Economics General Degree Program Faculty of Applied Sciences

University of Sri Jayewardenepura

B.Sc. Economics (General) Degree Year I - Semester I (2021)

101 3.0 Principles of Microeconomics
Group Assignment
 INTRODUCTION

 Governments levy fees on residents and corporations in order to generate income, which is then used to meet their budgetary
obligations.

 Some of the taxes that the government has imposed includes,

1. Income tax

2. Value added tax

3. Capital gain tax

4. Nations building tax

5. Economic service charge

6. Stamp duty etc..

 1. INCOME TAX (IT)

 Ordinance No. 2 of 1932 was the first to introduce income tax to Sri Lanka.

 Income tax is a method for governments to collect earnings from your business, investment or personal gains.

 Anticipated growth in public sector employees could be seen over the past decade.

 Further, the Rs. 10,000 interim allowance was introduced in 2014 and 2015 and was added to the basic salary in five annual phases with
effect from 01 January 2016.

 If consumers believe a tax reform will last, they are more inclined to adjust their spending habits.

 In 2015, income tax rates were reduced restriction of the highest individual income tax rate applicable on employment income to 16%. In
2016 it was further reduced to 15% and in 2018 income tax rate related to the agriculture sector was reduced to 14%
 Income Tax (IT) contd

Tax Revenue estimated Actual Tax Revenue

Government Revenue (In Millions) 400,000.000
400,000.000
350,000.000
350,000.000
300,000.000
300,000.000
250,000.000
250,000.000
200,000.000
200,000.000
150,000.000 150,000.000

100,000.000 100,000.000
50,000.000 50,000.000
0.000 0.000
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
 2. CAPITAL GAIN TAX (CGT)

 CGT is a sort of tax levied on the profit made from the sale of a property or investment.
 It was recently reintroduced in Sri Lanka through the Inland Revenue Act No. 24 of 2017 and took effect on April 1,
2018.
 The gains are taxed at a rate of 10% beginning April 1, 2018,regardless of the length of time the asset has been owned by
the owners.
 If the profit/gain incurred by the resident individual is more than 50,000 per month and if the total profits gained within
the year (through multiple gains) is less than 600,000 are eligible for this tax.
 Capital gains are not taxed as the asset grows in value they are taxed only when the asset is sold.
 Capital gain is the difference between the sale price and the acquisition price. In addition, expenditure on advertising
transfer taxes, stamp duties, chargers imposed for establishing, preserving or defending ownership of the is deducted
from capital gain.
Capital Gain Tax Contd

Estimated Revenue vs Actual

Revenue
Estimated Revenue(in millions) Actual Revenue (in millions)
2,500,000.000
Year Total Revenue (in millions)
2,000,000.000

1,500,000.000
2018 104,148.162
1,000,000.000
2019 602,439.115 500,000.000

0.000
2020 357,594.125 2018 2019 2020
3. NATION BUILDING TAX (NBT)

 Introduced in: 2009, Nation Building Tax Act, No.09 of 2009

 A consumption tax

 Purpose: A social contribution to strengthen the welfare of security forces and to uplift the communities affected by the
civil war that prevailed from 1983 to 2009.

 It was charged considering the liable turnover

 Payable by every individual, group of people or organizations that conduct any form of;

1. Importations

2. Manufacturing

3. wholesale and retail sale

4. service providers
 Nation Building Tax (NBT) Contd.

Over the income of public sector employees.

 In 2011 NBT rate was reduced from 3% to 2% while also reducing the threshold per quarter from Rs.650,000 to
Rs.500,000.

 50% of the liable turnover from wholesale or retail sale as well as 75% of liable turnover of distribution was
made exempt from NBT in the tax computation.

 However, in 2015 threshold for NBT was expanded with the quarterly turnover liable to NBT being raised from
Rs.3 Mn to Rs.375 Mn.
 Nation Building Tax (NBT) Contd.

Over consumption behavior.

 The Treasury had collected about Rs. 1300 million from February to April 2014, but it had not been used for the
welfare of war heroes, instead the tax rate was raised to 3%.

 Minor producers were not subject to this tax as a ceiling was imposed and amendments to this tax have also expressed
concern over foreign exchange earnings. For example, in 2012 exemptions were made under the “Harmonized
Commodity and Coding System Numbers for custom purposes.

 All essential goods were exempted from this tax on imports under the Special Commodity Levy Act. For example, in
2013 and 2014, more exemptions were made to NBT such as in supplying of organic fertilizer and pesticides,
distribution of LP gas, imported milk powder etc.
 Nation Building Tax (NBT) Contd.

