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The Ceylon Chamber of Commerce, the most senior Business Chamber in Sri Lanka has put forward their proposals for the forthcoming Government Budget 2004.

The taxation sub committee of the Chamber obtained the views of eminent business personalities from its 35 affiliated associations, corporate heads and audit firms before the final submission was made.

Increasing revenue, Taxation and tax administration, policy and macro economic issues were the key areas covered in the proposal.

Curtailing revenue loss from under invoicing and under valuation, broadening the tax net to cover public servants, preparation of accounts to confirm to accounting standards which will improve transparency and also more consistent and acceptable accounts for the revenue assessment process optimising the tax revenue and tax audits to identify non- filers and non-compliers were some of the measures put forward by the Chamber to enhance the revenue for the Government.

As a measure of attracting new foreign and local investment and to encourage company formation the Chamber proposes the government to implement the 'Group Taxation" in Sri Lanka. Further, suggestions were put forward on double taxation treaty arrangements in order to optimise the attractiveness of Sri Lanka for investment, trade and technology transfers.

The Chamber also proposed to develop strategies for employment creation and improve living standards, a register of lands approved for investments, performance standards for public sector, reduction of transaction costs to improve competitiveness and infrastructure development in the areas power, port, airport, highways, water and telecommunications to increase economic growth. The Ceylon Chamber of Commerce with 165 years of service to the nation and business community is the premier forum for business in Sri Lanka.

Working closely with 22 trade, product and service associations and 18 bilateral business councils and through its network of nine regional chambers, the Chamber services as the gateway to a world of business opportunity.

Revenue Proposals

* Curtailing Revenue loss from smuggling

The State and the business community lose billions of Rupees annually due to the entry of smuggled, contraband/counterfeit goods and malpractices at points of entry such as under-valuation and under-invoicing by unscrupulous importers. This questionable trade is fast growing and threatening businesses engaged in ethical competition. Tax evasion is mainly aimed at minimising import duty and VAT payments.

The modus operandi by these unscrupulous traders are:

Under-declaration of value and quantity

Smuggling

The main methods used for these operations are:

Import under different product names and HS Codes

Concealed with other imported cargo in containers

Unaccompanied sea baggage?mainly of expatriate workers returning from the Middle East

Malpractices at Unaccompanied Baggage Warehouses

Misuse of Duty Free Allowance by arriving passengers

Baggage carriers/organised traffickers

Pilferage/smuggling from ships berthed in outer harbour

To prevent losses to Government Revenue, it is proposed that measures be taken to increase checking and vigilance, and enforce harsher penalties on those found guilty of having committed offences.

* Declaration of tax file numbers in large value transactions

Require parties engaged in business transactions in excess of a specified amount to disclose the respective income tax file numbers on the face of the invoice, receipt or contract note, to facilitate subsequent tracing and effective tax compliance. Possible limits could be:

- Acquisition of any capital assets with a dutiable value over Rs. 5 million

- Payments in excess of Rs. 1 million for any goods or services.

* Tax Liability and Statutory Dues of Foreign Contractors

Foreign contractors retained by government, non governmental organisations, multilateral agencies and private sector be required to open a tax file and register for statutory dues including super-annuation liabilities at the time of award of contracts.

The party securing the services of foreign contractors be made liable to ensure due settlement of taxes and other statutory dues before release of payment.

* Compulsory Registration of Business

Require compulsory registration of any business with a turnover above Rs. 25 million (and below a specified ceiling to be determined by Government) with the Department of Inland Revenue.

The registration certificate to be displayed prominently at the place of business quoting the income tax file number. At the time of registration, the businesses will have to elect either to pay a fixed charge of 1% of turnover as income tax or else be subject to the normal process of assessment. New businesses to register within first year of commencing business. Failure to register should be made a punishable offence.

* The Revenue Authority to facilitate :

- Unique pin numbers (Business Registration No. or NIC No) to be assigned by parties to all transactions over a specified amount. This recommendation is possibly a project already undertaken by e-SriLanka.

- Outsource tax investigations to private sector taxation professionals, where possible, and thereby establish a professional approach to co-ordinate revenue optimisation. In such events it should be ensured that there would be no conflict of interest in engaging them.

- Expansion of coverage and minimise revenue evasion to be facilitated through a well focused and networked online information exchange linking the Inland Revenue, Customs and Excise Departments, with centralised databases of the said departments and data collections made of high value transactions.

- An effective and professional investigation arm to support the online transaction and tax declaration matching facilities.

- Appointment of an independent Revenue Ombudsman to facilitate fair and expeditious settlement of tax payer grievances not requiring formal appeal or legal process.

- Education of public of the benefits of opening a tax file and ways in which they could manage their tax affairs and mitigate tax liability through legitimate measures

- Review the present structure of fines for all major offences and increase the general quantum payable.

* Encourage use of cheques for high value transactions

To discourage the informal sector operations and encourage the settlement of high value transactions by the use of cheques, set aside the debits tax now imposed and replace same with a tax, (say Rs. 10/- per thousand) for cash transactions over Rs. 100 000/-. This will be an initial step towards making bank transactions compulsory for transactions over Rs. 500 000/-.

* Taxation of Public Officials

At present all income derived from employment by public servants is exempt from taxation. The exemption extends to incentives and revenue shares received by such employees. Lack of tax files for these public servants make it difficult to locate and investigate accumulation of wealth by corrupt practices.

It is therefore suggested that all public servants be made liable to tax on income in excess of the tax threshold and be required to submit tax returns. The public servants may be granted a concession by making the emoluments they receive from the government salary as a qualifying payment. This would preserve the tax free status now enjoyed by the public sector on their salaries, but at the same time make the special income they receive as incentive payment liable to tax. Housing and transport provided by the government to public servants may also be exempted from income tax.

