Mangala warns against ad hoc tax changes

Finance Minister Mangala Samaraweera and State Minister of Finance Eran Wickramaratne at yesterday’s press conference – Pic by Upul Abayasekara  

• Cautions that sweeping tax cuts promised by GR could undermine fiscal consolidation 
• Says proposed cuts could cost Rs. 412 b, questions how funding will be found  
• Defends existing tax system, says it stabilised economy 
• Insists maintaining macroeconomic fundamentals crucial given pending debt repayments  
• Challenges GR to open debate on economic policy with SP

By Uditha Jayasinghe 

Finance Minister Mangala Samaraweera yesterday defended the fiscal consolidation path the Government had taken over the last few years and cautioned the public against believing massive tax reductions peddled in the run-up to the Presidential Election, labelling them unrealistic and dangerous to existing economic stability. 

Samaraweera faulted Sri Lanka Podujana Peramuna (SLPP) presidential candidate Gotabaya Rajapaksa for saying that he would introduce a slew of tax cuts if he came to power, including reducing Value Added Tax (VAT) from the current 15% to 8%, slashing Pay As You Earn (PAYE) tax as well as taxes on agriculture and telecom. 

Samaraweera argued that reducing taxes in such a drastic manner would result in additional challenges to managing public finance and undermine the fiscal consolidation process that had been pushed forward by the Government over the past few years. 

“The tax system that we have put in place is a simple and effective one. Any Government needs revenue to fund housing, healthcare, education and other essential public services. 

VAT is expected to earn the Government Rs. 530 billion this year. PAYE tax Rs. 62 billion. If all these tax cuts that Rajapaksa is promising were to happen then there would be a revenue shortfall of about Rs. 412 billion. Rajapaksa must say how he will deal with this revenue shortfall and what expenditure he will cut to do so,” Samaraweera said. 

The Finance Minister emphasised that during the time when Opposition Leader Mahinda Rajapaksa was President, VAT was as high as 20% before it was eventually reduced to 11%. Samaraweera contended that even though VAT was posted at 15% by the current administration, many essential food items were exempt from VAT. He also recalled that during former President Rajapaksa’s time in power, the PAYE threshold was just Rs. 62,500, which was increased to Rs. 100,000 by this Government. 

“It is through our fiscal consolidation process that focused on increasing State revenue and direct taxes as well as widening the tax net that we were able to put the economy on a sound footing. It is irresponsible for Rajapaksa as a presidential candidate to put forward these tax cuts when it can plunge the economy back into instability. Sri Lanka faces large debt repayments next year as well. How will these be met if State revenue is reduced to this extent and macroeconomic stability is to be undermined?  

“Rajapaksa is very quick to criticise our taxes but does he pay income tax? Has he ever declared his assets? It is not true that we have trimmed the fertiliser subsidy. We have also not imposed taxes on agriculture. How can a tax that does not exist be removed? We even removed the tax on data after we came to power. This Government has strived to establish a fair and depoliticised tax system.”    

However, Samaraweera, responding to questions, said that they were prepared to present proposals to Parliament to cancel the carbon tax, which Democratic National Front candidate Sajith Premadasa had said earlier this week he would abolish if he won the Presidential Polls.  Samaraweera also proposed that Rajapaksa meet Premadasa for a debate on economic policy.   

Samaraweera also said plans were underway to increase the PAYE threshold from Rs. 100,000 to Rs. 125,000 and stressed the present Government had increased public sector salaries by as much as 200% over the last four and a half years. He reiterated that no other Government had given such high pay hikes in such a short period of time.  

State Minister of Finance Eran Wickramaratne, joining in, pointed out that the Government had worked to depoliticise, simplify and remove the discretionary power of politicians when applying taxes. He also pointed out that a surplus in the primary account would be recorded this year as well and the Government was working to further phase out para tariffs that would improve transparency and competition within the local market to further drive down prices. He also stated that indirect taxes exerted disproportionate pressure on poor people and therefore the Government was focused on increased direct taxes.