Corporate Tax Administration Budget proposals - 2012

Dharmadasa Rangalle

In today’s business Community, Contributes more revenue through paying taxes to respective government revenue agencies. Some tax administrating agencies are regularly taking action to collect potential revenue and maintain proper tax compliances. In Sri Lanka there are three main revenue agencies engaged in the process of collecting revenue for the government. They are Department of Inland Revenue (IRD), Department of Custom and the Department of Excise.

Effectiveness of the any tax administration system are measured by the degree of taxpayer compliance with tax laws, filling returns on due date, paying taxes on due dates, reporting of correct amount of tax payable, registering for payment taxes etc. However, it was revealed that Income tax returns compliance of the past few years in Sri Lankawere not in desired level.

President Mahinda Rajapaksa who also being the Minister of Finance and Planning presenting budget proposals for 2013, in Parliament on November 8, 2012 stated that, government introduced far reaching reforms in the 2011 budget, towards a simplified and broad based tax regime in our country, drawing special attention to small and medium scale entrepreneurs through its tax proposals and accordingly several effected taxes were removed. In budget speech, The President further stated, that out of the 27645 businesses as in the Large Tax Payers Unit, only 11,101 Companies have a turnover above Rs. 10 million, which generate 97 percent of revenue from VAT and NBT, in addition to corporate Income tax.

Since the Inland Revenue Department needs to pay greater attention to corporate entities and intensify its tax audit activities, the management of such large tax files will be brought under one consolidated unit. History of LTU A number of tax administration in the world have established special systems to administrator there large tax payers. In 1950s and 1960s, several OECD Countries (Organization for Economic Corporation and Development) introduced special tax audit operations for large corporate.

A more recent trend specially in developing and transitional countries is setting up full-fledged Large Tax Payer Unit that are responsible for most tax administration functions relating to such tax payers including tax collection, enforcement and tax audit. Beginning of 1980s, the IMF (International Monetary Fund) has recommended that member countries facing revenue crisis and looking to strengthen tax administration, to establish Large Tax Payer Units (LTUs) to increase control over the largest tax payers and improve large tax payers tax compliance in the short and medium term. Currently more than 40 OECD members’ countries in their tax administrations have recognized the importance of concept of LTUs and established LTUs.

Further more than 13 countries in Asian region have set up LTUs at different periods and points of time. India, Bangladesh, Nepal, Thailand are some of the countries among them. Our neighboring country India, following the international practice, the Honorable Finance Minister in his budget speech 2005-2006, announced the proposal to set up Large Tax Payer Unit which would act as a single window facilitation center for all large entities paying excise duty, corporate tax/income tax and service tax.

International Experience

It is a proven fact that countries those are having LTUs in their tax administration mechanism have gained significant benefits from establishing special operation to control the compliance of largest tax payers. It has also experienced, certain risks needed to be addressed.

Clearly, countries like Australia, France, The Netherlands, New Zealand, United Kingdom, United States have shown that setting up special operations to control large tax payer compliance has resulted increased compliance and more effective tax administration overall.

Such tax administration mechanisms have focused tax administration to test reforms later extended to the rest of tax payers.

The LTUs needs reforms and modernization in a consistent manner to reach the deserved level of objects and to remain effective and to keep up with changes in the economy and the tax payer population.

In setting up of a LTU to increase the administration efficiency of tax collection and enforcement, it must meet certain minimum requirements Such as a sound legal framework, clear and simpler criteria for selecting large tax payers, standard and transparent procedures, the administration of all the large tax payers by the LTU, the administration of all national level domestic taxes. Proper reporting system, effective LTU staff selecting and training, appropriate job grading are also to be met in order to guarantee a smooth functioning of the LTU. IRD - LTU

Department of Inland Revenue of Sri Lanka also has set up LTU to strengthen its tax administration and this Unit was established in 1995 with 1000 large tax payers’ files, though the IMF recommended to establish with 500 files since more than 70% of revenue was generated from 500 large tax payers.

Now the number has increased to 1200 and accordingly 1200 larger tax payers’ files are currently administered in LTU and generated more than 60% of the targeted total revenue from IRD. It is accepted facts and research papers on this subject have been proved of the LTU is only partly established, it will not reach its potentials to improve the operations of the tax administration and increase large tax payer compliance.

Non availability of LTU or it is not well functioning, that is not only is an important opportunity for reform lost, but the LTU loses credibility as a vehicle for modernizing tax administration. Considering these facts, budget 2013, rightly focused to strengthen the LTU expanding its scope in order to administer the 90% of the targeted revenue through LTU. The fundamental purpose of taxation is raise revenue through measures that suit for country’s circumstances and administration capacity.

To line with such direction, establishing of fully-pledged well designing consolidated large taxpayer unit in IRD is timely and rightly decision taken to strengthen revenue administration in the country.