Taxes and tax revenue - 2011

Dharmadasa RANGALLE

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.

Dharmadasa Rangalle

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 the productivity.

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 burden.

To improve capital formation

To reduce tax burden for individual and all corporate and non corporate etc.

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.

Income Tax

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 government.

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 decisions.

Collection of Economic Service Charges also is a part of the income tax revenue since such ESC is set off against income tax payable.

PAYE Contribution

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 IRD collection.

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