By Kamanthi Wickramasinghe
The Ceylon Freights and Logistics Association (CEYFFA) recently organised a C-Suite Forum to enhance the knowledge and professionalism of participating companies through the sharing of knowledge and exchange of ideas among the stakeholders of the industry. The event was open for CEOs, COOs, CFOs and senior business executives of companies to participate in the forum and share their knowledge.

Various topics such as opportunities in transport and logistics industry and government policy, Companies Act compliance and commitments, strategic perspectives on business decisions and challenges and innovative logistics were discussed. The keynote speaker for the evening Gajma & Co. Tax Consultant and Senior Partner N.R. Gajendran addressed the gathering on the topic of tax compliance of a service provider. 


Contribution of good governance
In his speech, Gajendran mentioned that freight forwarders have been dealt specifically when considering taxes and they have been recognised. 
“I must congratulate you not because tax to gross domestic product (GDP) has been dropping, not because the tax base is shrinking, not because evasion in this country is not been tackled adequately or not because compliance rates are going down. Compliance means on its own; first and foremost good governance has become the order of the day. 

I don’t think there’s any political party in the world with the word good governance. So that’s going to have some meaning because you have the Liberation Front, National People’s Front. Technology and social media will bring good governance. Compliance will go up as a result of good governance and therefore the accountability will also go up. 

Another reason why compliance will go up is because of the tax to GDP ratio, which has been spoken in many political forums. The tax to GDP ratio was 11.6 percent in 2013. If a country wants macroeconomic stability and if their fundamentals have to be strong, then the minimum tax to GDP ratio should be 30 percent and macroeconomic stability should be around 25 percent but advanced countries have around 30 percent. In 2014, it was 12.8 percent and then it ended up in 10.8 percent and now in 2015 it is at 11.8 percent. If you see the revenue, we projected to have a sum of Rs.1.4 trillion in 2014 now we are hoping for Rs.5 million in 2015.”


A shrinking tax base
Tax compliance has different dimensions in which tax base is an important element. Addressing the contribution of the tax base, Gajendran said that the tax base is shrinking. 

“If the economy is to grow the tax base has to grow. The tax base has been coming down and one of the factors I can tell you is the informal sector. The informal sector should be integrated in the formal sector. They had a ‘thundu’ system those days and this is why we didn’t have any tax like VAT and VAT has been challenged. 

There is great thought whether we should go back to a cascading form of tax because we still have what is called a ‘thundu’ system within the informal sector that operates on absolute trust and faith. But I think that system is going to change because the children of the people of this informal sector has gone abroad to study and they have embraced good governance and they are now following the formal procedure of doing things. 

So they are becoming a misfit to these businesses. They are questioning their parents and systems about whether they can go ahead. One good thing or bad thing that education has brought in for the younger generation is that the life has changed for the parents. The informal sector will be heavily challenged because of the imbalance of mindsets between the generations.”


Evasion and avoidance
“I was congratulating you on evasion. Evasion and avoidance is mispronounced or mistaken at times. Evasion is where you avoid paying a tax without avoiding a liability. Avoidance is where you don’t pay because you have avoided your liability because the choice you make on transactions has different consequences on tax. You have heard of the black economy, the white economy but I don’t know if you have heard of the green economy. 

Green economy is agriculture and it is very difficult to tax because it is generally widespread and there is food involved in it which cannot be taxed. Recently our economists were saying that our GDPs have gone down because our measurements have changed. For example, we have three-wheelers and that’s another economy, we have more salons and they are contributing to the economy.”


Conclusion
“My role here today is to explain about compliance, the reasons for non-compliance, benefit of compliance and challenges of tax compliance. If you are to comply you must know the law. They say all tax-payers are ignorant but tax-officers are innocent, so this where the ignorant interacts with the innocent. Then you have the agents, the tax consultants coming in to protect the innocent. Why don’t people comply? 

The service sector is the easiest sector in which you can comply. Sometimes you have no trace. Service means there’s no trace. Any tax law is complicated but Sri Lanka has reduced its complications. If you have a solid tax base you have various sources of income such as trade business profession where you are a freight provider then you have employment and the source, income of shares, income of property can be profits. Then we add the taxable income. 

So when you aggregate all sources of income you get a statutory income and from this statutory income you make several deductions for interests and losses. Then the person who you are going to tax is also important. However, there are many challenges for compliance because compliance is taken as a tool and not an object.”