Commissioner General outlines plans:

Inland Revenue Dept targets more tax revenue

Mahinda Madagoda

Prasad Polwatte, Chartered Accountant of The Associated Newspapers of Ceylon (ANCL) interviewed the Commissioner General of Inland Revenue Mahinda Madagoda to have an insight of his responsibilities and future plans for the Department of Inland Revenue.

Q: What is your revenue target for the next three years - say from the present 15 to 16 percent of GDP?

A: The Department of Inland Revenue targets to increase the present tax revenue from 14-16 percent of the GDP for the next three years. The projected revenue for 2010 is Rs. 443 billion.

Q: Currently it is the Accountant’s nightmare to handle 10 odd tax returns that are strictly time-bound (Income Tax, VAT, Turnover Tax, Economic Service Charge, Withholding Tax, PAYE, Debit Tax, Nation Building Tax, Advanced Corporation Tax and Dividend Tax). Isn’t this too complicated for the taxpayer and the Department?

A: Government revenue is projected from these taxes, and it is not practical to reduce the number of taxes in the short-run. If taxpayer compliance increases to a higher level we could reduce the number of taxes. For this purpose it is important to widen the tax base to reach our target with a less number of taxes.

Q: The number of taxpayers in 2007 is as follows: companies and State corporations 24,850, individuals 163,438, partnerships 15,373 and PAYE 324,268. What are the measures taken to widen the tax net in Sri Lanka?

A: This number of tax files increased in 2008; companies 25,572, individuals 200,418 and employees 351,726. We increased the number of files almost in all categories of taxpayers.

The following measures have been taken to widen the tax base:

* Organized taxpayer educational programs in major cities to reduce the fear of the public on our tax system and encourage non taxpayers to open tax files and be a party to shoulder responsibilities of the mother land.

* The Department has taken measures to provide customer friendly and efficient services to taxpayers.

* To motivate compliance taxpayers we have a system of issuing privilege cards and duty concessions in the importation of motor vehicles, etc.

* A discount system has been also introduced to individuals on payments under self-assessments.

Q: The Effective Tax Rate of most corporates is above 40 percent. Don’t you think that such high rates prevent them from investing in the future?

A: Though it appears as 40 percent, the real effective rate is much less, a part of these taxes could be passed on to customers. The Economic Service Charge (ESC) is a levy to be charged from high turnover businesses to recover the infrastructure facilities of the country the ESC can be set off against a company’s income tax.

There are other indirect taxes such as VAT and NBT which are always passed on to customers. A wide range of concessions and exemptions are available in the tax system and it is the responsibility of finance professionals and tax advisors to make use of these concessions and plan taxes accordingly.

Q: Some sectors such as Banking are heavily taxed and as a result the lending rates by them are the highest among the region preventing us in competing in the export market. What is your view?

A:With the prevailing economic situation this revenue is much needed. However, there is lobbing to reduce present rates in the banking sector and consider new avenues to cover-up revenue loss.

Q: Wage earners are taxed on employment income and most of them solely depend on employment income. In contrast some self-employed and small businesses do not pay taxes. Also, certain businesses find avenues to siphon profits and taxes. What is your view?

A: With our proposed taxpayer education program we have planned to bring more small businesses to the taxpayer category. The Department expects small businesses and self-employed people to open tax files voluntarily.

Q: Other countries issue a simplified tax guide to taxpayers. This book explains the methods on deriving tax sources and the basis of computing tax liabilities. How practical is this type of system to Sri Lanka?

A: We also issue a taxpayer guide along with the return to compute their tax.

We have also introduced taxpayer brochures and they are available at our Taxpayer Service Centre. All current information is also available in our web-site.

Q: In many instances information in the Department’s computer system is in arrears and it has to be reconciled with the taxpayers’ records. Certain taxpayers are issued with penalty imposed letters due to these differences. What steps have you taken to rectify this situation?

A: Filling of erroneous returns has created this difference to some extent, errors in data entry have also contributed to the differences. From 2010, with the installation of new software this situation will be rectified.

Q: It is very difficult to claim Tax refunds from your Department. In most instances they are overpayments, but the refund process drags on for many years and taxpayers have to hire tax specialists to follow up on these claims. What steps have you taken to rectify this situation?

A: The reason for delays for some tax refunds is filling erroneous returns by taxpayers and it takes time to rectify it.

The Department has taken steps to minimize these delays by improving the refund procedures and administrative process.

Q: Public Sector institutions are managing public funds and they are not supposed to evade taxes. However, the Department takes a longer time to settle tax disputes in public sector institutions. Is it possible for you to fast-track public sector tax issues?

A: All taxpayers have to be treated equally and cannot be discriminated as private and public sector. In the private sector, the management takes the ownership on tax refund claims and continuously follows on them. In contrast, the public sector monitoring and follow-up on tax refund claims is poor compared to the private sector.

Q: Administrative bungling and the ever-increasing tax queries/ default letters for which the taxpayer is not liable has resulted in taxpayer dissatisfaction towards the service of your Department. Is there a possibility to adopt a more prudent mechanism?

A: Due to data entry errors and incorrectly filled tax returns these erroneous default letters would have been issued. With the installation of the new computer system these errors could be minimized.

Q: Letters are sent by the Department of Inland Revenue, stating that the taxes are in default and action is being initiated in the Tax Court to recover the taxes since all attempts to recover these taxes had failed. Most of these taxes have been already paid and appeals and objections have been made on the grounds that the taxes had been paid. Some of these taxes pertain to very long outstanding period. What is your view?

A: As a percentage these instances are minimal; a genuine taxpayer need not worry about these letters.

The taxpayer can contact the higher officers in the Department and make corrections accordingly.

Q: Unauthorized deposit mobilizing institutions became very popular in Sri Lanka and they introduced money market products to evade taxes. What action has the Inland Revenue Department taken to avoid these situations?

A: At present the Department is in the process of finding out how they have earned this money. If these depositors continued this source of income the Department will take appropriate action to collect the due taxes.

Q: What is the amount of the famous VAT scam? Is it 75 percent of 2004 GDP? What are the reasons for not detecting such high value malpractices and what measures have you taken to avoid a repetition of VAT scams in future?

A: The Supreme Court has to decide on the exact amount misappropriated. However, adequate precautionary measures have been taken to avoid such situations in the future.

Q: Do you have any reorganization plans for the Department?

A: Steps will be taken to strengthen the Jaffna and Batticaloa branches. We need to have branches in Tissamaharama or Hambantota, Kiribathgoda or Ragama and Vavuniya. We will shift the Matale office to Dambulla to provide more facilities to taxpayers in the surrounding area.

With modernization, the Zonal office program will commence in due course in the Colombo metropolitan, Southern and Central provinces. All regional offices within this Zonal office will be monitored by this office headed by a Commissioner.

Due to the terrorist attack on our head office, at present we operate from three locations. We have taken steps to reopen our main office with all modern facilities at Chiththampalam Mawatha from January next year. This office will be customer friendly with modern car parking facilities.