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Govt. introduces latest addition to tax system
"It is a single tax because we want to simplify the existing tax system without having five or six taxes for one product or service. It is one single tax like the International Monetary Fund (IMF) wants" Treasury Secretary S.R. Attygalle[/caption]
Tax in Sri Lanka
Current types
Some taxes, duties, and levies in Sri Lanka include Income Tax, Economic Service Charge (ESC), Value-Added Tax (VAT), Nation Building Tax (NBT), Stamp Duty, Tourism Development Levy, Betting and Gaming Levy, Share Transaction Levy, Telecommunication Levy, Luxury Tax on Motor Vehicles which substituted the Annual Luxury Tax on Motor Vehicles, Vehicle Entitlement Levy, Debt Repayment Levy, Crop Insurance Levy, Cellular Tower Levy, SMS Advertising Levy, Migration Tax, Casino Entrance Levy, and Carbon Tax.
Current tax system
The current Sri Lankan tax system is regarded as one of the most complicated tax structures in the world. For instance, if you take taxes charged on tobacco, each and every product will have different tax structures which makes it complicated for the government to calculate as well as also for the companies to keep their focus on. For example, if you take a Gold Leaf cigarette, it consists of Excise, VAT, NBT, net-of-tax, and a tax share percentage.
In order to simplify the tax structure, the Government took a measure in January 2020 to simplify the tax policy in order to better facilitate tax payers and also to make the tax administration more efficient.
However, it was revealed during the Budget 2021 reading that the Government will further take steps to simplify the tax process charged on products and services under one regulation named the “goods and services tax”.
What this would mean is that efficiency in admiration in Sri Lanka will improve, transparency will be accurate among the public, and companies could benefit by this implementation that is yet to be drafted and presented to Parliament.
Now, what exactly is this GST about?
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"I think it's a good benefit to all businesses as well as all other parties – vehicles, for example. This has excise special provision, luxury tax, vehicle entitlement levy, and other taxes for the different categories" Ministry of Finance Department of Fiscal Policy Director Kapila Senanayake[/caption]
GST in Sri Lanka
Announcing the Budget 2021, Prime Minister Mahinda Rajapaksa, who is also the Minister of Finance, stated that Sri Lanka will introduce a GST for items including vehicles, cigarettes, telecommunication, alcohol, and betting and gaming.
Speaking to The Sunday Morning Business, Treasury Secretary S.R. Attygalle said the necessary documentation to implement the tax is currently being drafted at the moment, which will be later submitted to Parliament to obtain approval subsequently.
“It is a single tax because we want to simplify the existing tax system without having five or six taxes for one product or service. It is one single tax like the International Monetary Fund (IMF) wants,” Attygalle added.
Meanwhile, Minister of Trade Dr. Bandula Gunawardena stated that since the current Government came into power, Income Tax, VAT, and other taxes have been “reduced significantly”, and therefore introducing GST would benefit the government in terms of tax revenue.
Introducing this new implementation in Sri Lanka is currently in progress, hence before we come to the final stage of this new measure, let’s dive deeper into what GST is in India and gain background knowledge of what exactly it is and the benefits enjoyed by the industry, the government, and the customers involved in the process.
GST in India
Neighboring country India established a dual GST structure in 2017, which was the biggest reform in the country's tax structure in decades. By introducing the tax, the biggest gain India will have is in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25-30%.
Key benefits faced by government
By implementation, it becomes easier for the government to administrate different indirect taxes available. This is because multiple indirect taxes at the Central and State levels are being replaced by GST and backed with a robust end-to-end IT system.
Additionally, GST will result in higher revenue efficiency. GST is expected to decrease the cost of collection of tax revenues of the government, and will, therefore, lead to higher revenue efficiency.
Key benefits faced by businesses
Firstly, this measure has enabled a robust and comprehensive IT system, which is the foundation of the GST regime in India. Therefore, all taxpayer services such as registrations, returns, payments, etc. would be available to the taxpayers online, which makes compliance easy and transparent.
Secondly, an uniformity of tax rates and structure. This is basically when GST ensures that indirect tax rates and structures are common across the country, thereby increasing certainty and ease of doing business. Thirdly, it improves competitiveness. For instance, reduction in transaction costs of doing business would eventually lead to an improved competitiveness for the trade and industry.
