to the Inland Revenue Act offered incentives to the export trade in non-traditional sectors.

"The tax exemption was increased from three years to five years. Income derived from expansion enjoys a period of two years' tax exemption. The expansion of manufacturing activities outside the non-traditional export sector, investment in infrastructure development, both large and medium scale, investment in the construction of housing and hospitals, were also included in the exemptions under the Amendment.

The acquisition of non-performing or under-performing businesses in approved areas with a view to making them viable has also received special exemptions.

Corporate and personal taxation have also been reduced. The Central Bank has dropped its lending rates to commercial banks. The Government has thus made a cumulative thrust towards opening the economy for development by the private sector. The Government is acting as the facilitator, and is encouraging in every possible way the private sector to be the active performer.

Whilst there has been a growth of GDP and a reduction in inflation, the industrial sector showed an adequate growth rate last year. We look to the private entrepreneur, and more particulary, the several Trade Chambers which represent them to come forward and play a more positive and active role in the expansion of the country's industrial output and employment," the Minister said.

He said the Government was faced with two options in turning around the economy.

"The first was to increase taxes and introduce short-term revenue raising measures. This was certainly the easiest path that was open to us. The other option was to implement well-structured fiscal measures and incentives to revive investor confidence, increase growth and curtail inflation.

There had also been a steady decline in tax revenue. This was largely due to a complicated tax structure, which had grown through ad-hoc measures and a variety of unplanned concessions and exemptions. The system did not yield the Government's required revenue. It made the task of tax administration complicated for the Tax Department and the tax payer. Simplification and de-regulation were critical necessities.

The Government took certain concrete decisions. De-regulation was effected in several areas of fiscal management. The GST and NSL were abolished and replaced by the simpler two-ban VAT system. The corporate tax surcharge of 20 percent, advance company taxation, the capital gains tax and Governmental stamp duty were abolished.

We aimed at turning the negative growth of 1.4 percent in 2001 to a positive four percent, to bring inflation down from 14 percent to nine percent and reduce the budget deficit from 10.5 percent to 8.5 percent. We substantially secured each of these targets for 2002.

The cardinal principle of the government's economic policy is private sector led industrial and trade development. The Government is rapidly distancing itself and the state organisations from trading and business activities.

These are best left in the hands of the private sector. Effective competition is the sure path to progress and development. Through the Government's first Budget, we spelt out a framework where the private sector could operate without unmeaningful restrictions and excessive taxation.

This policy has been continued through the second Budget of 2003, which further rationalised the taxation system and provided an easier atmosphere for expansion of the economy by greater private sector participation.

He said however, as the Finance Minister he is confronted with the difficult task of balancing the need to provide adequate incentives to non-state sector enterprises on the one hand, whilst preserving an adequate revenue base to maintain public services. "In certain areas, therefore, public-private partnership programs become necessary.

In formulating our taxation policy, the government has to be conscious of an important factor. The greater number of the country's population resides and works outside the urban sector. Agricultural produce and employment in the agricultural sector constitute a large segment of the nation's economy.

The disparity between the rural and urban sectors led to the two youth uprisings we experienced in recent years. In formulating tax policies, therefore, adequate consideration has been given to ensure benefit and growth of small-scale and medium industries and self-empoyment ventures operating outside the urbanised and industrialised localities.

He said the government's outlook and principles of taxation policy include the simplification of the tax structure by reducing the large number of taxes, continuity of tax and tariff policies without constant change, granting of incentives in identified sectors, granting of planned incentives for expansion of existing industries, reduction of income tax rates so as to make more funds available in the hands of business and industry for expansion and striking a balance between the collection of revenue through direct taxes on the one hand and consumption taxes on the other.

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