Earlier this month, yet another twist took place in the Value-Added Tax (VAT) saga in the country, with the Supreme Court ruling that Parliament stop considering a bill to raise VAT as the drafting of the proposed legislation had not followed due process.
The story had been brewing since 2 May when VAT was increased from 11% to 15%, shortly after which on 11 July the SC suspended the increase, citing that it had not been approved by Parliament. While Finance Minister Ravi Karunanayake said the Government would present the bill – which was due to be tabled in Parliament on 11 August – again in the near future and raise VAT as planned, this uncertainty surrounding the country’s tax policies does not bode well for the Government’s fiscal consolidation process.
VAT is crucial for several reasons. Firstly, it is at the core of increasing public revenue, and secondly, it is essential to establishing a fundamentally-sound macroeconomic environment maintained by policy consistency. Unless the Government achieves macroeconomic consolidation, it is unlikely to attract foreign investment – no matter how many trade deals are signed. If policy consistency is not established, then it is unlikely that the private sector will ‘recalibrate’ their risk appetite as advocated by Central Bank Governor Dr. Indrajit Coomaraswamy. Without growth in investment and exports, Sri Lanka will remain caught in a debt trap. In short, the economy will continue its current decline.
VAT would be the start of much-needed tax reform. It would be the first step to widening the tax net and simplifying the tax system. Both these goals are critical to increasing revenue and creating a fair system where everyone pays equitable dues.
However, a majority of Sri Lankans rightfully assume a healthy dose of scepticism when it comes to the subject of VAT, or any tax in general, in the country, as they are far from content with the Government services being offered in return for their tax money. If the Government is to get the public onside, communication and transparency need to improve drastically.
But sadly, for a Government that came into power promising ‘Yahapalanaya,’ it has failed in its quest of transparency. And though the Finance Minister has dismissed claims of wrongdoing and insisted they have followed “traditions” followed by previous governments, they have nonetheless failed to improve the principles on which taxes are levied.
The Supreme Court was correct in its decision to stop the VAT increase bill being considered in Parliament; every bill that goes through Parliament should follow due process no matter how crucial it is to a Government’s long-term objectives. Just because the International Monetary Fund (IMF) has pointed out the obvious in relation to tax increases in approving its loan to Sri Lanka, it does not mean they have to be dismissed.
Taxation in Sri Lanka has needed a serious overhaul for years. All economists have long-agreed Government revenue has to be boosted, loans reduced, investment and exports have to increase and the economy liberalised to bring sustainable growth to Sri Lanka. Only fools would argue with the obvious.
But if the Government is to gain the trust of its people, policies need to be formulated through the correct channels and stuck to.