Implement tax com. recommendations: 

Govt revenue could increase to  20% of GDP from current 13%

*IMF calls for second round of reforms to boost govt. revenue amidst limitations of expenditure cuts
* 2013 budget not very encouraging for revenue as per IMF estimates

May 20, 2013, 6:32 pm 

Full implantation of recommendations of the Presidential Taxation Commission could see government revenue at 13 percent of GDP in 2012, increase over the next few years to 20 percent of GDP, a senior economist and member of the commission said, as the International Monetary Fund (IMF) calls on Sri Lanka to go for a second round of tax reforms to halt declining revenue.

Institute of Policy Studies (IPS) Executive Director Dr. Saman Kelegama said the commission’s recommendations were partially implemented by the government.

"There are many more (recommendations) to be implemented and they have to be done soon if the revenue levels are to be enhanced close to 20 percent of GDP," Dr. Kelegama, who was a member of the commission, told a recent forum in Colombo.

The current Chairman of the IPS Prof. W. D. Lakshman headed the Presidential Taxation Commission, which included Sarath Jayatilleke, Rajan Asirwatham, Nihal Fonseka, B. R. L. Fernando, Samantha Kumarasinghe, R. P. L. Weerasinghe and K. J. Weerasinghe and Dr. Kelegama.

In 2012, revenue declined to 13 percent of GDP from 14.3 percent of GDP in 2011, mainly due to tax revenue declining from 12.4 percent of GDP in 2011 to 11.1 percent in 2012.

Revenue from VAT declined by 0.8 percent of GDP in 2012 compared to 2011 (3.5 percent to 2.7 percent of GDP), mainly due to many exemptions or zero ratings.

Income tax declined from 2.4 percent GDP in 2011 to 2.3 percent of GDP in 2012 due to rate adjustments not being matched by broadening the tax base in 2012.

The ratio for direct:indirect taxation in Sri Lanka was close to 20:80.

"As long as the revenue from direct taxation remains low, this ratio will prevail and this in turn means that the bulk of the burden of indirect taxation will be felt by the poor people," Dr. Kelegama said. He said the ideal was a ratio of 40:60.

"At a time when public debt per GDP is 79 percent and Sri Lanka is depending on a debt roll over strategy for settling maturing debt and a time when infrastructure development is taking place rapidly it is all the more important to enhance domestic resource mobilization, especially by enhancing revenue," he said.

The Presidential Taxation Commission (PTC) was appointed and its recommendations were submitted to president Mahinda Rajapaksa in October 2010.

A recent IMF country report of the IMF highlights concerns of falling government revenue.

"Tax revenues as a share of GDP have been falling almost continuously since the mid-1980s, leaving Sri Lanka with one of the lowest revenue-to-GDP ratios in the region. As a consequence, deficit reduction has relied on expenditure compression, although this strategy is approaching its limits, as evidenced in 2012 when the deficit exceeded its target despite expenditure cuts and arrears," the IMF said.

"The main challenges are to broaden the revenue base and improve administration in a second phase of reforms. In particular, the VAT should be extended fully to the wholesale and retail sectors, and its refund management system reformed. Equally important is to reduce and revise tax holidays and exemptions, which have undermined revenues but failed to enhance FDI," it said.

A high-quality fiscal consolidation that makes space for increased spending on infrastructure while safeguarding critical social expenditures—to support inclusive robust growth and further gains in equality and poverty reduction—will require reversing the decline in tax revenues, the report said.

"The 2013 budget contained several welcome measures, including the extension of VAT to large retailers and regime simplification. However, these measures are estimated to yield only about half a percent of GDP in new revenue, significantly short of the budget’s target. New exemptions were introduced, and profit taxes could underperform with moderate growth. Moreover, revenue efficiency is below comparator countries, particularly for VAT. Broadening the VAT base and increasing its efficiency could raise an additional 2 percentage points of GDP in revenue above the baseline scenario," the IMF report said.