There is lot of anxiety among the corporate entities and the high net worth individuals as to the impact on their tax liabilities arising out of the taxation legislation and amendments passed in parliament recently.
The government expects substantial additional revenue from the new tax legislation. Even the chambers of commerce are upbeat on the new legislation. As we all know our tax revenue has been falling steadily over the past decade with indirect taxes climbing the ladder. As a percentage of GDP, the tax revenue dropped to below 11%.
However, the trend was reversed from 2016 onwards with the revision of vat rate to 15% from 11%. Since the introduction of GST and VAT in 1998 and 2002 respectively, the tax revenue especially from direct taxation started on the downward path. Due to inadequate controls in the introduction of VAT, there was a huge vat fraud from 2002 to 2004 resulting in a loss of over Rs. 4 billion to state coffers. There was collusion on the part of revenue officials as well for this. The malpractices were originated from the refunds due to VAT payers on the returns filed. Prior to this there was a tax amnesty granted especially on taxes upto year of assessment 2000/2001. As a result, the tax payers got into a “Holiday Mood”. This affected all revenue collection modes.
Tax legislation
Some are of the view that the recent tax legislation was forced on the Government by the IMF to release the quarterly dollar loan instalments on the loans approved by them. Naturally, strings are attached to IMF loan packages. The developing countries developed their economies on large tax collections over 30% of GDP. We did not employ sufficient measures but were hell bent on providing subsidies on education, health, transport, electricity, petroleum and other areas. The real culprits are the successive governments which ruled this country for the last 70 years. At every elections the parties include many relief measures to win the public vote. We should have built our infrastructure in the seventies coupled with donor grants and tax revenue. However, even the so called “ Colombo Plan” was also not materialized. The politicians come up with very long term plans for goal achievements for the country. These should have been medium term plans broken into short term segments with specific responsibility centres.
Even the promised Audit Commission was not established. The chambers of commerce should appoint private sector Audit Committees for every state enterprise and corporations without any further delay, like in quoted companies backed up by internal audit divisions of the private sector. The funding for this exercise could be sought from the IMF and other overseas donor agencies. This will no doubt eliminate waste and corruption of public funds. The private sector will also greatly benefit by lower and meaningful taxes for the future. These internal audits should be extended to provincial councils and local government authorities also.
Sri Lanka too had higher tax revenues in the past especially with the BTT(business turnover tax) in force at those times. However, there were very few infrastructure development projects at that time. Infrastructure projects received outright grants and loans of very long term tenure coupled with low interest rates. Scenarios changed with the reduction of funds to overseas countries from the so called development countries. This was mainly due to those countries beefing up their regional cooperation endeavours and the beefing of their defence capabilities.
India took a late start in the late nineties to liberalise their economy and they were fortunate to attract huge capital and latest technology from their own countrymen in overseas countries. United States Of America reiterates that they now need the support of India to take their economy to greater heights and also to maintain their role as the “ police force” of the world.
In a scenario where grants and soft loans will not be forthcoming to Sri Lanka, the government should strike a balance with corporate sector taxation and the maintenance of steady tax revenues and higher economic growth rates to create more employment opportunities and higher per capita incomes.
Black money
Single individuals and non corporate bodies are resorting to a number of tax evasion measures which need extensive tax investigation measures. The inland Revenue should seek the assistance of retired private sector tax practitioners in mapping up strategies to unearth these evasive measures. There should be equality in tax collection measures for all sectors. Single personal allowance is quite adequate even to cover dependents. There are vast sums of “ Black Money” in the economy. The state should attract this black money for fruitful ventures to generate more employment. The employment measures to be created should be stable in the long run, so that excess staff in loss making state ventures could be encouraged to join. Over the years the government allowed the importation of various types of vehicles and raked in substantial “ Black Cash” in the economy by way of taxes and also achieved the double objective of raising the revenue levels of the already completed highways.
The government should always endeavour to reduce the local and foreign debt to under 60% of GDP to bring up a manageable economy and to lower the taxation levels. The biggest problems faced by the present Government is to meet the interest cover and loan repayments of both the local and foreign debt and the meeting of additional monthly salary bill of the state sector. The RS.10,000 increment given to state sector employees is a huge burden monthly. The number of state sector employees is around 15 lakhs and the annual additional salary bill is around RS.180 billion. Even now trade unions demand more salaries and perks and the Government is forced to give in to some of their demands giving rise to escalations in salary bill monthly. This will have the chain effect of local borrowings and higher taxes.
