SME tax reductions will boost growth
Tax reduction for SMEs and tax exemptions for targeted sectors are
most welcome, said Tax Consultant and Partner Gajma and Co, N.R.
Gajendran. “Yet it is mind boggling how blanket exemptions can be given
for strategic projects for a long period of time - 25 years, which
itself, may exceed the life span of some of these projects. This has
challenged revenue,” he said.
From a tax policy perspective, we have consciously reduced the rates
of tax, focused on SMEs and strategic projects. These decisions do not
definitely boost revenue. Nevertheless, tax reductions for small and
medium scale businesses and targeted sectors will help boost growth of
During the past few months, there was a slack in general trade and
business activity. This itself will have an impact on revenue
collection. The tax policy has certainly been business-friendly and
thlis may have had a negative effect on tax revenue. This does not mean
that there has to be a change or reversal in the tax policy.
He said that indirect tax is a consumption tax which contributes
significantly towards tax revenue. A greater proportion of the tax
revenue comes from indirect tax. A word of caution on indirect tax and
revenue is the severity of the impact it could have on the poorer
segment of the people and too much focus on it, impedes their purchasing
power and consequently their standard of living and quality of life. The
State should not be hell-bent to boost its revenue from indirect tax, as
macro economic stability with social justice could only be achieved, if
greater proportion of the tax revenue comes from direct tax.
In the first half of the year, there seemed to be a drop in revenue
and non-attainment of targeted goals from indirect tax. This has thrown
a huge challenge to the revenue administration and to the State. Here
again, there are reasons we have to reconcile with. The indirect tax
rate had been brought down and one analysis is that with the tax rate
going down, indirect tax revenue should have grown.
This may not be so, particularly because indirect tax is a reflection
on the cost of living. The cost of living has increased particularly for
the people living in the city and urban areas.
The strategy in the short term should not be to enhance indirect tax
but allow businesses to function and muddle through the difficult times
and the State should focus its attention on management of expenditure.
Consumer psychology will also play a huge role as they are affected by
the rupee depreciation. Consequently, the tax administration should not
chase after business entities to collect taxes, particularly indirect
Regarding tax evasion, he said that it is not a new problem. It may
even be older than human civilization. Evasion arises for more than one
reason. The lower segment of the society evades taxes purely on the
question of affordability and human need. The higher segment of the
society evades taxes which are exorbitant and unreasonable. There is
another segment which evades tax as it has become a convenient practice.
The saddest part of tax evasion is where politicians openly evade
taxes and where because of excessive harassment, retroactive actions,
unfair, unjust and unreasonable decisions by revenue administration,
people are pushed out of the tax net either fully or partially.
Even the tax evaders will go through a cost benefit and a risk
analysis in evading taxes.
The benefit of course is obvious. The cost of tax evasion is the
financial handouts that will have to be incurred. Risk analysis will
deal with two issues, one being the extent of probability of being
detected and the other, severity of punishment, if detected. If these
two factors are manageable, then tax evasion will be rampant, which may
be the case in Sri Lanka.
No consorted effort is being made to rope in tax evaders and make
them compliant. This is not plausible in Sri Lanka in the contemporary
environment as the big and mighty of the country's personalities may be
the biggest offenders. Frankly, the evaders seem to be amused as it is
beyond their logic to pay taxes and they poke fun at the compliant
taxpayers who continuously go through rigorous query and or harassment
at the hands of the tax administration.
It is the responsibility of the tax administration to evolve a
taxpayer-friendly administration whereby they systematically and
professionally rope in the non-compliant taxpayers and consciously ease
the burden of the compliant taxpayers.