Institute of Development Studies, IDS

Understanding the Tax Man: How to improve public revenues in Sri Lanka

Press Release   •   Nov 22, 2011 08:31 GMT

I recently visited Colombo, Sri Lanka, for a conference on tax and development. It was organised by the Institute of Policy Studies, together with the International Centre for Tax and Development at IDS.

After the conference, my friend Anjali asked me about what had been discussed, and what it meant to her as a citizen of Sri Lanka.

I explained to her what was foremost on my mind.

The costs of declining tax revenues

The Government of Sri Lanka was gradually ceasing to tax. The proportion of Gross Domestic Product collected by the tax man had been in steady decline for the last 20 years, down from about 20% to around 13%.

The loosening of the grip of the tax man was far from costless. The Government is funding itself from interest-bearing loans that will have to be repaid one day. Public spending on health and education has shrivelled.

‘The bottom line,’ I said to Anjali, ‘is that the Government does not seem very interested in raising revenue’.

I could sense her irritation. ‘Why then is the Inland Revenue harassing me so much since I bought my little flat and a small car?’

I tried to explain to her that it is precisely because the Government is not much interested in revenue-raising that the Inland Revenue mercilessly pursues people like her who have only modest salaries and assets.

How to raise tax revenue more effectively

If the Government of Sri Lanka really wanted to raise more revenue, here are some of the things it might do:

  1. Stop fiddling with the tax regime – changing rates, adding new taxes and charges, and generally making the tax man’s job far more complex than it need be.
  2. Ensure that the Inland Revenue Department, the Customs Department and the Excise Department use digital systems routinely to store information on taxpayers, assess liabilities, control payments, reconcile and collate information from different sources to bring complete evaders into the tax net, allow taxpayers to file returns online, and target their audits on those categories of taxpayers most likely actually to be evading on a significant scale.
  3. Find ways of ensuring that the three taxing Departments work together, share information, and become more effective collectively than they are separately.
  4. Give the heads of taxing Departments enough managerial autonomy so that they can tailor their activities to the needs of modern revenue raising.
  5. Encourage the development of effective human resource management practices, providing real incentives for staff to provide a good service to taxpayers, and not simply to meet collection targets.

How do incentives shape the way tax is collected?

But why exactly has Anjali been harassed by the Inland Revenue? Let us start from the fact that the key Inland Revenue operational staff all have targets to meet.

And those targets are set entirely in terms of money collected.

Add to the mix the fact that the Government of Sri Lanka has made it quite hard for the tax collectors to meet those targets. And it has taken from them the authority to tax large areas of the economy.

There are virtually no capital taxes now. Wealthy people pay nothing on their property or assets. Taxes on income are low. Tax exemptions for companies have expanded enormously.

Put these things together and we have the answer to Anjali’s question: the Inland Revenue harasses her because they have information about her. She has a formal job, and bought her flat and car legally and openly.

Recapturing Sri Lanka’s missing public revenue

Things need not be like this. Imagine giving a bunch of computer literate young Lankans good IT hardware and access to records on property and vehicle ownership, foreign travel, credit card purchases, share trading, banks accounts and company registrations.

It would not take them many months to generate a long list of people who should be filing tax returns. And to get them to file, Inland Revenue wouldn’t need to harass anyone. A polite request to file returns from now on, with forgiveness for past omissions, would be enough.

It would be a mistake to blame the tax man and the tax woman for the ways in which they treat Anjali. It really is ‘the system.’

And, by the way, her real name is not Anjali. Although she pays all her dues to the tax man, she does not trust him.