CPS-Sri Lanka

On November 13, President Ranil Wickremesinghe unveiled his government's 2024 budget, underscoring the critical need for stringent measures to revitalize the nation's faltering economy.the estimated total revenue and grants for the year 2024 are LKR 4,127 billion, while the total estimated expenditure stands at LKR 6,978 billion. Therefore, the budget deficit with bank capitalization stands at LKR 2,851 billion. The budget estimates a tax revenue/GDP ratio of 12.1% for the year 2024, compared to 9.2% based on revised estimates for 2023. The same ratio calculated for 2022 stood at 7.3%. The estimated total tax revenue of LKR 3,820 billion consists of LKR 2,235 billion in taxes from goods and services, LKR 1,080 billion from income tax, and LKR 505 billion in taxes from external trade.

The tax revenue as a percentage of GDP has gradually increased from 7.3% (2022) to 9.2% (2023) and is budgeted to increase to 12.1% (2024). The World Bank has established a benchmark of 15% tax revenue as a crucial factor in fostering economic prosperity and alleviating poverty. despite this benchmark, Sri Lanka's tax-to-GDP ratio has consistently fallen short, indicating a potential hindrance to achieving its developmental goals.

Several factors contribute to sri Lanka's low tax-to-GDP ratio. A significant portion of the economy operates informally, evading taxation. additionally, the government relies heavily on taxes on goods and services (GST), limiting the scope for revenue generation.
To enhance its tax-to-GDP ratio, sri Lanka must broaden its tax base and refine tax collection mechanisms. Introducing new taxes, such as a property tax or a capital gains tax, could also prove beneficial.

Revenue from income tax compared to total revenue has increased from 27% (2022) to 30% (2023) but is budgeted to reduce to 26% (2024). The lower income tax revenue budgeted for 2024 compared to the income tax revenue for 2023 may predominantly be due to the increase in VAT revenue resulting from the proposed increase in the VAT rate to 18% effective from January 1, 2024.

Finance Minister Wickramasinghe unveiled the following key tax proposals during the presentation of the 78th Sri Lankan Budget on November 13, 2023:

*Tax Identification Number*
Submission of a copy of the Certificate of the Taxpayer Identification Number (TIN) will be made a mandatory requirement to:-
(a) Open bank current account at any bank;
(b) Obtain approval for a building plan,
(c) Register a motor vehicle or renew license
(d) Register a land or title to a land, by the buyer
The required guidelines will be issued by the Commissioner General.

*Income Tax Treatment on Salary Arrears & Value Added Tax (VAT)*
Present tax treatment on salary arrears will be changed to remove the excessive tax liabilities of the employees, with effect from January 1, 2024.

*Value Added Tax*
(a)Amendment will be introduced enabling the Commissioner General to specify the format of the tax invoice
(b)The expression “taxable Period” in section 83 of the VAT Act, will be defined to have same return filing frequency for all taxpayers
A gazette notification will be issued to implement the increase of VAT rate with effect from January 1, 2024.
(c)The registered persons will be encouraged to use Point of Sale (POS) machines which automates invoicing and sales recording, to support VAT collection in supplying goods or services.

*Submission of Documentary Evidence*
The documentary evidence called by tax officials during tax audits or administrative reviews but not submitted within a reasonable period of time (6 months from the original date of call for evidence available in Sri Lanka and 9 months for others), will not be allowed to submit during the hearing at Tax Appeals Commission. Relevant provisions in the Tax Appeals Commission Act, No. 23 of 2011, will be amended as well.

*Tax Payable by Withholding*
(a)A special tax return to be introduced for the WHT of 2.5% deducted on the sale price of any gem sold at an auction conducted by the National Gems and Jewellery Authority. Currently, any amount derived by a person from the sale of any gem on which WHT at 2.5% has been deducted is exempt from income tax. Based on this amendment, exemption will be granted only where the respective details are given on the return filed.

