SL must focus on higher revenue mobilisation to overcome crisis 

Thursday, 11 August 2022 00:00 -     - {{hitsCtrl.values.hits}}

Advocata Institute Senior Research Fellow Dr. Roshan Perera 


  • Expert opines tax reforms will depend on desired revenue, institution capacity, people’s willingness to accept
  • Insists on being realistic with targets, continue to be within program to overcome crisis 
  • Recommends not to compromise growth with tax collected vs. actual tax potential 
  • Calls on to implement well-designed policies to broaden tax base, improve compliance, administration
  • Outlines VAT, income, corporate and property taxes to enhance revenue collection 
  • Asserts frequent tinkering to VAT system, plethora of tax exemptions and minimal use of technology significantly eroded tax base 
  • Opines burden of majority taxation must be borne by high-income earners
  • Suggests property tax as low-hanging fruit, which can be included in next budget
  • Points SL depends on very few sectors for corporate taxes, resulting distortion of resource allocation

By Charumini de Silva

Sri Lanka still has scope to overcome the macroeconomic instability if the Government could focus on revenue mobilisation through inclusive tax reforms based on scientific analysis, Advocata Institute Senior Research Fellow Dr. Roshan Perera opined.

Speaking at the ‘Let’s reset Sri Lanka’ forum organised by the Advocata Institute recently, she underscored that the root cause of the existing macroeconomic instability was due to lack of fiscal discipline.

Although taxation has been a contagious issue, she said it is widely accepted that a certain level is required for the Government to facilitate sustainable economic growth and to provide essential services to ensure greater inclusion.

“There are some possibilities to rationalise the expenditure from non-productive to more productive areas. However, the main focus should be on revenue mobilisation with wide-ranging tax reforms based on scientific analysis on what needs to be revamped and how,” she added.

She also emphasised that the desired revenue, institution capacity and people’s willingness to accept were three key factors that tax reforms will depend on.

“Consistently we have never met our revenue targets because it was not based on scientific analysis and the numbers were picked out of a hat. Given the economic situation, we cannot get it wrong this time and even the International Monetary Fund (IMF) will give us some targets. Thus, if we want to get out of this crisis, we need to be realistic, meet those targets and continue to be within the program,” she explained. 

Dr. Perera said empirical evidence points to a positive relationship between tax collection and gross domestic product (GDP) growth. 

“Advanced economies collect higher tax rates compared to developing countries. Studies show that once the tax to GDP ratio of a country reaches 13%, the real GDP of the country rises sharply and this sustains over several years. Hence, the recommendation for counties with low tax to GDP ratio is to aim at least 15%, so that they can move towards a higher growth trajectory,” she explained, adding that Sri Lanka is far behind this level.

She pointed out tax collected as opposed to actual tax potential needs to be achieved without compromising the growth through well-designed policies to broaden the tax base, whilst improving compliance and administration.

Dr. Perera suggested that Sri Lanka needs to ramp up its tax collection efforts significantly in key areas; value added tax (VAT), income tax, corporate tax and property tax.

Noting that VAT is a major source of revenue around the globe, she claimed continuous tinkering with the tax system in Sri Lanka has been a huge problem in VAT collection.

“Frequent changes in VAT rates, revisions to the tax threshold and a plethora of tax exemptions has significantly eroded tax base and as a result, our revenue collections from this source has been minimal,” she said, adding that the 4% VAT to GDP ratio in 2004 has subsequently declined to 2% in 2021.

Dr. Perera emphasised that the administration issues have contributed to this low tax revenue collection, particularly with the lack of use of technology to assess and monitor VAT receipts.

“The ideal situation to make a VAT system is, you do not think of adjusting the VAT system once it is implemented. Most of the advanced countries have stuck to that rule and they have been successful,” she added.

She pointed out that the rate was not the only issue, but the policies need to be improved, insisting that the tax collection authorities have an equally important role to play, to increase Government tax revenue.

“Sri Lanka has one of the highest VAT thresholds compared to most countries in Asia. When the then Government increased it to Rs. 300 million we lost around 70% of the registered VAT payers. Now, they have decided to reduce it to Rs. 120 million. But the big question is how did they come up with this target. What was the scientific basis and will it earn the kind of revenue we need from VAT,” she argued.

Dr. Perera said successive Governments have arbitrarily come up with these values, but from an economic standpoint, Sri Lanka needs a scientific basis for determining the threshold.

In terms of income tax collection, she insisted that the burden of higher taxation must be borne by high-income earners, highlighting that 20% of households enjoy 50% of the income generated in the economy.

“Given this crisis, we need to focus on collecting more revenue via income taxes, as consumption taxes have been the major tax revenue generator, which is one of the key reasons that the low-income vulnerable groups are the most affected by the economic downfall,” she explained. 

She said it was critical to move towards a progressive tax system, with a tax composition of 60:40 reducing dependence on indirect or consumption taxes. 

Property tax was pointed out as a low hanging fruit, which can be included in the next budget, as it has scope for increasing yields. Given its fairness perspective, it can improve social cohesion and be considered a reasonable burden for most property owners. 

However, it was pointed out that the lack of a centralised land bank and proper valuation system is a hindrance to implementing it in the short term. 

Dr. Perera also outlined that Sri Lanka was dependent on very few sectors for corporate taxes, resulting in distortion of resource allocation. 

“Based on a study we conducted, it was found that the majority of the corporate taxes are borne by a very few sectors and 20% of it from the 250 listed companies in the Colombo Stock Market. The financial sector is the most taxed, followed by the food and beverages and telecommunications industry. State-owned companies also contributed to larger taxes,” she said.

She asserted that many sectors of the economy are either exempted or have a low tax rate. Sectors like IT and agro-processing have also not factored much in terms of tax revenue collection as opposed to their contribution to the GDP. 

Dr. Perera explained that the inordinate burden on the financial sector and differentiation from other sectors is also a reason for the economic distress experienced at present.