Key benefits faced by consumers
Implementation of GST has resulted in an overall tax burden on most commodities to reduce because of efficiency gains and prevention of leakages. Furthermore, due to the transparency present in the country, the charges of goods and services are noted to be decreased, resulting in low prices while consuming.
Drawbacks
However, a critical review presented by Madhu Bala on 21 March 2018 mentions several disadvantages faced after the imposition of GST in India. According to the document, it states that “as the GST considers all the transactions for taxation purposes, this procedure will increase the price of the transfer from one department to another for further process”.
In addition, the statement adds that “as per the study undertaken by the Curtin University of Technology, Perth in 2000, GST would negatively impact the real estate market as it would add up to 8% to the cost of new homes and reduce demand by about 12%”.
Challenges
When GST is imposed, it is likely that the structural reform will change the entire taxation landscape. While implementing this new reform, India faces critical issues such as, according to the Central GST Bill 2017, allows the central government to notify CGST rates, subject to a cap which implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament.
Secondly, around 37 returns have to be filled in a year on the GST portal. This kind of arrangement requires access to the internet and being digitally literate. However, India's performance on these two aspects was very low; deficiencies are severe in rural India. According to some estimates, computer literacy in India is just 6.5%. In terms of internet penetration, the estimated internet penetration had reached only 27% in 2016.
To gain an in-depth knowledge regarding GST, a comparison between GST in India against GST in other countries is essential.
GST in Brazil
Talking about the Brazil model of GST, it is much independent and carefree in comparison to other nations, and has a dividing rule of taxes between the states and the centre. Brazil has six tax slabs: 0%, 1.65%, 2%, 7%, 12%, and 17%.
GST in Australia
In Australia, the GST is a federal tax which is collected by the supreme authority and thus divided further among the states without any conflict arising through the process. The GST was firstly introduced in 2000 with the tax rate of 10%, which is consistent to date.
GST in China
After the European and Asia Pacific markets, China has maintained the GST applications over goods and the conditioned provision of repairs, processing, and replacement-assisted services, which also means it is restrictedly collected on goods which are consumed in the manufacturing process as the fixed asset goods. China has three tax rates: 0%, 5%, and 19%.
GST in UK
In the UK, there are three tax rates – 0%, 5%, and 20% – applicable on goods and services. Most of the goods are covered under the 20% tax rate. The VAT on postage stamps, financial, property transactions, and most food and children’s clothes are exempt from any tax.
GST in Ukraine
In Ukraine, there is a standard tax rate which is 20% and the VAT value is added to the cost of goods and service prices. Some of the supplies are also subject to lower rates under 0% and 7%. Generally, 7% rate is applicable to pharmaceutical products, medicines, and medical equipment while the export of goods and services attract 0% VAT.
Conclusion
GST could be a game-changing reform for the Sri Lankan economy by developing a common market and reducing the cascading effect of tax on the cost of goods and services. Accordingly, this will impact the tax structure, tax incidence, tax computation, tax payment, and compliance.
Furthermore, speaking to The Sunday Morning Business, Ministry of Finance Department of Fiscal Policy Director Kapila Senanayake stated that this new improvised tax structure could further benefit companies.
“I think it's a good benefit to all businesses as well as all other parties – vehicles, for example. This has excise special provision, luxury tax, vehicle entitlement levy, and other taxes for the different categories. However, through this implementation, there will be only one tax,” Senanayake said.
According to him, payments and collection of the tax would be easy and the transparency of the tax would also be visible due to the online payment system.
In regard to GST being implemented in Sri Lanka, we spoke to an alcohol company who would be subjected to this tax before the end of the first quarter. Accordingly, a senior official, who wished to remain anonymous, told us that the industry is not certain about the tax or the tax structure. The official added that they have spoken to the relevant authorities but no clear directives were given to the industry.
“They are combining all the existing taxes. As of now, taxes imposed on those categories are not consistent – some are charged on value (VAT), some are product-based, and some are revenue and unit-based, and they are trying to merge them together, so this is not easy. It is a cumbersome process. We still do not know the impact we will face,” the official noted.
Meanwhile, another leading alcohol manufacturer told us that they have not received anything in writing and until that, they do not want to comment on the tax.
Implementation of GST in Sri Lanka could be an advantage or a disadvantage to the industry. The efficiency, benefits, and the other commentaries of this tax can only be analysed after the structure and other details of the draft are submitted to Parliament and made public to corporates and the general public.