Importance and Issues of Taxation in Sri Lanka

Abstract

Fiscal deficit is a chronic problem for many countries including Sri Lanka. Although there are several ways, budget deficit tax revenue will be the best source to finance budget deficit which may consider the adverse repercussions of alternative sources such as money creation and debt. Though increasing share of tax revenue in GDP is an instrumental objective of economic development policy, Sri Lanka has not been successful in raising adequate tax revenue to meet its public expenditure on general public services, social services, economic services, etc. The country faces several issues such as declining of low level tax ratio, slow structural change of tax composition, dismal outcome even after changing of tax system and low level of efficiency and productivity of Value Added Tax (VAT). This paper intends to emphasize the need of enhancing tax revenue while analyzing the adverse repercussion of alternative deficit financing methods such as money creation and debt. This study uses secondary data published by the Central Bank of Sri Lanka, the Department of Inland Revenue and the World Bank and illustrates its finding using graphs and tables. To reduce its dependency on money creation and debt, the country should take several measures including broadening the tax base, simplifying the tax rates, simplifying the tax laws, reducing the number of taxes, facilitating voluntary compliance, avoiding politically motivated tax amnesties and tax concessions, and avoiding political interferences and influences on tax administration to enhance tax revenue.