New Inland Revenue Act On The Cards

Sri Lanka is getting a brand new Inland Revenue Act. Though yet to be gazetted, the draft Act has already been approved by the Cabinet of Ministers (though reportedly not without some internal dissenting voices), subject to amendment once tabled in Parliament.

What We Know

The bill was presented by Finance Minister Ravi Karunanayake early this month, and as confirmed by the Government Information Department, was approved by Cabinet and is expected to be taken up for vote in Parliament, sooner rather than later.

The Act was reportedly drafted by International Monetary Fund (IMF) experts and the delay in tabling the Bill has resulted in the postponement of the third tranche of the IMF’s extended fund facility.

The new Act will introduce brand new income tax laws and legislation to broaden the tax base. If passed, capital gains tax will also finally become a reality.

The new Bill is expected to bring much needed changes to income tax collection – Image courtesy myfinancialzone.com

Criticism

The proposed act has been taking some flak for allegedly being a “carbon copy” of the inland revenue act in Ghana, drafted by the International Monetary Fund (IMF) with that country’s socio-economic realities in mind. The Sri Lanka Act, too, was drafted by IMF experts, allegedly in line with the Ghana act, and has drawn the ire of some who have denounced the Government for capitulating to the Washington D.C. based organisation.

The third tranche of USD 168 million out of the total USD 1.5 billion extended fund facility to Sri Lanka from the IMF was reportedly put on hold due to the delay in tabling the proposed Act, and opponents have argued that the Government has bent over backwards to please the IMF.

Commissioners of Inland Revenue themselves have joined the chorus of voices against the new bill, claiming that the exercise would be a waste of resources, with some going to the extent of warning that a new bill will render the newly-introduced RAMIS obsolete.

Needlessly Complicated?

Trade unions within the Inland Revenue Department have also expressed their opposition, with some threatening union action, arguing that the new tax laws will provide “undue priority to less important sections which have less relevance to the economy and neglects the more important sections on tax law imposition and recovery.”

Cabinet Minister and Sri Lanka Freedom Party (SLFP) stalwart Dayasiri Jayasekara was critical of the IMF’s dominant role. Speaking at a forum on international trade policy where this reporter was present, Jayasekara said: “This is why I say we can’t cut and paste these things from other countries. This is a cut-and-paste thing. I have opposed this before. Some old white men from the IMF or the World Bank tell us that this should be Sri Lanka’s Inland Revenue Act. Don’t we have taxation experts of our own in Sri Lanka?”

However, the Minister confirmed that the proposed act has received the Cabinet nod, subject to amendments. The process of making amendments to the draft Act will need to be carried out in Parliament, he said, after which further matters can be ironed out.

IMF Responds

The architects of the bill are determined to soldier on.

“The Board is expected to consider Sri Lanka’s request for completion of the second review in June 2017, by which time the new Inland Revenue Act is expected to be submitted to Parliament as a prior action. The new law should pave the way for a durable fiscal consolidation based on revenue mobilization—a key pillar of the government’s reform program. The team commends the authorities for resuming accumulating net international reserves as a corrective action for missing the end-2016 target. This reserve accumulation should continue and help reduce Sri Lanka’s external vulnerability,” the IMF said in a statement.

In response to the criticism, the IMF told a local weekly that the new tax laws are, in fact, a joint effort by the IMF and local authorities. “The Inland Revenue Act (IRA) is a product of the IMF’s extensive collaboration with the Sri Lankan authorities over the past year and incorporates feedback from local experts,” it said.

The legal framework ultimately adopted by the authorities has always adhered to the specificities and circumstances of the individual country concerned, the newspaper quoted an IMF official as saying, adding that the framework underpinning the new Act reflects international best practices and is influenced by a number of key G20 common law tax systems.

Not As Black As It’s Painted?

The Act will also introduce the long awaited capital gains tax – Image courtesy clipartfest.com

Criticisms notwithstanding, the new act does have some salient features, chief among which is legislation aimed at bringing up the country’s income-tax-to-GDP ratio, which currently stands at an abysmal 2%, to 4% by 2020. According to a report by Echelon magazine, the new act will remove sweeping exemptions and concessions, with the aim of broadening the tax base. The much discussed capital gains tax will also finally see the light of day with the advent of the new act, though, as pointed out by Echelon, it cannot be known for certain what will be taxed at the proposed 10% rate until the bill is tabled in Parliament.

As things stand now, the bill will be taken up for a vote in parliament over the next few weeks, despite some hiccups. Stay tuned to Roar for a more detailed analysis soon.

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