VAT tangles?

The Supreme Court suspension on VAT delivered on Monday has added a fresh chapter of confusion to the Government’s attempt to increase its revenue and puts fresh impetus on having consistent policies clearly communicated to the private sector and public. 

Many companies were left scrambling to bring down the costs of their products temporarily and fix their tax calculation system from 15% to the previous 12% of VAT to ensure they would not lose customers. The Government was left to pull up its socks to get the relevant legislation passed in parliament on 20 July while the Finance Ministry will have to figure out how to provide an exemption of some form to VAT payers to cover the days from 11 July to 20 July. 

As the Government that came into power promising ‘Yahapalanaya,’ it has failed in its quest of transparency, even though Finance Minister Ravi Karunanayake, has dismissed claims of wrongdoing and insisted it followed “traditions” followed by previous Governments, they have nonetheless failed to improve the principles on which taxes are levied.        

It does not take a rocket scientist to understand that taxation in Sri Lanka has needed a serious overhaul for years. Just because the International Monetary Fund (IMF) has pointed out the obvious does not mean they have to be dismissed.  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 the golden rule is communication. The Government has to project a united front and ensure that their policies are defined clearly and communicated consistently to the public. Cabinet approving Capital Gains Tax after the Finance Minister had told Parliament no new taxes would be introduced is a major blow to public confidence. In addition when discussing issues such as tax increases on vehicles there has to be a concentrated effort led by Government leaders that is not undermined by insensitive comments from ministers and self-serving decisions that anger the masses. 

Ahead of the 2016 Budget Prime Minister Ranil Wickremesinghe made a clear statement to Parliament on the economic goals of his and President Sirisena’s Government but the opposite was outlined in the subsequent Budget. Counter policies and contradictions have spawned from this mix up resulting in the Government being on the back foot over most economic policy decisions. 

Instead of communicating clearly with the public on what needs to be done and why, the Government has remained on the defensive for months, battling endless criticisms. Even though some of the encounters have resulted in the Government offering a compromise they are perceived as policy retractions or admissions of failure rather than attempts to responsibly engage with the public. So where the Government could have built a reputation of being more transparent, flexible, empathetic and democratic they are instead left the impression of being indecisive and easily led.

Policy changes as daunting as those facing the Government are tough for any administration but particularly more so given the vastly different economic policies of the United National Party (UNP) and the Sri Lanka Freedom Party (SLFP). As the Government moves deeper into its reform process it must work to ensure political survival does not take precedence over meaningful change.