Drastic measures?

Friday, 18 April 2014 00:01 -     - {{hitsCtrl.values.hits}}

PAKISTANI tax authorities have published a list of defaulters in a desperate attempt to get people to pay up. In a country where as many as 50% of politicians fail to file their tax returns and there are few resources to track them down, the naming and shaming tactic seems to be the only recourse. Sri Lanka is also struggling with pretty much the same challenges when it comes to taxes. While the International Monetary Fund (IMF) would likely not be tolerated if it influenced such radical measures here, there is little doubt that the tax imposing and collecting system need a complete revamp. In fact the Treasury is banking on a rise in tax revenue this year to help Sri Lanka reduce its fiscal deficit to below the Government’s 5.2% target. Revenue for last year was estimated at 13.6% of GDP, less than an originally expected 14.5%. In its 2014 Budget, the Government introduced new taxes on banks and retail goods. It now expects revenue of 14.5% of GDP this year. But this still remains low for a developing nation. Sri Lanka expects its $ 67 billion economy to grow 7.8% this year from 7.3% last year. The Government has already reduced key interest rates to multi-year lows to boost expansion. But private-sector credit growth has still been sluggish, despite the lower interest rates. Senior Minister of Human Resources and Parliamentary Committee on Public Enterprises (COPE) Chairman D.E.W. Gunasekara in a famous speech last year 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  while the poor are taxed heavily. Despite the Government’s attempts to plaster the tax system, many people believe borrowing for infrastructure development has overshadowed improvement of living standards and insist numbers of high growth and low inflation are not actually felt by the masses. Many pundits have pointed out 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 shows that income disparity is huge. In addition to a comprehensive taxation policy, many have called for the restructuring of Customs, Excise and Inland Revenue Departments as the three “houses” that bring in the bulk of public expenditure. Reports have indicated that the ratio for direct and indirect taxation in Sri Lanka is close to 20:80 whereas the number should ideally be 60:40. This is largely supplied by taxes on essential goods, particularly food, that push the tax burden on people who can bear it the least. Protectionist policies prohibiting the import of cheaper food and import substitution policies also have their share in increasing the cost of living for vulnerable groups. The IMF has repeatedly called on the Government to revamp its tax policy and increase the efficiency of its 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. With so many loopholes, perhaps the direct method employed in Pakistan should be considered here.