Fuel increases
The fuel prices are expected to go up in the near future. The LIOC has already requested price increases for their products to cover up their lossess. If Ceylon Petroleum follow suit, this will have a killer effect on consumer prices. A cost of living committee and a taxation committee will have to meet on a weekly basis along with treasury officials and the officials of the consumer protection Authority to arrest the adverse effects on the general public and the private sector. With the new tourist season commencing soon, there will be an additional demand for consumer goods especially on food and beverages.
The PPP Authority will also have to speed up their efforts to improve productivity and profitability of public sector enterprises to lessen the burden on the treasury but not with the objective of selling off these enterprises to outsiders. The objective need be higher productivity, efficiency and profitability.
To tackle the task of tax planning by the local corporate sector, a three pronged strategy should be adopted. They could be listed as follows.
1. To file the annual tax return for
year of assessment 2016/17
2. To carry out a tax planning and control
exercise for year of assessment 2017/18
3. A detailed tax planning exercise
for year of assessment 2018/19
Talking about the first task, the annual tax returns are due by 30 November 2017.The audited accounts and a detailed tax computation need be obtained from the company external auditors for this purpose. The return should be filed only after paying the balance tax liability, if any,as per the final tax computation.
When we come to the second task we have almost 6 more months for the ongoing financial year to end. By now the tax payable for the first quarter should have been paid. The second quarter instalment of tax is due by November 15 2017. The 3rd and 4th quarter payments are due by February 15 and May 15 respectively of 2018.
The companies should always endeavour to prepare the actual tax liabilities for above quarters based on actual draft accounts for quarters ending December 31 2017 and 31march 2018 to avoid huge balance tax payments possibly with penalties. Maintenance of accurate accounts is a must for determining actual liabilities.
Fixed assets
The decisions to acquire fixed assets such as much needed plant and machinery, office equipment, computer software, need be considered based on tax benefits and liquid funds available. ualifying payments and corporate social responsibility needs(CSR} are other considerations.
Another major factor in determining the purchase of fixed assets are the prevailing interest rates on leases and long term loans as long term assets need be purchased with long term funds either by fresh capital or through debt with low interest.
This would ensure sound cash flows for the company and will assist in achieving corporate goals at all times such as enhanced market share, enhanced turnover and enhanced profitability coupled with higher staff/worker benefits.
Tax planning for year of assessment 2018/19 should take place after the presentation of budget proposals by the government in November 2017 as the future scenarios could be accurately predicted. Certain proposals will be operative from 1 January 2018 and some will come into effect from April 1 2018. There could also be proposals effective from midnight of the announcing of the budget proposals
An indepth study of recent tax legislation approved by parliament could be taken up for a brainstorming session in every company amongst the finance management firstly and tater with the top management.
Based on outcomes and decisions reached a formal meeting should be conducted by the top management with the board of directors to decide on future strategies for finance, production, marketing, transport. The decisions should be taken after the budget is passed in parliament as there could be proposals for amendments.
Long term objective
The medium and long term objective of government will be to increase the direct taxes to a level of 60% of total tax collection. Further the government is targeting a tax collection of over 20% of GDP. The international donor agencies, particularly the IMF has been voicing their concerns for the last few years over the lower level of tax collections and steadily climbing country debt.
The companies should also plan for their taxes vis a vis the tax liabilities of the directors arising out of remuneration & perks to the directors from the company with the objective of mitigating the liabilities for both the company and the directors.
At the same time, the maximum returns also should be ensured for the shareholders for their investment. It should be a “win win” situation for all parties. The employees at all levels should not be forgotten and they too be ensured increased take home pay packets.
For raising fresh funds for development and also to mitigate or pay additional taxes, the following options could be employed.
1. Rights issues preceded by bonus issues
2. Issue of Long term debentures
3. Arranging low cost syndicated long term loans
4. Finding strategic foreign/local investors for a strategic alliance which would boost the company
profits and market shares
Other than the above 3 stages of tax planning, it is of paramount importance to check the company tax position based on records maintained by the inland revenue. The following aspects are vital for a healthy tax position of a corporate entity and even for a partnership or files of individual tax payers.
