Adam Smith goes digital

Ultimately, taxation in Sri Lanka will succeed not merely by meeting revenue targets but by earning citizens’ belief that the system is fair, reliable, and deserving of their commitment proving that Smith’s insight resonates powerfully in the digital era, just as it did 250 years ago

Sri Lanka’s path to economic recovery is a delicate balancing act. The country is navigating fiscal discipline, IMF conditionalities, debt restructuring, and the urgent need to restore public confidence. Taxation, once seen as a technical instrument, has now become intensely political, affecting households, businesses, and the credibility of the State itself. Reforms including higher rates, broader tax bases, and more rigorous enforcement have strengthened revenues. But they have also sparked frustration among salaried employees, small enterprises, and informal sector participants, many of whom feel disproportionately burdened.

Revisiting Adam Smith’s 18th century wisdom

In today’s Sri Lanka, facing economic fragility and public skepticism, it is timely to revisit Adam Smith’s 18th-century wisdom. His four canons of taxation equity, certainty, convenience, and economy were designed to create a fair and efficient system. More than 250 years later, these ideas are still relevant, offering a guiding framework for reform. However, applying them now is not straightforward. Blindly following the old rules will not work. Instead, they need careful reinterpretation to fit a modern context: one shaped by digital systems, political sensitivities, and economic uncertainty, where fairness and trust are as crucial as efficiency.

Take equity, for example. Sri Lanka’s post-crisis tax framework relies heavily on 

Pay-As-You-Earn, VAT, and other indirect taxes. While these instruments improve collection, they concentrate the burden on visible formal-sector employees, salaried workers, and urban Small-Medium Enterprises. Wealthier individuals, professionals, and segments of the informal economy often remain largely untaxed, creating a strong perception of unfairness. When a tax system is seen as fair, it broadens the revenue base without constantly raising rates. People are more willing to comply voluntarily, and resentment among those who already pay their taxes is reduced. However, achieving this balance is no easy task. Fragmented data systems make enforcement difficult, and sudden wealth-based reforms could trigger capital flight or political resistance. Without careful planning and clear communication, attempts to modernise equity risk creating new grievances rather than resolving existing frustrations. Adam Smith’s principle of equity remains highly relevant, but its application must evolve. Today, equity is less about strict arithmetic and more about fairness ensuring access, proportional contribution, and recognition of who benefits from public services.

Certainty today is not about rigidity.  It is about predictability and clarity even when policies must adapt. Convenience now means making compliance truly accessible to everyone

Certainty through disciplined coordination

Certainty is another canon that requires modern reinterpretation. Since 2022, Sri Lanka has experienced frequent tax policy changes shifting VAT thresholds, new PAYE slabs, modified exemptions, and updated compliance rules. While these measures were often necessary to respond to fiscal pressures, they have created uncertainty for households and businesses, undermining investment planning and medium-term confidence. Certainty today is not about rigidity; it is about predictability and clarity even when policies must adapt. Clear timelines, advance notice of changes, and legal as well as digital frameworks that minimise ambiguity make it easier for individuals and enterprises to plan ahead. In a volatile economy, rules that are too strict could limit Government flexibility to respond to shocks like currency fluctuations or sudden fiscal emergencies. Achieving certainty requires disciplined coordination across fiscal, monetary, and political institutions, a capability still developing in Sri Lanka.

Convenience as a benefit

Convenience has taken on new significance in the digital era. Sri Lanka has made strides in digitising tax compliance through e-registration, e-filing, online payment portals, and mobile-friendly systems. But access remains uneven. Rural taxpayers, older citizens, and those with limited digital literacy often struggle, risking exclusion and inadvertent noncompliance. Convenience now means making compliance truly accessible to everyone. User-friendly, multilingual digital platforms, support through helplines or local centres, and education campaigns for youth and less tech-savvy populations can reduce errors and encourage timely, voluntary participation. However, the digital divide remains a challenge, and technical glitches or poorly designed systems can quickly erode trust. Sustained investment in infrastructure and taxpayer education is crucial to ensure convenience becomes a genuine benefit rather than a source of frustration.

Adam Smith’s four canons of taxation equity, certainty, convenience, and economy were designed to create a fair and efficient system. Adam Smith’s principle of equity remains highly relevant, but its application must evolve

Economy vs efficiency

Economy, in Smith’s sense, is about efficiency and in today’s Sri Lanka, efficiency demands intelligence rather than brute effort. The country must maximise revenue while minimising administrative waste. Traditional approaches such as manual audits, lengthy litigation, and low-efficiency enforcement often reduce the net gains from higher tax rates. Targeted, risk-based audits, data sharing across institutions, and automation can streamline processes, redirect resources to public services, and reduce unnecessary burdens on compliant taxpayers. But reliance on automation also raises concerns, from potential privacy issues to inaccurate targeting. Strong governance and oversight are essential to ensure that efficiency does not become a cover for aggressive or arbitrary enforcement.

The writer argues that Sri Lanka’s greatest challenge lies beyond Smith’s original four canons: trust. Years of fiscal mismanagement, corruption allegations, and weak public service delivery have eroded the moral contract between the State and its citizens. Even technically sound tax policies falter if taxpayers doubt how funds are utilised. Trust is earned through transparency, consistent enforcement, and visible improvements in public services. When citizens perceive fairness and see tangible benefits, they are far more willing to pay taxes. Trust transforms taxation from an imposed burden into a shared responsibility, strengthening the social contract and supporting voluntary compliance in ways that enforcement alone cannot. Yet trust cannot be legislated. Political short-termism, fiscal missteps, or public scandals can quickly undermine it. Building trust requires consistency, accountability, and tangible results over years, not months.

Taxation, once seen as a technical instrument, has now become intensely political, affecting households, businesses, and the credibility of the State itself

Adapting Adam Smith’s canons 

Adam Smith’s canons are far from outdated.  They serve as a guiding compass. In the Sri Lankan context, their value lies in careful, context-sensitive adaptation. Equity should guarantee fairness across income, wealth, and public benefits. Certainty must focus on predictability in an environment of economic and political volatility. Convenience requires accessibility, inclusivity, and digital ease of use. Economy demands efficient, targeted enforcement. For Sri Lanka, a fifth canon trust may be vital to secure legitimacy and sustain long-term compliance. When applied thoughtfully, Smith’s principles can balance revenue goals with public acceptance, steering the country toward a credible, inclusive, and sustainable tax system. Applied mechanically, however, they risk deepening inequality, fostering resistance, and entrenching informality. Ultimately, taxation in Sri Lanka will succeed not merely by meeting revenue targets but by earning citizens’ belief that the system is fair, reliable, and deserving of their commitment proving that Smith’s insight resonates powerfully in the digital era, just as it did 250 years ago.

(The author is an independent researcher.)