Issues in taxation in Sri Lanka: A descriptive analysis

Abstract

Tax policy in Sri Lanka has been changed very frequently, stressing more indirect taxation in contrast to the theory and the empirical evidence of many developed and emerging economies. The tax authority has not historically been successful in raising tax revenue through direct taxes. Hence the study seeks to identify the important issues related to taxation in Sri Lanka, as a country in which revenue is mainly composed of tax revenue and the major proportion is drawn from indirect taxes, while the gap between the two types of taxes has been stagnant, with indirect taxes constituting nearly 80% of total tax revenue for a long period. Total tax revenue as a percentage of GDP (tax ratio) has also been declining, amid fluctuations, and was 11.9% in 2018. It was revealed that the number of corporate tax payers is very low and the total number of personal tax files is insignificant, while there is a significant reduction of total income tax payers in the recent past. This means that Sri Lanka faces a major shortfall with no proper mechanism in tracking individual income or corporate profits earned by corporate giants. Indirect taxes mostly comprise VAT, but this is also declining as a percentage of GDP. Hence Sri Lanka has to reconsider its tax structure if it is aiming to be a developed nation in the future without relying so much on external debt.
Key Words: Direct (income) tax, indirect tax, tax ratio decline, Sri Lanka