Tax System in Ancient Sri Lanka

Historical records, inscriptions and ancient literature provide us with abundant information regarding an organized tax system spamming from the time before Christ up to the introduction of the modern tax system in the country. Inscriptional records from the 3rd century BC provide information regarding the taxes paid for the consumption of water for agricultural purposes and the taxes were collected on behalf of the state by the officials (“Dakapathi” “Bojakapathi”)

Apart from the mechanism of collection of taxes, the titles of collecting officials in charge of the purpose of collection and for what purposes the collected taxes had been utilized are also mentioned in such inscriptional records. “Kaniya, Kannika and Athana of such places where taxes were collected and as international trade flourished from the very ancient times, in Sri Lanka (Even from the time of the arrival of Aryan settlers in Sri Lanka from India), there were officials collecting taxes at the point of import and export. Thus, during the Anuradhapura period we come across officials “Mahapatuladda” who was responsible for collecting import and export duties at Mahattita (Mannar) where pearl fishing was a main source of foreign exchange. Godawaya the harbour at Hambantota was another point where taxes were collected at the point of import and export.

From the 2nd century BC land tax had been in existence according to inscriptional records. Allocating the collected taxes for specific purposes has been recorded in the ancient inscription. Thus, Carts carrying grain supplies to the city had to pay taxes in kind at the point of entering the city and these collections we directed to the “Mahapola Alms Hall” a dwelling house for the Buddhist clergy. The last kingdom of Sri Lanka ruled from the hill country where the kings had reigned till the entire country came under the rule of the foreign invaders. Robert Knox, landed in the country after a shipwreck in 1660 was captured by the Sinhalese king and was held captive for twenty years till he escaped from the captivity. He fled to England and recording his experience in captivity (Historical Relation of Ceylon). He explains how the taxes were collected three times a year and how the collected taxes were directed to the king’s treasury. According to knox’s record there had been different rates of taxes and taxes paid in kind. Such items included gems, wine, oil, Corn, Honey, wax, cloth, iron tobacco and even elephant teeth.

“Maral was a tax (Marala Badda) to be paid at the death of a person and for the collection of this tax, there was a separate official appointed for the purpose. At the time of the British colonial rule there had been instances where taxes with adverse effect on people were removed for the welfare of the people. In 1882 paddy tax which was in existence was abolished in the Eastern province of Sri Lanka.

The abolition of paddy tax was a step to promote the cultivation of paddy in the province (Government Agents Report - 1882). In 1893 taxes were levied on wheat flour, rice, sugar, tobacco and cotton (Government Agent’s Report 1893, Eastern Province).

There is sufficient evidence to show that tax in some form or other was levied from the dynasty of King Saddatissa in Anuradhapura kingdom to dynasty of King Narendrasinghe in Kandian Kingdom. During these periods there was a direct relationship between taxation and the service provided by the King to his people. As the king provided the protection to his people he was entitled to a portion of production from the land in return. Also there was an obligation to service as a condition of holding land.

Anuradhapura Kingdom

Income producing irrigation units, such as small lakes and canals and field fed by them had to pay tax on water. Water could be bought and sold. Owners of tanks (vapi-hamic) had to pay for water came in to the tanks and tanks owners imposed a charge from the users in turn. The King had the largest share of tanks and he was the prime beneficiary of this levy on water until the beginning of the Seventeenth Century AD. Levy on water was called ‘diyabedum’ or ‘dakapath’. It was paid to the king as well as to private owners of small canals and lakes.

In addition to dekapath the king claimed a share of produce from all occupied and cultivated lands.

Polonnaruwa Kingdom

During the Polonnaruwa Kingdom, the principal source of kings’ revenue was land tax with tax on paddy. The tax on the use of water (diyabedum) from irrigation canals was also payable. There was a tax on external trade, on items such as Gems, Pearls, Cinnamon and Elephants.

These taxes were collected by hierarchy of officials. Village Headman was primarily entrusted with the collection of taxes due to the king from the respective village.

Taxes were paid partly in grain or other agricultural produce. The Land tax was charged at one sixth of the produce. Another notable feature in this period was a growth of market towns linked by trade routes. Toll and other levies were imposed by the State. Duties were levied on export and import of commodities.

Kandyan Kingdom

The economic base of Kandyan Kingdom was subsidence agriculture in which paddy cultivation was the main feature. All paddy lands in the kingdom were subject to compulsory service for the King and taxes paid in kind.

Tax System Since 1932

Income tax was first introduced in Sri Lanka in 1932. (First year of Assessment 1931/1932). The Income Tax Department was established in the same year to administer this tax. Mr. N.J. Huxham was the first Commissioner.

Estate Duty and Stamps Offices were amalgamated with the Income Tax Department in 1933 and named as “Department of Income Tax, Estate Duty and Stamps”.

Policy Changes over the years:

Year 1941		Excess Profits Duty came into operation
Year 1948		Profits Tax was introduced replacing Excess Profits Duty
Year 1950		Signed the first Double Tax (Relief) Treaty by Ceylon with UK
Year 1958		Kaldor Commission Proposals - Taxation of Capital gains - Imposing Wealth Tax - Expenditure Tax - Gifts Tax Named the Department as Department of Inland Revenue
Year 1961		Introduction of surcharge on income tax, National Development Tax, Rice Subsidy Tax, Surtax, a Tax on Registration of Business and Professions and a Sales Tax (Last for 2 days only)
Year 1963		Establishment of first Regional Office in Jaffna. Introduction of Business Turnover Tax under Finance Act 11 of 1963.
Year 1964		The first tax amnesty
Year 1971		Compulsory Savings Levy came into operation PAYE scheme was introduced. Capital Levy was introduced
Year 1972		Introduction of the Self Assessment Scheme.
Year 1974		The Department of Inland Revenue was re-structured. Inland Revenue Service was established
Year 1979		Introduced current year basis taxation (79/80)
Year 1983		Introduction of Rehabilitation Levy
Year 1985		Abolished Estate Duty and Gifts Tax
Year 1986		Introduction of Withholding Tax on interest
Year 1988		Implementation of the “Imputation System” of Company Taxation. Imposition of Betting and Gaming Levy.
Year 1991		Devolution of Turnover Tax on whole sale and retail to Provincial Councils.
Year 1992		Introduction of Withholding Tax on Specified Fees. Commenced Automation Introduce Defence Levy (NSL)
Year 1998		Introduction of Goods and Services Tax (in place of Turnover Tax)
Year 2000		Inland Revenue Act No.38 of 2000
Year 2002		Introduction of Value Added Tax (by abolishing Goods and Services Tax and National Securities Levy) - Abolished Stamp Duty and introduced Debits Tax
Year 2004		Economic Service Charge was introduced
Year 2005		Introduced Share Transaction Levy and Social Responsibilities Levy.
Year 2006		Inland Revenue Act No.10 of 2006 Economic Service Charge Act No.13 of 2006
Year 2009		Introduction of Nation Building Tax (NBT)
Year 2011		- Abolition of Debits Tax (01.04.2011) - Abolition of Withholding Tax on Specified Fees, and Commercial Rents (01.04.2011) - Abolition of VAT Advance Payments (January 1,2011) - Abolition of Social Responsibility Levy (SRL) (01.04. 2011 in relation to income tax) - Abolition of Regional Infrastructures Development Levy (RIDL)(January 1, 2011) - Abolition of Turnover Tax (TT) collected by the Provincial Councils (01.01.2011)