By P.Guruge
‘Listing’ should be purely on economic considerations
Tax on online transactions - a complicated matter
In this article I am not dealing with the entire Budget speech, running into 140 pages with 529 paragraphs. My comments are limited to taxes.
Corporate Income Tax -
It has been proposed to have three different rates for different activities -
1. 40% - Liquor, tobacco, betting and gaming;
Why not lotteries? Already, lotteries enjoy this privilege. It is important to consider all aspects of these activities, especially, in relation to liquor and tobacco.
In addition to manufacturing or import transporting, stocking, wholesale and retail activities should also be considered.
The cultivation of tobacco should also be considered under this higher rate. Otherwise, it will not be different from the existing situation.
2. 14% - SMEs, exporters, agriculture and education.
How about deemed or indirect exporters of goods and services and Health Services? Agriculture may be covering all activities including horticulture, farming and fishing. Educational services may be limited only to pure educational services, excluding additional goods and services provided by them.
If Health services are to be considered it should be applicable to pure health care services only. In the last budget, the Minister proposed a 15% rate.
3. 28% - All other activities
This is not a new rate. Already 28% is applicable to companies. At present, a number of other rates are applicable to companies. 10%, 12% and certain BOI companies enjoy 5% and 2% of turnover etc. Integration of these cases under 14% or 28% has to be done using an acceptable method.
It is good that depreciation rates are to be aligned with economic depreciation, instead of economically misleading accelerated depreciation. Incentives for listing may not work since this has been tried several times earlier. Let the ‘listing’ take place purely on economic considerations.
Additional revenue estimated - Rs. 32,000 m. Proposals for 2016 were not implemented and legal provisions for 2015 were applied to 2016 also.
When compared with the estimated company tax revenue for 2016, the additional revenue estimate may be unrealistic.
Personal Income Tax -
Certain proposals are not clear. What is the exemption limit for individuals? For PAYE it is Rs. 1.2 m. per year. How about other individuals liable to pay income tax? Is it the current exemption limit, i.e. Rs. 500,000 or some other amount?
All employees whether professionals, or not will be considered in the same way and current tax rates, i.e. 4%, 8%, 12%, 16%, 20% and 24% will be applicable? To prepare PAYE Tax tables such rates will be used. Tax slabs will be Rs. 600,000 each. PAYE - Exemptions - It is proposed to remove all exemptions in relation to benefits applicable to employment income. This removal of exemption should be applicable to non- PAYE employees as well.
However, there may not be a reduction in revenue due to the increase of the exemption limit to Rs. 1.2 m. per year, and some employees now getting taxable remuneration just above the exemption limit may not get a big relief.
Further, non-PAYE employees, and other individuals should be treated in the same manner as ‘corporate citizens’.
For example, if an individual is engaged in agriculture he should get 14% rate on such income which should be the maximum rate on such income.
This treatment should be applicable to all sources where 14% is applicable for a company. However, the maximum rate applicable to such individuals also should be 24%. At the same time, if any activity where 40% is applicable was carried on by any individual 40% rate will be applicable to him as well.
Therefore, these 14%, and 40% rates should not be considered as company tax rates only, but special rates under the 5th Schedule to the Inland Revenue Act, which are applicable to all entities and individuals.
The rate applicable to partnerships has not been given.
Value Added Tax (VAT) -
It is proposed to abolish ‘S-VAT Scheme’, introduced by the previous regime, which is against VAT refunds.
They wanted a VAT system without refunds, which is impossible under our VAT system. Instead of strengthening the VAT refund system after the massive VAT fraud they went on the reverse gear.
No one knows what happened under this S-VAT system and no audit has been done on this activity. I feel the Minister should be commended for this bold decision.
Refunds for tourists - A separate section was incorporated in 2006, under the VAT Act (section 58A), but this section was also repealed by the previous regime.
This is a must to encourage tourists to purchase certain goods in Sri Lanka and to take such goods out of Sri Lanka. The systems and procedures should be introduced after careful consideration.
Other VAT refunds - The entitlement to refunds should be limited in relation to excess input tax of exporters, deemed exporters and registered new projects.
All other registered persons should carry forward their excess input tax and no refunds. It would be ideal if a guarantee system can be adopted to issue a refund within a short period.
Economic Service Charge (ESC) -
The ESC is a tax on persons and partnerships carrying on any trade, business, profession or vocation. The ESC is creditable against the relevant person’s income tax liability. If the person has no income tax liability, ESC charged will not be refunded. It will be the minimum tax payable by such person. By reducing the turnover threshold applicable to Rs. 12.5m from the current level of Rs. 50m many persons carrying on trade, business, etc. may be liable to this minimum tax even if there is no income tax liability.
Tax administration
It has been proposed to make certain changes in the Inland Revenue Department (IRD) administration. Reduction of time-bar for making assessments where return of income has been furnished on or before the due date for six months from the current 18 months may not be advisable.