Figure 1: Comparison of Estimated and Collected NBT Revenue Over the Past Decade

Comparison of Estimated and Collected NBT Revenue Over • A considerable proportion of the total revenue was received
the Past Decade
120,000,000,000
from this tax.
100,000,000,000
Figure 1: Collection of NBT as a % of Total Revenue from 2011 to 2020
80,000,000,000

60,000,000,000 Collection of NBT as a % of Total Revenue Over

40,000,000,000
the Past Decade
14.00%
20,000,000,000
12.00%
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 10.00%
Estimated Revenue Rs. Revenue Collection Rs. 8.00%

6.00%
• 100% achievement in the collection of NBT is observable until 4.00%

the tax was abolished 2.00%

0.00%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
 Nation Building Tax (NBT) Contd.

 As instructed by the Ministry of Finance and permitted by the Cabinet Ministers, Nation Building Tax was
abolished by the government with effect from 01st December 2019.

 According to the performance report issued for the year 2020 by the Inland Revenue Department of Sri Lanka, a
new amendment was introduced under the Nation Building Tax (Amendment) Act, No. 03 of 2020.
Nation Building Tax (Amendment) Act No. 3 of 2020
 4. VALUE ADDED TAX (VAT)

 A consumption and an indirect tax on domestic consumption on various goods and services
 Levied on the stages where the value is added on the supply chain
 Introduced by the Value Added Tax Act, No 14 of 2002, and was amended by the government throughout the years
 The Chargeability of VAT (Excluding Financial Services)
 Manufactures
 Importers
 Services providers
 Suppliers
 Wholesale and Retail trade
 Policy Changes over the past decade
 VAT reductions throughout the years
 Changes in the VAT threshold over the years
 VAT refund scheme for tourists in 2018
 Tax reliefs in 2020
 Value Added Tax (VAT) contd

Income of Public Sector

 VAT reductions contributed to the reduction of the expenses of the general population, a positive impact
on the income of the public sector employees
 Introduction of the tax to the wholesale and retail trade in 2013 had a negative impact on the cost of
living

Consumption Behavior
 Increases of the VAT threshold reduced the number of eligible entities, negatively impacted the
consumption behavior
 Tax reliefs implemented in 2020 subjected goods such as health protective equipment and similar
products, which enables the consumption to be unaffected during the pandemic timelines
Value Added Tax (VAT) contd

Collection of VAT as a % of Total Revenue from

Comparison of Estimated and Collected VAT Amount from 2011 to 2020
2011 - 2020
60.00%
600,000,000,000

50.00%
500,000,000,000

40.00%
400,000,000,000

30.00%
300,000,000,000

200,000,000,000 20.00%

100,000,000,000 10.00%

0 0.00%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Revenue Estimated (Rs) Revenue Collected (Rs) Collection as a % of Total Revenue

5. ECONOMIC SERVICE CHARGE
(ESC)

► The Economic Service Charge is a levy imposed on individuals, partnerships, companies who/which is
carrying out a trade, business, profession or vocation.
► The ESC is levied under the Economic Service Charge Act No.13 of 2006
► Originally the ESC rate was 0.25% when initiated in 2006.
► In 2016 the ESC rate was increased to 0.5% until abolished for any quarter starting from January 01,
2020.
► When imposed in 2006 the threshold was Rs.15 million per quarter
► In 2017 this threshold was increased to Rs. 50 million per quarter and remained till abolished in 2020.
Economic Service Charge (ESC) contd

► Exemptions from ESC

Number ESC of taxpayers and tax files Over the
• Lottery Dealers Past Decade
18,000
• Airlines and Shipping lines 16,000 15,589
14,000 14,542
• Lak Sathosa 12,000
11,159
10,000
• Cooperative societies 8,000
7,189
6,000
• Mutual funds 4,000 4,561 4,024 4,090
3,515
• Government departments and local government bodies 2,000
0
2011 2012 2013 2014 2015 2016 2017 2018
• Fertilizer and pesticide manufacturers
• Locally manufactured clay tile manufacturers
 Economic Service Charge (ESC) contd

C omp arison of E stimated an d C ollected E S C

R even u e Over th e P ast D ecad e
Comparison of ESC as a % of Total

65,000,000,000
Estimated Revenue Collected Revenue
Revenue Over the Past Decade

59,200,000,000

55,301,397,166
52,978,509,494
48,000,000,000
44,719,757,960
5.88
5.67
5.35
4.82
21,335,091,270
21,072,700,000

21,000,000,000
20,458,175,363
17,318,000,000

16,000,000,000
3.5

14,950,043,000
14,864,241,267

12,763,000,000

3.19
2.92
8,400,000,000
6,595,600,863

6,500,000,000
6,154,508,746

6,148,447,689

1.2 1.1
1

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CONCLUSION

 The primary goal of taxation is to raise funds to fund government spending in an administratively
practical, equitable, and efficient manner.

 The Sri Lankan tax system faces numerous obstacles, including formulating clear and explicit tax
regulations and statutes.

 Government should be made up of people with the necessary skills, expertise, and experience in order to
benefit both the public and the government.
THANKYOU!