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ECONOMYNEXT – Every Sri Lankan who possesses a National Identity Card (NIC) may be urged to open tax files in the future, two top government sources said, as President Ranil Wickremesinghe’s effort to expand the tax net with opening of one million new tax files this year has failed.

Wickremesinghe in his 2023 budget last year urged all above 18 years of age to open a tax file as a first step, though many of those would not have to pay taxes because they will be below the tax-free thresholds and thus to introduce measures that identify high income earners specifically and get them into the tax net.

Contrary to President Ranil Wickremesinghe government’s expectation of 1 million new tax files, Sri Lanka’s Inland Revenue Department has found that out of 16 million potential taxpayers among citizens above 18 years of age, only 198,253 new taxpayers have registered so far in 2023.

“We are moving towards asking all those who have NIC to open tax files,” a top government source, told EconomyNext.

“Without widening the tax net, the authorities will be burdening only a few registered taxpayers.”

Another official, however, said the idea was only at a proposal level and not gone beyond that though that is likely with the future after the country adopts the unique identity card.

About 13,000 firms had registered to pay value added tax so far this year, while the Inland Revenue Department was trying to use technology (RAMIS) to track large numbers of people and collect tax.

However, there were still problems with the RAMIS revenue management system, IRD officials had told the parliament panel.

Admitting the failure to boost tax revenue in the recent time, President Wickremesinghe, who is also the finance minister, has proposed to establish a revenue authority in the 2024 budget to boost tax collection.

Sri Lanka is now collecting income tax from everyone who earns more that 10 dollars a day, after the revenue based fiscal consolidation and potential output targeting debacles drove the country to external sovereign default, in the wake of serial currency crises and stabilization programs which reduced growth and pushed up debt.

Unlike value added tax, where the state and rulers get to collect money after a free citizen engages in a growth generating transaction by their own choice, income tax allows the coercive state to appropriate money before a transaction is made by the person who earned the cash.

As a result, high income tax rates and the low tax-free threshold (about 300 dollars a month) on top of VAT and import duties has been blamed for brain drain.

Though income taxes and other capital consumption taxes like wealth tax kills future growth and jobs by destroying investable capital, they have the advantage of being designed to hurt, and makes taxpayers feel the weight of the state and the ruling class more than a painless value added tax would. (Colombo/Nov 20/2023)

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