After all how many working days are there in a six-month period. It may be reduced to 12 months and where the returns have not been furnished by the due date, the current 48-month period should not be changed.
Period for the determination of an appeal by the Commissioner General of Inland Revenue (CGIR) which is currently two years, may not be reduced to six-months as proposed.
Then, the CGIR may confirm all absurd assessments! Even now with the two-year period, the CGIR confirms about 90% of assessments are under appeal. This period may be reduced to 12 months. In relation to appeals before the Tax Appeals Commission (TAC), the current period is nine months or 270 days. This period may be justified. The two-year period is applicable to the ‘old appeals’ transferred from the Board of Review (BOR), most of which are now over.
The problem with the TAC Act is that the consequences of not adhering to the time limit have not been spelt out. Therefore, the TAC takes up the position that the requirement is not ‘mandatory’. As in the case of CGIR’s hearing of appeals, TAC determination within the time limit should be made mandatory and provisions should be included to discharge the assessment in such situations.
Carbon Tax -
This may create some practical problems in implementation. Once a person paid this tax and obtained the Revenue Licence, he may not obtain an emission test certificate. Sometimes the relevant institution may not perform the test properly. If the collection of tax can be done through Divisional Secretariats and the revenue licence issued after the submission of emission test report, these problems may be avoided. In relation to this it is better to tell the truth rather than confuse the public.
Taxation of E commerce or online transactions -
This creates a lot of practical problems since it is difficult to establish the trade or business carried out in Sri Lanka by the relevant foreign national. A tax may be recovered from the local recipient of goods but that may also create problems. Many countries still watch the situation since it is a complicated matter.
Financial transactions levy -
If this levy is charged on the institution and not on customers, it may not create a problem. But, collecting it from customers by the relevant institutions may be prohibited. If you collect this as a surcharge on Financial VAT, this problem may be avoided. However, this will not discourage cash only transactions by criminal persons etc.
Tax on ethanol - Why no VAT on ethanol?
Withholding Taxes (WHT) -
Specified Fees - This WHT (section 151 of the Inland Revenue Act) was abolished by the previous regime w.e.f. 1.4.2011, for obvious reasons. At that time the rate was 10%. Since this is not a final WHT, instead of 5%, a 10% may be introduced.
Commercial Rent - The WHT (section 155 of the Inland Revenue Act) on commercial rent was also abolished by the previous regime w.e.f. 1.4.2011. Why not this also be revived? It may be extended to residential rent where the landlord is an institution.
There are some doubts on the 2017 Income Tax and external trade revenue estimates.
As regards income tax, the estimate shows an increase of Rs. 99 billion over 2016. Even with the new proposals it may not be possible to collect this additional revenue in 2017, under the existing self assessment payment system. In the 1st quarter of 2017, the new proposals are not applicable, which will come into effect only from 1.4.2017.
Therefore, the maximum Income Tax Revenue one can expect for 1Q2017 will be ¼ of the previous year’s amount (236 x ¼) i.e Rs. 59 billion. In the other 3 quarters also they can pay ¼ of the previous year’s tax for each quarter, ignoring tax rate changes and other changes in law.
Accordingly, 2Q, 2017 (April to June) revenue from income tax may not be more than Rs. 59 billion. In 3Q,2017 (July to Sept) and. 4Q, 2017 (Oct - Dec) too the income tax revenue may be the same.
Any excess income tax due to rate or other changes can be paid on or before September 30, 2018. For 2017, there may not be additional Income Tax revenue.
However, there may be some additional revenue from 1April, 2017 due to the changes in withholding taxes and the dividend tax rate, but it is doubtful whether such additional revenue will be as high as Rs. 99 billion.
The other problem is with the so-called taxes on external trade. These are really import duties and Port and Airport development Levy (PAL). Many import cesses are to be abolished and import duties on motor vehicles may be very much less. Accordingly, collection of Rs. 400 billion in 2017 from Customs Duties and PAL may not be achieved. The Minister has given an undertaking not to incur expenses over the estimates without Parliamentary approval in 2017. This is the norm. What is important is to see that the expenditure will not spill over the estimates which will affect the Budget deficit, severely.
Practical inclusion -
Some proposals in the Budget will help to develop the North and East. So far, it has been only rhetoric. Additional capital allowances and proportionate exemption on income earned may be good incentives for investment. However, in the North and East, priority should have been given to improve their traditional way of life i.e - agriculture and fishery.
I request the Joint Opposition parliamentarians and others to please read the statistics and charts etc given in the Budget speech, which speak about the progress made by the ‘Yahapalanaya Government’. For easy reference, I, quote some statistics (In Rs. billion).
The writer is a senior Tax and Investment Consultant. He was a former Fiscal Policy Advisor to the Ministry of Finance.
