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Taxation Assignment

SAITM

T. N. C Hapugoda

MG12003BBF0005



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Abstract Summery

In this report briefly explain about the Tax System which practicing within Sri Lanka by
referring to a phrase which give an idea about the system by emphasizing the determinants of a
tax system, principles of taxation, objectives of taxation, different types of taxes in a tax system,
possible reasons for failure of a tax system and tax administration and the proposals for a
successful tax system and tax administration.














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Table of Contents


1.0 Introduction ............................................................................................................................................ 4
2.0 Determinants of Tax System ................................................................................................................... 5
3.0 Principles of Taxation .............................................................................................................................. 6
4.0 Objectives of Taxation ............................................................................................................................ 7
5.0 Type of taxes in a tax system .................................................................................................................. 9
6.0 Possible reasons for failure in tax system of administration ................................................................ 10
7.0 How government can improve the tax system and tax administration ............................................... 11


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1.0 Introduction

A tax system of a country at present has come to stay for long, shaping up and charging its
components, with the changes of many determinants of taxation, at macro level. Factors affecting
a tax system and a tax system and a tax administration of a country originate not only within that
country but also outside the country. Thus taxes and the statutes, by which such taxes are
imposed, have been subjected to unavoidable changes along with the consistent of requirements.
However, a successful tax system should achieve the objectives serving the citizen of the country
at different levels with a least detriments.

In 1932 Sri Lanka introduced income tax as its first tax. Since then many taxes and levies have
been introduced. In addition, Provincial Councils introduced by the 13
th
Amendment to the
Constitution has empowered Provincial Councils also to charge and levy taxes. Inland Revenue
Department as the main collector of government revenue is responsible of administering many
taxes including income tax, VAT, Economic Service charges, Stamp Duty, Debits Tax, Social
responsibility Levy, Betting and Gaming Levy and newly introduced National Building Tax.

In current scenario, Sri Lankan tax system which having existing corporate tax rate is 28%,
whereas different rates and exemptions are also available within the system. Personal income tax
rates ranges from 4% to 24% of the taxable income while the personal allowance is LKR
500,000/- with the availability of an additional qualifying payment 100,000/- for the employment
income earners. Sri Lanka also gas a policy of taxing the residents on worldwide income and the
non residents on income sourced in Sri Lanka keeping pace with the prevailing trend of the
world. And capital gains were taxed as a source of income tax up to March 31, 2002 in Sri
Lanka. The rate of VAT in SL is 12% and Zero percent is available for exports. Tax revenue as a
percentage of GDP is around 13% in recent years.


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2.0 Determinants of Tax System

There are few determinants are affect for the tax system of a country. And following factors are the
mainly affect for the tax compliance.
1)Economic Factors : According to the economic stage of the country deicide about the tax rates that
should be collected and also tax audits are the main factors which are affecting tax system.
2)Political factors : Influences from political parties and charges in taxation policies by the
government for the welfare of the society and want to consider about the parties who are affected
by those taxation policies and focus to avoid the inequality of income distribution.
3)Social and demographic Factors: In social mainly focus on age limit of the population with
taxation and perceptions of equity and fairness.
4) Institutional factors: Inland Revenue Department is the Sri Lankan tax authority which
monitoring the tax revenue and administration in sources of taxation.
5) Others factors : Gender, income level, education level culture of a country will affect for the
taxation system. Changes of each factors should be under consideration for taxation.






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3.0 Principles of Taxation
As mentioned above phrase follow principal should be there to practice a suitable tax system.
Equity: Tax should be based on the ability to pay
Horizontal equity:
People in equal circumstances should pay an equal amount of tax
Vertical Equity:
People in different circumstances should pay different amount of tax
Efficiency: Tax system should promote the economic and efficient use of countrys
resources

Simplicity: Rules should be simple so that people can understand them
Tax procedures should also be simple

Flexibility: Tax system should be flexible enough to reflect trends in economic growth,
to be used as a fiscal weapon and to effect tax changes expeditiously

Stability: Tax should be certain and remain unchanged for a considerable period of time


Neutrality: Tax should be natural on resource allocation and economic activities

Elasticity: Tax system should be elastic for keeping a constant ratio with increasing GDP


And several other principals of taxation is affect for the Sri Lankan tax system. And it guides for
a successful system to be practices within country.


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4.0 Objectives of Taxation

A successful system should include at least follow achievements for serving the citizen of the
country at different levels with a least detriments.
1. Raise More Revenue
The fundamental objective of taxation is to finance government expenditure. The government
requires carrying out various development and welfare activities in the country. For this, it needs a
huge amount of funds. The government collects funds by imposing taxes. So, raising more and more
revenues has been an important objective of tax.