(b)The withholding tax certificate issued by the withholding agent pursuant to section 87 shall be issued without charge or payment from the with holdee.

*Income tax on Unit Trusts and Unit Holders*
(a)The current tax treatment of Unit Trusts shall continue to apply subject to the mandatory requirements of furnishing information specified by the Commissioner General such as details of income, exempt amounts and withholding tax details to every unit holder before 30th August following the year of assessment.

(b)Any Unit Trust which has not complied as mentioned above will be considered as not conducting an “eligible business” and thereby taxed at the rate of 30% on its income [as per current law, a unit trust that conducts an “eligible business” as defined is taxed similar to a trust, where the income is only taxed in the hands of the unit holders].

*Prosecution actions against failures to file tax returns*
A special penal provision will be introduced to prosecute persons who have not submitted tax returns and information required by the tax officials.

*Clarity of certain provisions will be improved*

Section 18, 67, 163 of Inland Revenue Act, No. 24 of 2017 will be amended to improve the clarity of the application of such sections.
taxation of insurance business and court proceedings for recovery of tax to be amended to provide clarity.

Section 18 – Deductible amount of finance cost It is assumed that this amendment refers to treatment of Negative Retained Earnings/ Accumulated Losses when applying thin capitalization rules.
Section 163 – Court proceedings The term “competent jurisdiction” in relation to recovery of taxes to be clarified.
Section 67 – Insurance business Clarity to be provided on the tax treatment applicable of Insurance Companies in relation to life insurance.

*New Revenue Authority*

A new Revenue Authority is proposed to be established to increase the effectiveness of revenue administration, expedite reforms and provide solutions to human resources related issues by avoiding obstacles such as outdated government regulations and processes.

*RAMIS to be linked to other government portals/ databases*
To fast rack the integration of key government authorities such as the Land Registry, Department of Motor Traffic, financial institutions and CRIB with the IRD’s RAMIS to gather information for the improvement of taxpayer compliance.

*Tax administration measures for the Excise Department of Sri Lanka*
(a)Introduction of an online license-issuing system to provide customer friendly and efficient regulatory environment expeditiously

(b)Appoint a committee to evaluate the security features and security features management system to address the issues including fake or counterfeit stickers.

A new excise licensing system will be introduced to:-
(1)Streamline the guidelines/rules for various types of licenses
Revise the maximum limit for certain licenses with a view to address the irrational distribution of liquor outlets creating ‘Dry Areas’
(2)Introduce flexible opening hours to discourage illicit selling of liquor and to maintain industry discipline
(3)Revise related regulations for the tourism promotional activities
Introduce an appropriate policy for soft liquor licenses

(4)Establish Design and Monitoring Unit and Risk Management Unit at the Excise Department
(5)Introduce Key performance Indicators (KPIs) related to core administration functions
(6)The toddy tender system will be revised to gain more revenue to the government while discouraging illicit toddy industry.
(7)Administrative fees on the services provided by the Excise Department will be introduced
(8)Networking and sharing intelligence and information with stakeholder institutions will be done

*Policy Proposals of the Excise Department of Sri Lanka*
(a)Increase the Excise License fees with a rationale that is corresponding to the present demand for those licenses

(b)Make selected locally produced liquor to be available in duty free shops
(c)Introduce ‘Revenue Administration System for Excise Department’ (RASED) by end October, 2024 to increase the efficiency and productivity of excise revenue management and minimize the risk for wastages and corruption
(d)Strengthen the tax collection and enforcement in Beedi Industry

**Department of Sri Lanka Customs**

(a)Development of risk management capabilities of Sri Lanka Customs by developing a sophisticated software solution. The project goals include
enhancing risk assessment for revenue risks, improving operational efficiency in customs clearance, ensuring compliance with regulations, and creating a sustainable, adaptable software system for future needs.

(b)Establishment of a mechanism to prevent mis-invoicing and upgrade ASYCUDA system
(c)Introduction of Key Performance Indicators (KPIs) related to core administration functions of the Customs.