Taxes and tax revenue - 2011
Taxes, according to Justice Holes, are the price of Civilization, but
the question is who pays. As we know, taxes are not voluntary purchase
payment, but mandatory imposition, payable in line with whatever tax
statute has been legislated.
The Economic effects of taxation are manifold. They include micro
effects on the distribution of income and the efficiency of resource use
as well as micro effects on the level of capacity output, employment,
prices and growth. All these effects interact.
The major impact of fiscal policy upon capacity output is through its
effect on savings and capital formation. Since labor is more productive
if it is combined with a large capital stock; capital formation raises
Effect of tax policy upon savings in the private sector, matters
because they bear on the division of resources use between consumption
and capital formation. In Sri Lankan context, as the government is
persistently looking for increasing the proportion of income tax in the
revenue basket through various means and measures is equally important
that the government create a sense of perception among the taxpayers
vis-à-vis the citizen that the taxes they pay are being utilized in
efficient and effective manner.
An individual need to pay taxes on his income without expectation of
any direct return but, however, taxpayers may reasonably and honestly
hope to see the government engage their certain very basic needs such as
security, health, infrastructures, education etc.
While they paying taxes tax payers may also ask for rationalization
of tax rates. As individuals, corporate sector also may ask reasonable
tax rates and simple tax system in order to increase their corporate
profits, savings and thereby create capital formation.
Considering the facts mentioned above, both taxpaying community and
their trade chambers asked the tax policy makers to guarantee a smooth
revenue flow to the government while at the same time creating a good
taxpaying culture in the country. Hence tax rates and the tax base have
been slightly changed.
The Tax reform proposed by the government in its previous budget of
2011, mainly focused:
To simplify the tax system
To improve compliance and reduce the tax gap.
To improve to ability to pay taxes according to the income with less
To improve capital formation
To reduce tax burden for individual and all corporate and non
The personal tax free allowance for individuals of private and public
sector was increased from Rs. 300,000 to Rs. 600,000 with effected from
01.04.2011 and maximum tax rate also reduced from 35% to 24% with
effected from 01.04.2011.
In corporate taxation, Corperate tax rate was reduced to 28% from 35%
with effect from 01.04.2011.
Certain identified industries such as tourism, construction etc and
of the companies those whose profits less than Rs 5,000,000/- were
reduced to 12% from existed rate of 15% effected from 01.04.2011 while
With Holding Tax on interest also reduced to maximum rate of 8%. So
Fifteen (15) legislation were enacted at the end of March 2011, to
implement the tax changes introduced 2011 onwards.
Outcome of different changing initiatives that were introduced to
existing tax system effected from 01.04.2011, were reflected in the
revenue figures of year 2011.
This figures evidenced that weather taxpaying community received that
expected benefits by way of serving through less paying in taxes and
incase of corporate they properly complied to the tax law by declaring
their correct tax liabilities by paying correct taxes while enjoying the
less tax rates and increasing their profit savings for capital creation.
Since the maximum income tax rate reduced to 24% and tax free
allowances for the employees under Pay As You Earn (PAYE) scheme
increased, all the employees of private and public sector were
benefitted. PAYE tax income for the year 2011 was marginally reduced as
a result of such changes. (These changes were affected only to nine
months of the year 2011).
It is more important to compare the past six year's government tax
revenue to get clear understanding of the effect of tax policy changes.
Tax free allowances and PAYE revenue of the past ten years are as
follows and it reveals that the tax free allowances and the tax revenue
has a direct relationship.
Further reducing the tax rates and the slabs also has contributed to
the downfall in the PAYE revenue.
The above figures clearly indicate that the PAYE revenue has gone
down due to the reasons of reducing of tax rates, slabs and the
increases of tax free allowances. For the year 2011, expected and
estimated government revenue from the PAYE taxes was Rs.14,760 million.
Its achievement was Rs 14,516/- million and it revealed that there is no
considerable revenue drop due to tax changes.
This revenue drop in the PAYE means that the savings of PAYE
taxpayers have gone up and it is believed such savings utilized to
consumptions or savings or investments. That is the intention of the
policymaker. Further, for administration conveniences of the PAYE tax,
more than 12,000 income tax files of PAYE tax payers were closed by the
Department of Inland Revenue and thereby the requirement to filing
returns of income tax in each year by employees were also stopped. This
type of policy and administrative measures helped to reduce the
compliance cost of both taxpayers and the tax administration.
Corporate and non corporate pays income tax at the specified rates
introduced by the government for the respective periods. Though the
income tax rate reduced to maximum of 28% with effected from 01.04.2011,
it has been recorded an unexpected growth of income tax payments in year
2011. This significance growth were achieved while taxpaying cooperates
and non corporate enjoying other tax concessions introduced by the
The above revenue figures are clearly indicative of the tax reforms
introduced to the income tax system that positively affected both tax
payers and the government having their objectives.
Increase of tax revenue means, the corporate and non corporate have
increased their profits from business activities, Contributing more
revenue through income tax while applying lower rates is an indication
about more profits retained in the business and majority of such
retained profits gone to investments.
Income Tax Contribution
Inland Revenue Department (IRD) being the highest revenue collecting
agency in the country, more than 50% of the government revenue is
collected by the IRD and it is reflected in the revenue collection
figures. Since the income taxes play a major role in any tax structure,
any changes of income tax affect the revenue as well as the savings and
investment of a country. As economist says, savings is a necessary
condition for capital formation but it is not sufficient one. Investors
must also be willing to invest.
In year 2011, was the year in which the income tax rate and the tax
slabs and the bases were changed since taxes influence investment
Collection of Economic Service Charges also is a part of the income
tax revenue since such ESC is set off against income tax payable.
Public sector employees whose annual employment income exceeds Rs.
600,000 per year with affected from 01.04.2011 were chargeable with
income tax. However, tax free allowances increased to Rs. 500,000 from
Rs. 300,000/- number of employees Subjective to the PAYE deduction was
reduced. Revenue collection of the year 2011 managed to keep 3.42% to
Good Tax Structure
The United State tax system; which is known as a good tax system, and
the Singapore tax administration system which is known as good tax
administrator, likewise any other countries have developed their owned
tax structures and administration systems in regards to many influences
such as Economic, political and social. As concluding remarks;
followings are the major importance of tax system.
Revenue yield should be adequate
The distribution of the tax burden should be equitable. Everyone
should be made to pay his or her fair share.
What taxes are imposed and its final resting place.
Tax structure should facilitate the use of fiscal policy for
stabilization and growth objectives
The tax system should permit fair and non arbitrary administration
and it should be understandable to the tax payer
Administration and compliance cost should be as low as is compatible
with the other objectives