* Preparation of accounts to conform to accounting standards

All directors of companies, partners and sole proprietors of business with a turnover of over Rs. 50 million be required by law to prepare accounts strictly in conformity with Sri Lanka Accounting Standards and the auditors to confirm such compliance.

This will ensure improved transparency and also more consistent and acceptable accounts for the Revenue Assessment process optimising the tax revenue.

Measures to Ensure Speedier Collection of Tax Revenue

* Tax audits

A special focused group of independent professionals with no conflicts of interest to be recruited and placed either under the Revenue Authority or the Inland Revenue Department to do special field surveys in the informal sector to identify the non-filers and non-compliers as a revenue enhancement measure. This will also help to generate a level playing field and it will be appropriate, as the exoneration has been until March 31, 2002.

The Chamber feels that an enormous amount of tax can be easily collected by the evidence of the amount of moneys that have come into the economy.

* Withdrawal of Incentive Schemes in Revenue Services

Improve the professionalism of tax administrators and reduce harassment of taxpayers by replacing the present incentives scheme applicable to revenue officers of tax, customs and excise departments with a performance-based scheme.

* Tax Saving Certificate

Re-introduce the previously successful scheme of tax savings certificates at market rates of interest as a form of investment for taxpayers and to ensure advance collection.

* Speedy Tax Reforms

To improve tax payer services establish stretched targets for tax refund settlements and these be made in every instance with interest.

* Use of Private Sector Professional service organisations by the Revenue Authority on contractual basis

The Revenue Authority to identify areas and scope of work where. Private sector professionals can be engaged on contractual basis in supporting the Revenue Administration to ensure speedier and more effective collection of tax revenue and improved tax compliance.

In outsourcing this work, the Revenue Authority and the private sector professionals to ensure that there are no conflicts of interest.

* Taxpayer Recognition

Issue "taxpayer cards" to all individual tax payers and public servants, which will entitle them to preferential treatment in selected instances eg. Exemption from motor vehicle license fees, airport taxes, passport fees etc., as an incentive for complying with tax regulations.

These recognition cards be of varying types signifying level of tax payment in the preceding 3 years (say bronze over Rs. 0.5 Mn, silver over Rs. 1 Mn, gold over Rs. 2.5 Mn, platinum over Rs. 5 Mn).

Such card holders may also qualify for preferential treatment such as admission of tax payers' immediate family to national hospitals, to national schools and to other institutions owned and operated by the government to provide service to the public.

Privatisation Initiatives

* Realisation of proceeds on disposal of under utilised assets

Hold Secretaries of Ministries, Heads of departments, and Chairmen of Corporations personally liable to ensure that all fixed assets originally costing over Rs. 100,000/- in the books of the institutions under them are subject to the following:

- Physical verification

- Ensure utilisation efficiency be over 50% in any financial year.

- Where utilisation factors are less than 50% but over 20% in any financial year, subject to examination options available for: financial justification for retention at current level of use disposal without a replacement, disposal and hire when essential,

- When utilisation factors are below 20%, dispose by public auction and credit consolidated fund unless retention for strategic or economic value can be demonstrated.

* Asset Productivity

Relocate all Government Departments and Institutions that occupy Government owned residential houses to commercially rented premises.

The resultant increases in expenditure to be met by better resource management and productivity. The houses so released to be sold.

* Long term lease of property

Permit private sector companies to purchase long term leases of valuable property owned by the Government which is presently occupied by government institutions, squatters or left vacant. Compensation by the Private Sector to be payment of a capital sum up-front and in the case of squatters to construct an alternative building in a low cost area or provide state housing for present occupiers of the land.

This could be a first step to facilitate the establishment of an active real estate exchange market in the future.

* Securitisation of Revenue Systems Securities regular streams of income accruing to the Government, e.g. future lease rents of the privatised estates, by issuing long term (20-30 year) bonds to suitable investors. While raising revenue for the treasury this will also facilitate the creation of long term debt instruments, thus contributing to capital market development.

* Local Government/Municipal Bonds

Encourage local government authorities and similar bodies to raise funds independently by securitising regular streams of income due to them and to that extent reduce amounts voted as expenditure for them by the Central Government. Examples: municipal rates, rental income of BOI, NHDA, RDA, etc., lease rentals from agricultural and industrial land leased out by the Government, and shop rentals of Airport and Aviation Services (Sri Lanka) Ltd.

* Privatisation of Rest Houses

The Government to buy back the leases of rest houses run by local government authorities by paying them compensation equal to average rents/profits derived during the last three years. Privatise such rest houses with a management fee payable to the local authority and the government either as a capital sum or as regular annual payments. In the latter case, the future streams of income can be securitised. Cost Reduction Measures

* Space Productivity

All government ministries, government departments and government corporations be stipulated to reduce office and other building space used, by 20% from end 2003. The space so saved be allocated to Departments, Ministries and corporations occupying rented space on commercial terms and 50% of such savings/rents to be deposited to the credit of the consolidated fund. The other 50% should be made available to the relevant organisations for their use, subject to public administration rules and guidelines.

Public Expenditure/Institutional Reforms

* Rationalisation of Government Departments/Institutions

Rationalise the structure of ministries and other Government Institutions to avoid duplication of activities by different institutions. A detailed study of the present structure to be undertaken with technical assistance from a multilateral agency, prior to rationalisation.

* Resource Management Efficiency

All bank accounts of ministries/departments/corporations to be linked to call accounts with automatic overnight transfer to call accounts and balances in excess of Rs. 10,000/- and interest earned on such accounts be shared in a manner described under space productivity in cost reduction measures.

To be continued

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