2. Prevent Concentration Of Wealth In A Few Hands
Tax is imposed on persons according to their income level. High earners are imposed on high tax
through progressive tax system. This prevents wealth being concentrated in a few hands of the rich.
So, narrowing the gap between rich and poor is another objective of tax.

3. Redistribute Wealth For Common Good
Tax collected by the government is expended for carrying out various welfare activities. In this way,
the wealth of the rich is redistributed to the whole community.

4. Boost Up The Economy
Tax serves as an instrument for promoting economic growth, stability and efficiency. The
government controls or expands the economic activities of the country by providing various
concessions, rebates and other facilities. The effective tax system can boost up the economy.
Similarly, taxes can correct for externalities and other forms of market failure (such as monopoly).
Import taxes may control imports and therefore help the country's international balance of payments
and protect industries from overseas competition.

5. Reduce Unemployment
The government can reduce the unemployment problem in the country by promoting various
employment generating activities. Industries established in remote parts or industries providing
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more employment are given more facilities. As a result, the unemployment problem can be
reduced to a great extent through liberal tax policy.



6. Remove Regional Disparities
Regional disparity has been a chronic problem to the developing countries. Tax is one of the
ways through which regional disparities can be minimized. The government provides tax
exemptions or concessions for industries established or activities carried out in backward areas.
This will help increase economic activities in those areas and ultimately regional disparity
reduces to minimum.












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5.0 Type of taxes in a tax system

Taxes can form as direct tax or indirect tax. In a direct tax, the burden of tax is borne by the
payer himself. In ex. Income tax, wealth Tax, Rates etc. The burden of an indirect tax is always
on the consumer as the vender or the registered person collects the amount payable from the
buyer of the goods and services. In ex. Value Added Tax. Thus the total population of a country
becomes indirect taxpayers, provided all goods and services are taxed.
In Sri Lanka, bellow list of Taxes are the types of taxation which are contribute to the
government revenue in more than 50%.
Income Tax
Value Added Tax
Stamp Duty
Economic Service Charge
Debits Tax
Nation Building Tax
Social Responsibility Levy
Betting and Gaming Levy
Construction Industry Guarantee Fund Levy
Share Transaction Levy
Tax on Transfer of Property to a non-citizen






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6.0 Possible reasons for failure in tax system of administration
There can be some reasons which lead for some filatures. The tax system is not delivering the
potential revenue in Sri Lanka. As income increases in a country, the revenue also increases
although the rate of increase will decline after some time. This is not happening in Sri Lanka. As
an example Sri Lankas per capita income has increased from US$ 720 in 1995 to US$ 2053 in
2009 but our tax revenue has declined from 20.4 % GDP to 14.6 % GDP during this period.
Almost 90% of revenue comes from taxes (10% is accounted by non-tax sources).
And there are some issues in important taxes and VAT in Sri Lankan tax system. Important
taxes have made the tax structure more complicated and less transparent. All important taxes
operate under different tax bases. One reason for illegal imports and undervaluation of imports is
due to these taxes. What Sri Lanka should aim at is a less complicated border tariff structure
which gives reasonable protection and revenue. And the VAT system which Sri Lanka has is
very complicated. Therefore deal with the system is faced not much favorable for country like
Sri Lanka. So it will make inconvenient for the tax payer as well.








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7.0 How government can improve the tax system and tax administration

For minimise the failures within the system will help for practise a successful tax system. The manner
of collection of the tax and the time at which taxes are collected should be convenient for the tax payer.
The cost of collection should not be high and should not discourage businesses. All the tax policies
should be developed based on the platform above. The State should also decide whether the bulk of
taxes should be collected by way of direct or indirect taxes.

Given the economic disparity among the people in the country it may be good idea to collect direct
taxes, on the other hand the government also must evaluate whether the resources utilize for the
collection of individual taxes, justify the return. Sometimes it may not be a bad idea to focus and
utilized resources to tax the corporate as opposed to taxing individuals. For a small economy like Sri
Lanka, whether we need to have the existing number of taxes and levies. Perhaps there is room for
improvement and simplification some taxes and increasing the rates. This will ease the compliance
burden for both the tax payers and tax administrators.

The simplification of the formats of the tax returns should also attract the focus of the policy makers.
A tax return should be simple enough for a taxpayer to complete accurately without aid of a tax
consultant.