Care for country

PRIME Minister Ranil Wickremesinghe is a man on a mission. His stated goal is to liberalise the economy so an open and competitive environment is created for foreign investment to flow into the country. However, opening up Sri Lanka’s notoriously closed markets, among the most protected in the world, has proved to be challenging and potentially politically dangerous.      

In the latest chapter of the face-off, Wickremesinghe on Tuesday threatened to introduce a tax on capital if local companies do not do business with their international counterparts. This is largely in response to protests over the proposed Economic and Technology Cooperation Agreement (ECTA) with India, which could liberalise the IT industry allowing multinationals to move into Sri Lanka, attract the best talent in the industry and pay them at international standards. Such efforts while improving the local economy could also reverse the brain drain that is currently hamstringing the services sector.   

In response to the protests, the Prime Minister has warned that companies protesting liberalisation would face a tax on capital. Such a tax is broadly defined as a corporation’s taxable capital, comprising capital stock, surpluses, indebtedness and reserves. Capital tax is applicable to capital owned by a company, not its spending. Capital taxes, in contrast to income taxes, are charged regardless of the profitability of the firm. It is also known as “corporation capital tax”.

Many companies in Sri Lanka are protected under a variety of taxes that give exemptions, pushing up prices for consumers, reducing quality of products and services available in the market and strangling Government revenue. Economists and monetary organisations have been yelling themselves hoarse for years over the country’s budget deficit, which in 2016 is projected to miss its target, yet again. The lopsided tax structure also means the poorest 20% of the population shoulders the biggest tax burden and broad-basing it has faced stiff resistance.

Just 11% of GDP as revenue means the Government also has to deal with a rigid budget, with payments to an unproductively inflated public sector taking the bulk of the money. Capital expenditure and spending on social care such as education and health is getting ever-lower, with Sri Lanka’s figures being bad even by South Asian standards. 

In fact a World Bank report published on Tuesday estimates 40% of Sri Lanka’s population lives on less than Rs. 225 a day and poverty alleviation programmes introduced by the previous Government failed to meet its targets. In fact the official figure of 7% is reached by calculating the number of people who live on less than Rs. 150 a day. But more international measurements show a large chunk of the population live just above the official poverty line and are constantly in danger of falling below it. Most of this population also lives in highly urbanised areas but have no employment opportunities to earn a living wage. 

With such damning evidence before them, the private sector and assorted professionals cannot wrap themselves in the National Flag and oppose liberalisation on the grounds of patriotism. Key industries such as apparel grew in Sri Lanka because of imports and liberal policies and took employment to the villages. The Government must be transparent with their economic policies but it must be reflected by a private sector that is unafraid, honest, committed to inclusive growth and considerate of the greater good.