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PENALTY FOR UNDERPAYMENT OF TAX

Where in an assessment made on any person, the tax pained by him as the amount
due from him in respect of the taxable supplies specified in his returns and the
assessment is final and conclusive under section 37 the commissionergeneral may
unless that person proves to the satisfaction of the conditioner general that there
was no fraud or willful neglect inviolate in the disclosure of the taxable supplies
made by that person in such return in writing order that person to pay or before a
specified date as penalty for making an incorrect return a sum not exceeding 2500
rupees and sum equal to twice the amount of the difference between the total tax
claimed in the assessment and the tax paied on the return.

REFERD OF TAX

Where for any taxable period;

1) Total input tax exceed the output tax or


2) Payment has been made in excess of the tax assessed a refund claim must be
made in writing whiten 3 years from the end of the period.

Recovery of tax

The provisions on recovery action are available under the value added tax.

However there is a time limit available for the recovery of the tax in default under
sec 48(A) as follows

Commissioner general shall not commence any action for recovery of tax in default
where a period of 5 years has lapsed from competition of three months from the
end of the taxable period which assessment by which tax levied becomes final and
conclusive.
VAT could have been increased by 2 percent instead of adding new taxes and
rates
Sri Lanka ranks poorly in international taxationratings
By Devan Daniel
The President said the country’s tax rate eroded as a result of various
concessions granted from 1977 to promote investments.
"Different tax rates prevail in the country, for entrepreneurs in the same
region. Local entrepreneurs have been subjected to second class treatment.
"A tax system that lacks transperancy has evolved consequent to there
being no consolidated or coordinated approach between revenue
administration institutions such as the Inland Revenue Department, Customs
and the BOI," President Rajapakse said when he presented the 2009 budget
proposals to parliament.
President Rajapakse said a Presidential Task Force would be appointed to
prepare proposals to improve the tax regime and hopes to implement the
proposals by 2010.
Analysts argue whether or not the 2009 budget will be conducive to the
entire domestic business environment or to a few selected sectors. They
agree, however, that only time will draw out the conclusions.
Sri Lanka’s rankings in Paying Taxes 2009 report.
Sri Lanka ranks 164th out of 181 economies for ease of paying taxes in a
‘Paying Taxes 2009’ report compiled by the World Bank Group and
PriceWaterHouseCoopers.
Sri Lanka has a total of 62 tax payments that must be paid for a given year.
There are 5 corporate income taxes, 24 labour tax payments and 33 other
taxes; and this gives the country a ranking of 170.
The country is ranked 96th for the time taken per year to comply with taxes.
The time taken to comply with these taxes is estimated at 256 hours a year.
Corporate income tax time is 16 hours a year, labour tax time amounts to 96
hours and the time taken to comply with consumption tax amounts to 144
hours a year.
SriLanka’s total tax rate is 63.7 percent according to the report which gave
Sri Lanka a ranking of 157.
The total tax rate for corporate income tax is 26.5 percent, 16.9 percent in
labour taxes and 20.3 percent in other taxes.
Taxes pushed to the limits?
Although the government has provided tax relief to middle income groups
and reduced the VAT rate from 15 to 12 percent, analysts say the new
Nation Building Tax (NBT), the increase of the Port and Aviation levy from 3
to 5 percent, the increased maximum liability limit of the Economic Service
Charge, from Rs. 15 million to Rs. 30 million per quarter and increased
cesses more than compensates for the reduced taxes.
The government estimates Rs. 30 billion in additional tax revenue in 2009.
While it is argued that this could increase general prices in 2009, analysts
say thattaxation has been made even more complicated with the 2009
budget.
N. R. Gajendran, Senior Partner, Gajma and Company, says the government
could have increased the VAT rate by about 2 percent instead of introducing
a new tax, particularly the NBT, which would require new files to be open
and additional time spent on the compliance and administration sides.
Business chambers are concerned about the new tax and increases to
existing taxes and cesses, apart from this they are also concerned about the
complexities of the tax regime.
Business are already pushed to the wall and the tax regime is not helping.
The ability of the private sector to generate employment and sustainable
returns, in the midst of high inflation, high interest rates and utility bills will
be a challenge next year.
Analysts say that prices could increase in 2009 depending on the rate of
which taxes can be passed on to the consumer, even though the VAT rate
will be reduced to 12 percent from 15 percent.
"The psychology of pricing is such that, traders would not reduce prices just
because taxes are removed," Gajendran said.
He said the tax administration depends on a computer system based on
abstract mathematics.
"They (Inland Revenue Department) are still grappling with the electronic
system. The manual system was far superior. Technology has taken us a
different way it seems," he said addressing one of several post budget
seminars he was called to deliver his analysis on the budget.
The Banking Sector
The country’s banking sector is the most heavily taxed sector.
In an interview with the Island Financial Review last month, The President of
the Bankers’ Association, Rajendra Theagarajah, said in order to attract
foreign investments and bring about long term benefits to the economy that
short term policies of over-taxation of the banking sector has to be relooked.
About 60 percent of the profits are taxed and after further regulatory
requirement of retaining reserves for capital adequacy are created it leaves
little to pay out a decent return to shareholders.
"The policymakers should not sacrifice long term opportunity for short term
necessity. The banking sector can be positioned as a gateway to attract
Foreign Investment into Sri Lanka through the capital market. The sector is
somewhat the darling of the stock market and represents a better regulated
industry, well run and managed.
"This is where reconciliation has to take place between seeking short term
revenue collection against long term opportunities," Theagarajah said.
However, Senior Tax Advisor to the Ministry of Finance and Planning, R. P. L.
Weerasinghe said the government could not afford to reduce taxes of the
banking sector.
"We did bring the banking sector some relief in the 2009 budget by not
increasing their taxes or introducing new taxes," he told a post budget
seminar last week.
He also acknowledged that the Inland Revenue Department could face
collection problems next year.
The Budget Deficit
A widening budget deficit has been attributed, in part, to the Inland Revenue
Department’s incapability of recovering budgeted tax revenue targets
because of the inherent complexities of the system (leaving aside the
defaulters).
Tax Consultant and Fiscal Advisor to the Ministry of Finance, Former Deputy
Commissioner of the Department of Inland Revenue, P. Guruge told another
post budget seminar that government always over estimated revenues and
under estimated expenditure and budget deficits, which are covered often at
the expense of development expenditure.
Total expenditure was estimated at Rs. 710 billion in 2006 and the actual
expenditure amounted to Rs.730 billion.
In 2007, total expenditure estimated amounted to Rs. 834.8 billion but
actual amounted to Rs. 841.6O.
The budget deficits estimated for 2007 and 2008 was Rs. 235 billion and
293.4 billion respectively but the actual for 2007 was Rs. 276.55 billion and
the revised deficit for this year is 307 billion.
In 2007, the budget estimated a current account surplus of Rs. 3.6 billion
but actually recorded a current account deficit of Rs. 57.71 billion. In 2008,
a revenue surplus of Rs. 37.8 billion was estimated but the revised estimate
shows a deficit of Rs. 34 billion.
The budget for 2009 estimates a current account surplus of Rs. 31.49 billion
and analysts are skeptical this can be achieved if at all a surplus is achieved.
The budget deficit is estimated at Rs. 336.67 billion.
"After every budget is proposed we think we are doing well but half way
through it does not become possible. We are consistently finding ourselves
back to square one," Guruge said.