1. Check whether there are any appeals outstanding.
2. Check with the computer division of the Inland Revenue whether there are any default taxes
3. The possession of acknowledgement cards duly date stamped and signed for all tax returns filed or
acknowledgements via electronic modes, if applicable
4. Always forward the tax return along with a covering letter and also obtain an acknowledgement
on the copy of a the letter for preservation in the company tax file
5 Covering letter should itemize the attachments to the return such as tax computation, donation
and other approved investment receipts ,fixed asset purchase receipts, interest paid/received
confirmations from banks and financial instituitions.
6. Always attach only the copies of original supporting claims due to possibility of misplacing
7. Retain a copy of tax return after the signature of the declarant
8. Clearly indicate the tax overpaid for the year of assessment and the desire to carry forward the
overpaid tax for future liabilities
9. The tax overpaid, if substantial, should be agreed and minuted with the assessor concerned as any
disallowances later will result in penalties for future years on the overpayment disallowed later.
10. Any estimated assessment should be settled after filing the return and proceed to get the estimated assessment withdrawn as soon as possible and peruse same in the computer records of the inland revenue department.
11. Do not delay filing returns and forwarding requested data and details by the inland revenue Department as these would leave room for possible raids to be conducted by the inland revenue Department
The above points are only a few in maintaining a healthy tax position for any company as there are contingent liabilities for additional taxes imposed by the Inland Revenue Department.
The Inland Revenue is handling a large number of files and there could be delays in updating their computer records. An updated tax file will improve company standing with the inland revenue and also with banks and other financial instituitions as they regularly request tax certificates for processing of new facilities or renewing the existing facilities.
The corporate growth could be spurred by an accurate and timely system of tax planning. The corporates also could take advantage of specific incentives, reliefs and concessions applicable to their industries.
The treasury officials should have regular dialogues and formal meetings with chambers of commerce, trade associations and professional associations to ensure a fair system of taxation for the corporate sector with objectives of creating additional employment avenues, higher volumes of trade and higher tax revenues and minimal tax evasive practices.
The treasury should themselves eliminate wasteful expenditure to lessen the dependence on taxation for running governments. Tax planning is a legitimate right of the tax payer. Tax evasion takes place on a larger scale in sole trader and partnership businesses and also among individual tax payers.
India tax revenue
Talking about our giant neighbor India, corporate tax collections have risen nearly 12 fold in the 15 year period ending in 2016 and personal income tax by 9 fold. However, share of direct taxes in the economy has fallen to almost a decade low of 5.4% of GDP in 2015.It was also found that 2.8 crore Indians filed income tax returns in 2015.This amounts to a little over 2% of Indian population.
Considering the Sri Lankan population, this 2% benchmark comes to around 420,000 tax files of individuals. This should be our first target in trying to raise direct taxes. The local corporate sector should be armed with lower taxes and lower interest rates, if they are to create more employment avenues. The foreign investors should be sought primarily for new companies with “flagship” status mainly for infrastructure development and creation of more export markets.
India State of Maharashtra generated the highest tax revenue, like in Colombo for Sri Lanka. Delhi is the next tax generator. Direct taxes in India is made up of 36% of total taxes in 2000/01 and has risen to 51% by 2015/16.This percentage has gone down from a high of 60% in 2009/10.
The standard VAT rates range from 12% to 15%.Different states have different tax legislation based on levels of poverty and development drives. Certain states employ very high point of sale taxes on tourists for services provided to them.
Looking at Singapore, where there is a rigid tax administration, the VAT was introduced in 1994 at the standard rate of 3% which has now gone up to 7%. However, citizens in Singapore do not engage in public protests since they are aware that the government is doing their best to upgrade the living standards of their people.
Singapore tax revenue is closing in on 60 billion Singapore dollars. Singapore has high property taxes. As a result, the property prices in Singapore are quite high.
Every successive government praises the corporate sector as the “engine of growth” for Sri Lanka and every government should assist the corporate sector by awarding major mega development project tenders to the local private sector as they are second to none.
The writer counts over 40 years of professional experience in assisting the corporate sector to achieve steady corporate growth and could be reached via csassociatescolombo@gmail.com
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