Home > Research Briefs > EIU RESEARCH BRIEF

EIU RESEARCH BRIEF

'

Government Revenue in Sri Lanka - 11 Insights on 2016 Performance and 2017 Outlook

Taxation is the hot topic of conversation among the business and policy community, as the Government prepares to pass a new Inland Revenue Bill and continues with fiscal reforms driven by an IMF programme. During the course of the last year we witnessed many discussions and proposals for enhancing Government revenue in Sri Lanka, amidst the implementation of the Revenue Administration Management Information System (RAMIS) at the Inland Revenue Department and the drafting of the new Inland Revenue Bill. ‘Revenue based fiscal consolidation’ is the main focus of the Government’s reform efforts, and in that context it is useful to look at the latest revenue numbers. The fiscal reform effort launched in 2016 is already showing results, with Government revenue as a share of GDP recorded 14.2% in 2016, the highest on record since 2010. This report investigates the performance of Government revenue in 2016 – including what contributed to the changes, what impact tax reforms have had on achieving the expected revenue outcome, etc., and a look at the 2017 revenue performance so far and outlook for the rest of the year..

11 Quick Insights

  1. Non-Tax Revenue Outperforms Tax Revenue 
    What really drove government revenue in 2016 was not tax revenue but non-tax revenue. Non-tax revenue doubled it’s share in GDP from 0.9% in 2015 to 1.8% in 2016, while the share of tax revenue to GDP remained steady at 12.4%. Revenue collection from non-tax sources increased more than threefold, from LKR 29.8 Bn in 2015 to LKR 108.2 Bn in 2016 as a result of the improved performance of State Owned Business Enterprises (SOBEs) in banking, insurance, petroleum and telecommunications. Total Government revenue increased by LKR 231.2 Bn in 2016 with tax revenue and non-tax revenue contributing by LKR 107.9 Bn and LKR 123.2 Bn respectively.
  2. Non-Tax Revenue Thrives On Depressed Oil prices and Profitable SOEs
    The growth in non-tax revenue was driven primarily by the revenue generated in two sub components – ‘profits and dividend transfers from state owned enterprises (SOEs)’ and ‘fees and charges’. Revenue collection from profit and dividend transfers of SOEs increased by LKR 78.4 Bn to LKR 108.2 LKR in 2016, supported by the improved performance of SOEs in banking sector, Ceylon Petroleum Corporation (CPC), Sri Lanka Insurance Corporation and Telecommunication Regulatory Commission (TRC).
  3. Direct – Indirect Tax Ratio No Closer to 60:40 Target
    Although the Government’s stated policy objective since 2015 has been to rebalance the indirect tax to direct tax ratio from 80:20 to 60:40 in the medium term, 2016 did not show any signs of getting closer to that target. Indirect tax share in total tax revenue was 82.6% in 2016, the highest share on record since 2010.
  4. Which Tax Collector Collected The Most Revenue?
    The Department of Customs collected the highest tax revenue in 2016, continuing the trend of previous years. Customs, which accounted for 56.8% of total tax revenue while IRD and Excise Department contributed by 31.8% and 8.2% respectively.
  5. Consumers Contributed the Most Tax
    The changes to consumption taxes by the Government last year have already begun paying off, with revenues from VAT on domestic goods and services being nearly one-third higher than the year before (28.8%). Meanwhile Nation Building Tax (NBT) jumped 39.2% and Excise Tax on alcohol and cigarettes/tobacco rose 12.8%. Overall, taxes on domestic consumption contributed to 67% of the increase in tax revenue in 2016.
  6. VAT Hike Drives Tax Revenue Growth
    Revenue from Value Added Tax (VAT) made a strong rebound from the negative growth recorded in 2015 and contributed to 59.1% of the growth in tax revenue in 2016. So far this year, VAT revenue has grown 97.6% YoY (Q1), placing VAT on a strong footing to generate one fifth of Government Revenue in 2017.
  7. Excise Tax Collection Falls amidst Weak Vehicle Imports
    Excise Tax – the single largest contributor to tax revenue – declined by LKR 42 Bn in 2016 as a result of the sharp fall in revenue generated by its major source, motor vehicles (down by 29.2% YoY). The share of motor vehicles in excise revenue recorded a sharp decline from 52.9% in 2015 to 41% in 2016.
  8. Taxes on Foreign Trade Brought Half of Tax Revenue
    Government revenue is highly reliant on foreign trade taxes, and it accounted for 50.5% of the tax revenue in 2016. Revenue from import duty grew by 18.4% in 2016, and just 11 products contributed to over three fourths of all imports revenues.
  9. No More Super Gains in 2016
    The absence of the ‘Super Gains Tax’, impacted on the revenue from corporate income tax with a dip of LKR 17 Bn in 2016. As a result taxes on net income and profits contracted by 3.5% on YoY basis to LKR 258.9 Bn in 2016.
  10. Analysis on 2017 Outlook
    The revenue performamance and the devlopments in the tax environment point to four revenue drivers to watch during 2017; (a) Strong growth in VAT makes it a potential source for bringing more than one fifth of tax revenue for 2017; (b) Excise revenue is likely to remain week with the subdued demand for motor vehicle imports and high duty structure on alcohol and tobacco products; (c) Non-tax revenue likely to be influenced by external factors such as oil prices and drought conditions.  (d) Proposed IR bill is expected to give a further boost to revenue.
  11. Perspectives from the Ceylon Chamber’s Taxation Steering Committee
    Commenting on the taxation outlook, members of the Taxation Steering Committee of the Chamber indicated that the enactment of the new IR Bill, would broaden the tax base and direct tax collections are likely to improve with the limiting of exemptions and incentives and streamlining of taxes. Overall, revenue collection from VAT and NBT would continue to increase as a result of revisions to rates as well as removal of certain exemptions/lowering of tax liable threshold.
    Members of the Committee also had concerns that the tax policy is likely to be influenced by populist demands and political pressures in the year ahead.  Further, continued uncertainty with regards changes to tax legislation and the difficulty in understanding the impact of such changes is likely to have an adverse impact on overall business activity and investor confidence, particularly if tax changes are not subject to a robust consultative process with the taxpayer community

To read the full document use the download button below:

The Ceylon Chamber of Commerce

Economic Intelligence Unit

Leave a Comment

Comments