Friday, 2 August 2013 00:00
Sri Lanka’s quest for an equitable and simple tax policy is a long one and perhaps the reason for this is that the people who guide such policies are not honest in their intentions to reduce the inequality seen in society. This was further underscored by Wednesday’s tax increases that focused on dairy products and vehicle spare parts.
The Finance Ministry defended the move by insisting it was protecting the domestic dairy industry but disregarded the fact that average families do not have access to locally produced milk. Moreover, products such as cheese are not only of lower quality than premier international cheeses but are also priced higher than average due to protectionist policies.
Senior Minister of Human Resources and Chairman Parliamentary Committee on Public Enterprises (COPE) D.E.W. Gunasekara recently warned of Sri Lanka’s continued inattention to providing a tax system that efficiently takes from the rich to give to the poor, rather than a system where the rich get richer (with the help of offshore bank accounts if recent revelations are to be believed) while the poor are taxed heavily.
Speaking at the Central Bank’s Annual Report launch, he told the gathering that included President Mahinda Rajapaksa, that borrowing for infrastructure development has overshadowed improvement of living standards and insisted that numbers of high growth and low inflation are not actually felt by the masses.
He recalled that the tax-to-GDP ratio is the lowest since independence and non-direct taxes account for the bulk of the government’s tax receipts. This, the Minister stressed, shows that income disparity is huge. Intimating that the best solution is a comprehensive taxation policy, Gunasekara went on to call for the restructuring of Customs, Excise and Inland Revenue Departments as the three “houses” that bring in the bulk of public expenditure.
The problems that Gunasekara referred have been articulated by top economists in the country and organisations such as the International Monetary Fund (IMF). Reports have indicated that the ratio for direct and in-direct taxation in Sri Lanka is close to 20:80 whereas the number should ideally be 60:40.
In 2012, revenue declined to 13% of GDP from 14.3% of GDP in 2011, mainly due to tax revenue declining from 12.4% of GDP in 2011 to 11.1% in 2012. Revenue from VAT declined by 0.8% of GDP in 2012 compared to 2011 (3.5% to 2.7% of GDP), mainly due to many exemptions or zero ratings. Income tax declined from 2.4% GDP in 2011 to 2.3% of GDP in 2012 due to rate adjustments not being matched by broadening the tax base in 2012.
The IMF has repeatedly called on the Government to revamp their tax policy and increase the efficiency of their tax collection system. During their last visit to Sri Lanka, the delegation noted that other countries gain higher revenue for each percentage of tax that is imposed. Not only does this mean that income for public services such as healthcare and education are lower it also places high tax burdens on legitimate businesses. Therefore, instead of creating a culture that rewards taxpayers, it encourages tax evaders.
This is clearly a phenomenon that gains mileage on a daily basis. Take, for example, the logic of the Government introducing casinos, arguing that they would increase tax gains but in reality, handing out 10-year tax holidays to the projects. The carrot of tax concessions is not essential if the investment environment is efficient and corruption-free but rather than addressing these concerns, policymakers prefer to heap more misery on the masses.
Strengthening direct taxation, launching investigations into as many as 30 Sri Lankans holding accounts in tax havens and implementing a simplified and equitable tax policy is arguably the biggest development challenge faced by the Government.