BUDGET 2013 – TAX PROPOSALS

By Dharmadasa Rangalle
President Mahinda Rajapaksa who’s also the Minister of Finance and Planning presenting budget proposals for 2013, in Parliament on 08th November 2012, stated that, the government introduced far reaching reforms in the 2011 budget, towards a simplified and broad based tax regime in our country, drawing special attention to small and medium scale entrepreneurs through its tax proposals and accordingly several effected taxes were removed.
In budget speech, President further stated, that out of the 27645 businesses  as in the Large Tax Payers Unit, only 11,101 Companies have a turnover above Rs. 10 million,  which  generate 97 percent of revenue from VAT and NBT, in addition to corporate Income tax.  Since the Inland Revenue Department needs to pay greater attention to corporate entities and intensify its tax audit activities, the management of such large tax files will be brought under one consolidated unit.



LTU history
A number of tax administrations in the world have established special systems to administer large tax payers.  In 1950s and 1960s, several OECD Countries (Organization for Economic Corporation and Development) introduced special tax audit operations for large corporates.   A more recent trend specially in developing and transitional countries has been to set up full-fledged Large Tax Payer Units that are responsible for most tax administrative functions relating to tax collection, enforcement and tax audit.

Beginning of 1980s, the IMF (International Monetary Fund) has recommended that member countries facing revenue crisis and looking to strengthen tax administration, to establish Large Tax Payer Units (LTUs) to increase control over the largest tax payers and improve large tax payers’ tax compliance in the short and medium term.  Currently more than 40 OECD member countries in their tax administrations have recognized the importance of concept of LTUs and established LTUs.  Further more than 13 countries in Asian region have set up LTUs at different periods and points of time.  India, Bangladesh, Nepal, Thailand are some of the countries among them.

Our neighboring country India, following the international practice, announced in the 2005-2006 Budget Speech the proposal to set up Large Tax Payer Unit which would act as a single window  facilitation centre for all large entities paying excise duty, corporate tax/income tax and service tax.



International experience
It is a proven fact that countries having LTUs in their tax administration mechanism have gained significant benefits from establishing special operation to control the compliance of largest tax payers.  Countries like Australia, France, The Netherlands, New Zealand, United Kingdom, United States have shown that setting up special operations  to control large tax payer compliance has resulted in increased compliance and more effective tax administration overall.  Such tax administration mechanisms have focused tax administration to test reforms later extended to the rest of tax payers.
The LTUs need reforms and modernization in a consistent manner to reach the desired level of objectives and to remain effective and to keep up with changes in the economy and the tax payer population.

In setting up of a LTU to increase the administrative efficiency of tax collection and enforcement, it must meet certain minimum requirements such as a sound legal framework, clear and simpler criteria for selecting large tax payers, standard and transparent procedures, administration of all the large tax payers by the LTU, administration of all national level domestic taxes etc.

Proper reporting system, effective LTU staff selecting and training, appropriate job grading are also to be met in order to guarantee a smooth functioning of the LTU.
The effectiveness of tax administration is measured by the degree of tax payers’ compliance with tax laws while efficiency reflects the actual costs of tax administration.



IRD - LTU
Department of Inland Revenue of Sri Lanka also has set up LTU to strengthen its tax administration, and this Unit was established in 1994(Y/A 1991/92) with 1000 large tax payers’ files, though the IMF recommended to establish with 500 files since more than 70% of revenue was generated from 500 large tax payers.

Now the number has increased to 1200 and accordingly 1200 larger tax payers’ files are currently administered in LTU that generated more than 60% of the targeted total revenue from IRD.  Budget 2013 has rightly focused to strengthen the LTU expanding its scope in order to administer the 90% of the targeted revenue through LTUs.

(The writer is the Deputy Commissioner- Inland Revenue Department)