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Egg on the face

The government has ended up with egg on its face after stridently denying that the Inland Revenue Department was seeking to probe bank accounts with holdings in excess of Rs. 100,000. The President herself went on public record calling a news report on the subject to be "a deliberate lie fabricated with the aim of destroying the economy" and saying that it was "baseless and false" (Daily News, Nov. 23). But a circular sent from the Matara regional office of the Inland Revenue Department has been published conclusively demonstrating that the authorities have been less than truthful about this whole business.

Three days after the president's speech, Deputy Finance Minister G.L. Peiris was forced to admit in parliament that two Deputy Commissioners of Inland Revenue had issued notices on banks requiring them to furnish information relating to their customers accounts. Prof. Peiris said that the Commissioner General had directed his regional Deputy Commissioners not to send out such notices in the future except through the head office. He also said that the Commissioner General had given an undertaking to the Commercial Banks Association that such information would only be sought in future in cases of absolute necessity and no more notices of general application would be issued.

As the president pointed out at Galle, only those with incomes of Rs. 144,000 a year or more are liable to income tax. A person with a holding of a million rupees in fixed deposit earning say an average interest of 15 percent per annum will be barely liable as his income from this source would only be Rs. 150,000 a year. That is, of course, if the fixed deposit is his only income. Public service emoluments, for example and government pensions are exempt from tax so that somebody with a ten thousand rupee salary (Rs. 120,000 a year) or a five thousand rupee pension (Rs. 60,000 a year) can have tax free incomes of over Rs. 2 lakhs. It is possible for a married couple to separately hold a family's savings and the exemption limit would then work out to Rs. 288,000 on such income.

The banks are understandably unhappy about the tax man nosing around fixed deposit and savings holdings of their constituents for the very good reason that this would encourage those evading taxes to keep their money at home or even hold it abroad. Already too much of the country's resources are outside the formal organised economy. That is why this government and its predecessors have sought by various devices to attract such money into the banking system so that such funds can be applied to the development effort. What are Certificates of Deposit (CDs) that pay lower interest rates than fixed or savings deposits all about? They are a device contrived to attract into the system cash that would otherwise remain outside the banks. Any fool knows that funds held in CDs is untaxed money and government prefers to forego the taxes rather than allow such holdings to remain outside the formal economy.

It is a pity that the Inland Revenue Department did not clearly express the position it has now done through the deputy minister of finance when the president chose to blast "Ranil's uncle's paper" (i.e. the Sunday Lankadipa) on account of a perfectly accurate news report. Hard on the heels of the president's outburst, the Commissioner General issued a press communique saying that the Sunday Lankadipa report was "completely false" and "designed to cause unnecessary panic." Now we are told that two Deputy Commissioners had in fact sent out these notices. These inquiries have not only gone to the banks but also to some finance companies, we are reliably told. The president's original remarks and the subsequent responses by Inland Revenue first and Prof. Peiris next are clear examples of the right hand of government not knowing what its left hand is doing. It also appears that Inland Revenue headquarters was ignorant of what was happening in at least one of its regional offices.

There is no doubt that there is a great deal of tax evasion in this country and the present government, like its predecessors, has sought to obtain better compliance. This has been done by reducing the rates of taxation by both increasing the exemption limits and also broadening the slabs leading up to the highest 35 percent rate of taxation. Additionally, amnesties have been periodically given permitting those who have not paid taxes to come clean without undergoing any penalty. As Prof. Peiris pointed out in parliament last week, such an amnesty is available even now for people with untaxed money to deposit such funds in the banks or invest them in BOI approved projects.

But the authorities should also rethink the present practice of trying to extract the maximum revenue from those who are already paying taxes. Instead of squeezing spent lemons, it is essential that the tax net be widened. Also, the present Rs. 144,000 exemption limit should be raised to a level that is realistic in the context of today's inflation.

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