• Rs. 369 b in VAT arrears, 20% lost
• Rs. 114 b in VAT arrears outstanding for 13 years
• 1,603 appeals worth Rs. 9 b unresolved
• Rs. 296 m in unreported tax arrears
• Rs. 98.5 b in unresolved appeals

The Government has incurred a staggering loss of nearly Rs. 22 billion in tax arrears and penalties over the past five-and-a-half years due to the inefficiency of the Inland Revenue Department (IRD), as revealed in the latest audit report from the National Audit Office (NAO), issued last week.

The report has highlighted that nearly 20% of the Value-Added Tax (VAT) revenue identified for collection has become irretrievably lost.

It has further revealed that as of 31 December 2022, the total VAT arrears and penalties amounted to Rs. 369 billion and of this, Rs. 255 billion in revenue arrears had been temporarily suspended from recovery due to various reasons.

Furthermore, the report has highlighted that a portion of this balance, amounting to Rs. 114 billion, had been outstanding for approximately 13 years. 

Additionally, it was noted that while these amounts were classified as ‘Tax Arrears,’ they had already been collected by either private or Government institutions from the public.

The audit has observed that these funds, which can be considered public property, had not been remitted to the Government and had instead been retained by the collecting parties.

The NAO has also uncovered that 1,603 appeals, totalling Rs. 9 billion, had remained unresolved beyond the additional two-year period allotted to the IRD.

According to regulations, if appeals are not determined within this timeframe, they are deemed allowed and the tax is charged accordingly. This oversight has potentially disadvantaged the Government, as the department has failed to act in a manner that would have been more beneficial to the Government, the NAO has stated in the report.

Moreover, although 46 cases were pursued for recovering tax arrears amounting to Rs. 296 million, these arrears were not reflected in the Legacy system, it is reported.

The report has highlighted significant failures by the Commissioner General of Inland Revenue, who had not made decisions or entered into agreements regarding VAT appeals within the required two-year period.

As of 31 December 2022, the Legacy system and the Revenue Administration Management Information System (RAMIS) have shown that tax arrears and penalties, for which recovery had been temporarily suspended, totalled Rs. 139.3 billion and Rs. 115.7 billion, respectively. 

Additionally, the department has identified VAT arrears and penalties amounting to Rs. 62.8 billion and Rs. 51.5 billion, respectively, as recoverable without suspension or obstacles. Despite this, 31% of the recoverable tax value remains uncollected, as stated in the report.

The NAO has further highlighted that an amendment to the VAT Act in 2003 stipulates that legal proceedings for tax recovery must be initiated within five years of the default.

The audit has identified 4,499 unresolved appeals worth Rs. 98.5 billion as of 25 May 2023, out of a total of 9,620 unresolved cases. Among these, 2,459 appeals worth Rs. 31 billion had been pending for over two years without a decision from the Commissioner General. 

Additionally, 1,603 appeals worth Rs. 9.2 billion had exceeded the additional two-year period granted by the Covid-19 (Temporary Provisions) Act No.17 of 2021.

The report has noted that VAT, which should have been collected from third parties supplying goods and services to Government institutions, had either been delayed or improperly collected.

The audit has also found instances where access to relevant information had been deliberately obstructed, prejudicing the Auditor General’s ability to properly assess the department’s performance in revenue collection.

In its recommendations, the NAO has called for a formal examination into the inefficiencies within the recovery processes associated with these funds, which were deemed recoverable without obstacles by 31 December 2022.

The investigation should focus on identifying the causes of these inefficiencies and any potential irregularities within the two tax administration systems, and immediate action is required to expedite the recovery of these tax arrears by implementing all necessary recovery measures and strengthening internal controls, the NAO has recommended.

Additionally, the NAO has recommended a detailed review of the individual balances related to recoverable tax arrears. This review should distinguish between arrears that have been long overdue, those being collected slowly, and those at risk of non-recovery. A targeted programme should be developed to address these arrears effectively.

For balances with temporarily suspended recoveries, the NAO has advised an examination to identify and resolve any controversial tax and penalty amounts. If a valid tax burden is confirmed, prompt recovery measures should be enacted, and the optimal use of existing data systems should be ensured.

The NAO has also recommended an institutional or higher-level regulatory examination to assess whether any officers have fraudulently, negligently, or willfully failed to act on recoverable tax arrears or have obstructed recovery efforts.

In light of these findings revealed by the NAO, The Sunday Morning’s attempts to contact IRD Commissioner General W.A.S. Chandrasekara were unsuccessful.

Meanwhile, State Minister of Finance Shehan Semasinghe stated that he had instructed his officials to submit a copy of the audit report on the IRD. “I haven’t received a copy yet, and therefore, I can’t go into details of its findings. I have instructed the officials to provide me with a copy of the report,” he said.