‘Listing’ should be purely on economic considerations
Tax on online transactions - a complicated matter
In this article I am not dealing with the entire Budget speech, running into 140 pages with 529 paragraphs. My comments are limited to taxes.
Corporate Income Tax -
It has been proposed to have three different rates for different activities -
1. 40% - Liquor, tobacco, betting and gaming;
Why not lotteries? Already, lotteries enjoy this privilege. It is important to consider all aspects of these activities, especially, in relation to liquor and tobacco.
In addition to manufacturing or import transporting, stocking, wholesale and retail activities should also be considered.
The cultivation of tobacco should also be considered under this higher rate. Otherwise, it will not be different from the existing situation.
2. 14% - SMEs, exporters, agriculture and education.
How about deemed or indirect exporters of goods and services and Health Services? Agriculture may be covering all activities including horticulture, farming and fishing. Educational services may be limited only to pure educational services, excluding additional goods and services provided by them.
If Health services are to be considered it should be applicable to pure health care services only. In the last budget, the Minister proposed a 15% rate.
3. 28% - All other activities
This is not a new rate. Already 28% is applicable to companies. At present, a number of other rates are applicable to companies. 10%, 12% and certain BOI companies enjoy 5% and 2% of turnover etc. Integration of these cases under 14% or 28% has to be done using an acceptable method.
It is good that depreciation rates are to be aligned with economic depreciation, instead of economically misleading accelerated depreciation. Incentives for listing may not work since this has been tried several times earlier. Let the ‘listing’ take place purely on economic considerations.
Additional revenue estimated - Rs. 32,000 m. Proposals for 2016 were not implemented and legal provisions for 2015 were applied to 2016 also.When compared with the estimated company tax revenue for 2016, the additional revenue estimate may be unrealistic.
Personal Income Tax -
Certain proposals are not clear. What is the exemption limit for individuals? For PAYE it is Rs. 1.2 m. per year. How about other individuals liable to pay income tax? Is it the current exemption limit, i.e. Rs. 500,000 or some other amount?
All employees whether professionals, or not will be considered in the same way and current tax rates, i.e. 4%, 8%, 12%, 16%, 20% and 24% will be applicable? To prepare PAYE Tax tables such rates will be used. Tax slabs will be Rs. 600,000 each. PAYE - Exemptions - It is proposed to remove all exemptions in relation to benefits applicable to employment income. This removal of exemption should be applicable to non- PAYE employees as well.
However, there may not be a reduction in revenue due to the increase of the exemption limit to Rs. 1.2 m. per year, and some employees now getting taxable remuneration just above the exemption limit may not get a big relief.
Further, non-PAYE employees, and other individuals should be treated in the same manner as ‘corporate citizens’.
For example, if an individual is engaged in agriculture he should get 14% rate on such income which should be the maximum rate on such income.
This treatment should be applicable to all sources where 14% is applicable for a company. However, the maximum rate applicable to such individuals also should be 24%. At the same time, if any activity where 40% is applicable was carried on by any individual 40% rate will be applicable to him as well.
Therefore, these 14%, and 40% rates should not be considered as company tax rates only, but special rates under the 5th Schedule to the Inland Revenue Act, which are applicable to all entities and individuals.
The rate applicable to partnerships has not been given.
Value Added Tax (VAT) -
It is proposed to abolish ‘S-VAT Scheme’, introduced by the previous regime, which is against VAT refunds.
They wanted a VAT system without refunds, which is impossible under our VAT system. Instead of strengthening the VAT refund system after the massive VAT fraud they went on the reverse gear.
No one knows what happened under this S-VAT system and no audit has been done on this activity. I feel the Minister should be commended for this bold decision.
Refunds for tourists - A separate section was incorporated in 2006, under the VAT Act (section 58A), but this section was also repealed by the previous regime.
This is a must to encourage tourists to purchase certain goods in Sri Lanka and to take such goods out of Sri Lanka. The systems and procedures should be introduced after careful consideration.
Other VAT refunds - The entitlement to refunds should be limited in relation to excess input tax of exporters, deemed exporters and registered new projects.
All other registered persons should carry forward their excess input tax and no refunds. It would be ideal if a guarantee system can be adopted to issue a refund within a short period.
Economic Service Charge (ESC) -
The ESC is a tax on persons and partnerships carrying on any trade, business, profession or vocation. The ESC is creditable against the relevant person’s income tax liability. If the person has no income tax liability, ESC charged will not be refunded. It will be the minimum tax payable by such person. By reducing the turnover threshold applicable to Rs. 12.5m from the current level of Rs. 50m many persons carrying on trade, business, etc. may be liable to this minimum tax even if there is no income tax liability.
Tax administration
It has been proposed to make certain changes in the Inland Revenue Department (IRD) administration. Reduction of time-bar for making assessments where return of income has been furnished on or before the due date for six months from the current 18 months may not be advisable.
