Sri Lanka’s Finance Commission (FC) has recommended that Provincial Councils should be allowed to collect taxes from business entities with quarterly income up to 3 million rupees.
Currently, only business entities with quarterly income exceeding 3 million rupees are subjected to NBT, which is collected at the national level, while businesses having less than 3 million rupees quarterly income are exempt from NBT.
Budget 2018 also proposed to further rationalise the exemptions on NBT in order to implement various policy measures of broadening the tax base and minimizing the tax expenditure.
The Commission, in its report dated 21.08.2017, further recommended enhancing provincial revenue through untapped revenue sources such as private schools, tutories, local and foreign collages of higher education, health service providers, and professional service providers.
Finance Commission said funds distribution among the provinces based on a rational methodology will not be effective if a meager proportion of the national budget is only spent through provincial councils.
The thirteenth amendment to the constitution made provisions for the establishment of the Finance Commission.
The main responsibility of the Commission is to make recommendations to the President and formulate policies on the apportionment of funds between the nine provinces with the objectives of achieving balanced regional development in the country.
Finance Commission consists of Uditha H. Palihakkara, Indrajit Coomaraswamy, R.H.S Samaratunga, V Kanagasabapathy and H.M. Zafrullah.
Policy Recommendations of FC’s 2018 report to President
To achieve Balanced Regional Development in the country, funds distribution among the provinces based on a rational methodology will not be effective if a meager proportion of the National Budget is only spent through provincial councils. Therefore, it is recommended that the National Ministries should consider the proportions recommended by Finance Commission in distributing their allocations among the provinces.
It is recommended that funds disbursed for the development sectors coming under the devolved subjects should be channeled through the provincial councils. It is further recommended that in the event of implementation of projects identified under devolved subjects by the Line Ministries should also be carried out through the Provincial Councils. This would minimize duplications of funds and overlapping of activities thereby promoting effective utilization of funds and maintaining transparency and accountability of investments.
In the policy making process for balanced regional development, lack of data and information related to public fund allocation and investment among regions are observed, due to poor inter-governmental fiscal relations and lack of coordination. Absence of common framework in the national planning system is also identified as a main issue that affects effective decision making process. Therefore, the establishment of common framework for national and sub- national planning system without undermining the concept of devolution is recommended. Further, this can be supported by a national level management information system (MIS) coordinated by the Department of Project Monitoring and Management which caters for national and sub-national level information requirements for planning and monitoring.
Provincial Councils play a major role in regional development in line with national policies and priorities, with the available resources at provincial level as well as funds channeled through the national ministries. Hence, it is observed that the recurrent expenditure of Provincial Councils cover the cost of human resource component of the development activities not only for the Provincial Councils but also for the National Ministries. Accordingly, it is recommended that high priority should be given for the enhancement of human resources in the Provincial Councils. This will enhance the identification of real needs, planning, implementation, and monitoring, evaluating and effective management of development programmes.
Currently, only business entities with quarterly income exceeding Rs.3mn. are subject to NBT, which is collected at the National Level, while businesses having less than Rs.3mn. quarterly income are exempt from NBT. Hence, it is recommended that Provincial Councils should be allowed to collect taxes from business entities with quarterly income up to Rs.3mn. Further, it is recommended to enhance provincial revenue through untapped revenue sources such as private schools / tutories/ local and foreign collage of higher education, health service providers, and professional service providers.
It is recommended that 25%-50% of the beneficiary contribution to be made compulsory for any direct grant provided under national and provincial development programs to ensure commitment of the beneficiary and sustainability of such investments.
It is recommended that there should be regularization and proper monitoring of private schools and private institutions of higher education in order to ensure quality education.
It is recommended that the state education should guide students for enhancing skills development.
It is recommended that provincial budgets should include provisions for rehabilitation of devolved nature infrastructure affected by natural disasters.
It is recommended to introduce an attractive provincial incentive package for private investors who are willing to invest in rural lagging / backward regions. The proposed preferential incentive package should be characterized by interest subsidies, tax holidays, reduced tax rates, concessionary loan schemes and easy collaterals. This will also be helpful to focus public investments on social infrastructure projects which are needed for uplifting the day today life of ordinary people.
It is recommended to link Infrastructure facilities with anchor projects with the provincial growth centers based on industrial activities. Considering the urgent need of linking the provincial growth centers with national level mega projects, special budgetary allocations are suggested to be provided for improving infrastructure by way of facilitating private investments at regional level.