Widening the tax net

Last week, we published a story in these pages that disclosed the plans of the Inland Revenue Department for this year and the immediate future. We reported that the Department was targeting Rs. 260 billion in revenue for 2006 and that they are also planning to expand the tax net to areas which have not been targeted so far.

Sri Lanka has a population of 19 million. Incredibly, only around 100,000 are regular taxpayers. Many countries with similar populations have at least a million or more taxpayers. In other words, our tax net is not wide enough to catch all those who should actually be paying taxes. The most pathetic situation is that while many wealthy persons evade tax altogether, the poorer sections of society have to ensure a raft of indirect taxes, including Value Added Tax (VAT) on products they consume.

In this context, we must laud the Department's efforts to widen the tax base at least to 200,000 by end 2007. This is by no means adequate to meet the enhanced revenue targets, but it is a step in the right direction.

The plain truth is that our tax infrastructure does not cover many basics. For example, why should only private sector companies and employees pay taxes ? Some vocations such as the ubiquitous 'tuition classes' are not under the tax umbrella. It is well known that these teachers earn millions of rupees a month. The funds are credited directly to their bank accounts.

As pointed out in our story, doctors earn millions from the so-called 'channel' services at private hospitals. Not a cent goes to Government coffers.

The illicit liquor and cigarette industry is another case in point. While legitimate manufacturers, and hence their buyers are taxed blind, the bootleggers enjoy a roaring trade without paying a red cent to the authorities. Nobody cares about the health cost of illicit liquor.

This is a somewhat controversial issue that has to be tackled by the Excise Department and fiscal planners.

There are many other legitimate businesses that are not covered by the tax infrastructure at present. These trades should also be brought under the tax net.

The Department is also planning to target frequent travellers, though how this can be implemented practically is not clear. Not all those who go abroad several times a year are engaged in business. Many travellers do bring various items from abroad, mostly for personal use. The Department must tread carefully on this issue, since it could be construed as an attempt to infringe on personal liberties.

The Department will hopefully be able to increase its efficiency and productivity with the recruitment of nearly 1,000 officers. It has been pointed out that more revenue should flow to the coffers even with the existing tax set-up, if not for the lack of manpower. This step should rectify such shortcomings.

The same goes for Customs and Excise Departments, the other two main revenue generating bodies. Their work too should be streamlined to serve the public better and earn more revenue for the Treasury.