Increasing the Tax Revenue in Sri Lanka Lesson from Malaysia

Current Tax System in Sri Lanka

Sri Lanka’s low tax-to-GDP ratio of approx. 12% indicates that the system is failing to gather sufficient tax revenue. The current tax system is unfair and inequitable as reflected in the direct to the indirect ratio of tax collection.WHT on interest, Capital Gains Tax, and Withholding tax on rent are the main features. There are main two types of taxes:

• Direct Taxes 
• Indirect Taxes

Lessons from Malaysia for increasing tax revenue in Sri Lanka 

1. Not Delivering potential revenue: 

• The tax base has not expanded with income and economic activity increases. Weak tax administration, tax evasion, and tax exemptions are to blame. 

Lesson: Malaysia's progressive income tax rate system saves time and makes tax calculations quicker and more efficient. This indicates that low-income earners pay a lower tax rate than those with a greater income.

Example: A qualified individual who is a knowledge worker residing in Iskandar Malaysia pays a 15% tax on income earned from employment and designation.

2. Complications of the tax system:

• Due to a lack of tax income, the government implemented several ad hoc taxes, with around 25 taxes.

Lesson:  Malaysia, despite having fewer taxes in place.

• In Malaysia, a short-term fiscal strategy was proposed for sustainability indicators as the role strengthening of long-term forecasts. 
• The tax only applied to a specific set of designated activities.
  

3. Dependency on indirect taxes:

• Depend on indirect taxes.
• It has been recommended to develop a balanced trade strategy with long-term returns.

Lesson: Malaysia mainly depends on direct taxes.

Examples  :

• In Malaysia, homeowners are now immune from certain stamp duty payments on specified property values.
• The expected higher revenue is largely contributed by Corporate Income Taxes, Petroleum Income taxes, and Individual Income Taxes.

Figure 1: Direct and Indirect tax revenue of Malaysia

Source: (Ahmed,2021)

4. Low efficiency on Value Added Tax (VAT):

• Sri Lanka has implemented a three-tier import tariff structure. 
• Step CESS as protectionist taxes an import substitution to increase the profitability of indigenous firms.

    Lesson: Proposal to broaden the Authorized Economic Operator System (AEO) facility status in Malaysia. 

Equation 1: Effective VAT rate

Source: (Borselli,2012)

• The government has suggested expanding the Authorized Economic Operator (AEO) facility.
• Include licensed logistics service providers to reduce the cost of doing business in more industries across the country.

Advantages of Authorized Economic Operator System:

• Effective risk management – at the entity level
• Improving trade facilitation
• Improving supply chain security
• Optimizing revenue collection

         

References

Ahmad, N., Taha, R., Endut, W.A. and Baatwah, S.R.A., 2021. The effects of house price and taxation on consumers’ burden: The case of Malaysia. Kasetsart Journal of Social Sciences, 42(2), pp.281-286.

Borselli, F., Chiri, S. and Romagnano, E., 2012. Patterns of reduced VAT rates in the European Union. International VAT monitor, (1).

Khan, K., Tareen, A.K., Aslam, M., Wang, R., Zhang, Y., Mahmood, A., Ouyang, Z., Zhang, H. and Guo, Z., 2020. Recent developments in emerging two-dimensional materials and their applications. Journal of Materials Chemistry C, 8(2), pp.387-440.

Bibliography 

Anojan, V., 2014. Tax Policy Changes and their Impact on Tax Revenue: A Case Study in Sri-Lanka‖. International Research Journal of Social Sciences, 3(10), pp.55-63.

Arunatilake, N., Inchauste, G. and Lustig, N., 2017. The Incidence of Taxes and Spending in Sri Lanka.

Amirthalingam, K., 2013. Importance and issues of taxation in sri lanka.

Gupta, P., 2015. Generating larger tax revenue in South Asia.

Ullah, N., 2016. The relationship of government revenue and government expenditure: A case study of Malaysia.