After all how many working days are there in a six-month period. It may be reduced to 12 months and where the returns have not been furnished by the due date, the current 48-month period should not be changed.
Period for the determination of an appeal by the Commissioner General of Inland Revenue (CGIR) which is currently two years, may not be reduced to six-months as proposed.
Then, the CGIR may confirm all absurd assessments! Even now with the two-year period, the CGIR confirms about 90% of assessments are under appeal. This period may be reduced to 12 months. In relation to appeals before the Tax Appeals Commission (TAC), the current period is nine months or 270 days. This period may be justified. The two-year period is applicable to the ‘old appeals’ transferred from the Board of Review (BOR), most of which are now over.
The problem with the TAC Act is that the consequences of not adhering to the time limit have not been spelt out. Therefore, the TAC takes up the position that the requirement is not ‘mandatory’. As in the case of CGIR’s hearing of appeals, TAC determination within the time limit should be made mandatory and provisions should be included to discharge the assessment in such situations.
Carbon Tax -
This may create some practical problems in implementation. Once a person paid this tax and obtained the Revenue Licence, he may not obtain an emission test certificate. Sometimes the relevant institution may not perform the test properly. If the collection of tax can be done through Divisional Secretariats and the revenue licence issued after the submission of emission test report, these problems may be avoided. In relation to this it is better to tell the truth rather than confuse the public.
Taxation of E commerce or online transactions -
This creates a lot of practical problems since it is difficult to establish the trade or business carried out in Sri Lanka by the relevant foreign national. A tax may be recovered from the local recipient of goods but that may also create problems. Many countries still watch the situation since it is a complicated matter.
Financial transactions levy -
If this levy is charged on the institution and not on customers, it may not create a problem. But, collecting it from customers by the relevant institutions may be prohibited. If you collect this as a surcharge on Financial VAT, this problem may be avoided. However, this will not discourage cash only transactions by criminal persons etc.
Tax on ethanol - Why no VAT on ethanol?
Withholding Taxes (WHT) -
Specified Fees - This WHT (section 151 of the Inland Revenue Act) was abolished by the previous regime w.e.f. 1.4.2011, for obvious reasons. At that time the rate was 10%. Since this is not a final WHT, instead of 5%, a 10% may be introduced.
Commercial Rent - The WHT (section 155 of the Inland Revenue Act) on commercial rent was also abolished by the previous regime w.e.f. 1.4.2011. Why not this also be revived? It may be extended to residential rent where the landlord is an institution.
There are some doubts on the 2017 Income Tax and external trade revenue estimates.
As regards income tax, the estimate shows an increase of Rs. 99 billion over 2016. Even with the new proposals it may not be possible to collect this additional revenue in 2017, under the existing self assessment payment system. In the 1st quarter of 2017, the new proposals are not applicable, which will come into effect only from 1.4.2017.
Therefore, the maximum Income Tax Revenue one can expect for 1Q2017 will be ¼ of the previous year’s amount (236 x ¼) i.e Rs. 59 billion. In the other 3 quarters also they can pay ¼ of the previous year’s tax for each quarter, ignoring tax rate changes and other changes in law.
Accordingly, 2Q, 2017 (April to June) revenue from income tax may not be more than Rs. 59 billion. In 3Q,2017 (July to Sept) and. 4Q, 2017 (Oct - Dec) too the income tax revenue may be the same.
Any excess income tax due to rate or other changes can be paid on or before September 30, 2018. For 2017, there may not be additional Income Tax revenue.
However, there may be some additional revenue from 1April, 2017 due to the changes in withholding taxes and the dividend tax rate, but it is doubtful whether such additional revenue will be as high as Rs. 99 billion.
The other problem is with the so-called taxes on external trade. These are really import duties and Port and Airport development Levy (PAL). Many import cesses are to be abolished and import duties on motor vehicles may be very much less. Accordingly, collection of Rs. 400 billion in 2017 from Customs Duties and PAL may not be achieved. The Minister has given an undertaking not to incur expenses over the estimates without Parliamentary approval in 2017. This is the norm. What is important is to see that the expenditure will not spill over the estimates which will affect the Budget deficit, severely.
Practical inclusion -
Some proposals in the Budget will help to develop the North and East. So far, it has been only rhetoric. Additional capital allowances and proportionate exemption on income earned may be good incentives for investment. However, in the North and East, priority should have been given to improve their traditional way of life i.e - agriculture and fishery.
I request the Joint Opposition parliamentarians and others to please read the statistics and charts etc given in the Budget speech, which speak about the progress made by the ‘Yahapalanaya Government’. For easy reference, I, quote some statistics (In Rs. billion).
The writer is a senior Tax and Investment Consultant. He was a former Fiscal Policy Advisor to the Ministry of Finance.
