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Recent government commitment to increase revenue through tax reforms has yielded results, it said.
But there is scope to enhance direct tax revenue by strengthening tax administration through Information and Communication Technology (ICT) to bring in tax evaders into the tax net, the central bank said in its annual report for 2017.
“Tax evasion by individuals and corporates has been one of the primary reasons for the decline in direct tax revenue as a percentage of GDP,” it said.
“Tax evaders deliberately understate or avoid reporting the true state of their net worth and income to the tax authorities to reduce tax liability.”
The central bank an effective method to address tax evasion is by the close monitoring of high end consumption driven transactions.
“This requires reconciling income declarations with data retrieved from high end transactions such as luxury car sales and property sales,” it said.
“Although, the Inland Revenue Department (IRD) carries out such examinations and follows up with semi automated systems, a sophisticated electronic system linking up relevant institutions with the tax system is essential to efficiently confront tax evasion.”
The central bank noted that the tax department had already started an automation process with various reforms initiated to improve tax administration, including the introduction of the Revenue Administration Management Information System (RAMIS).
“The full implementation of the RAMIS is expected to connect the system with over 20 other external institutions including the Central Bank, licensed banks, Sri Lanka Customs, Registrar of Motor Vehicles, Condominium Management Authority, Colombo Stock Exchange and the Land Registry, for effective tax reconciliation.”
The central bank said that addressing the remaining infrastructure and human resource bottlenecks to implement the much needed system would enable authorities to tackle tax evasion efficiently.
It would also enable the government to “address the obvious disconnect between the growth of high end economic activity and the declining direct tax revenue to GDP ratio,” the report said.
(COLOMBO, April 27, 2018)