Govt. expects income tax files to increase five-fold to one million by end of this year

Facilitated by recent tax reforms, the government expects income tax files to increase by nearly five-fold from 205,200 to one million boosting the country’s income tax revenue and enhancing the direct and indirect tax ratio to 40 percent vs. 60 percent by end of this year, which would pave the way for a potential Rs.400 billion cut in indirect taxes.

“Our per capita income stood at US$ 3, 268 in 2022. However, the number of income tax files was only 205,200. Hence, it’s clear that a large portion of people who were supposed to pay income taxes have evaded their tax payments. Based on the per capita income, it’s calculated that we should have had around one million income tax files,” State Minister of Finance Ranjith Siyambalapitiya told parliament. He noted that the government expects the number of income tax files to grow to one million supported by recent tax reforms, which include mandatory income tax registrations at the Inland Revenue Department (IRD).

If the government succeeds in achieving the targeted ratio between direct and indirect taxes to 40 percent vs. 60 percent, Siyambalapitiya noted the government would be able to reduce Rs.400 billion collected through indirect taxes from next year, which is imposed on ordinary citizens in a regressive manner.

During the first five months of the year, the direct vs. indirect tax ratio has had improved to 30 percent:70 percent from the 20 percent: 80 percent ratio last year. Accordingly, the government expects to reduce Rs.200 billion collected through indirect taxes.

In order to assist the parties registering for income taxes at IRD, the Minister shared that a new coordination unit would be opened within the IRD shortly. Meanwhile, the Minister stressed that the new parties registering for income taxes are only required to disclose their incomes and expenditures for 2022/23 period.

In a special gazette notification issued last week, the government made it mandatory for professionals belonging to 14 categories, including doctors, engineers, chartered accountants and architects, to register themselves with the IRD, with effect from June 1, 2023. The IRD in a document this week issued detailed guidelines on taxpayer registration.

Further, he noted that a proposal would be submitted to the President Ranil Wickremesinghe making it mandatory for all politicians and their office staff to register for income taxes at IRD. Under the proposal, when submitting nominations, the politicians would be required to maintain an income tax file at IRD.

With effect from January 1, next year, all individuals above the age of 18 will also be required to register with the IRD.