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Making a request from the Inland Revenue, Jayasundera called for those in the department to talk to people, listen to issues and try accommodating them. “Don’t create space for people to lobby, as this is allowing room for corruption. Don’t let the pressure build up. Tax departments all over the world are like that, they have one mindset, are insensitive.”
Young entrepreneurs from all over Sri Lanka had pointed out that the key issue is public and private sector bureaucracy – complex forms and systems understood only by officials. Noting that Sri Lanka has a small economy with small people and entrepreneurs, Jayasundera stated that what is needed is a quick and simple response.
“My humble request from my colleagues, particularly those in the Income Tax Department, is to please be sensitive to the client – the taxpayer – our king, the people who pay our salaries. If we do that, even without many changes, tax revenue will increase. People don’t pay tax because they don’t want to come to you. In a way it is politics, you need to win their confidence.”
Call for a simpler tax system
Although the President made his intentions clear through a simple yet broad based tax structure in the 2010 National Budget, a single change in the tax rates had not been made this year, he revealed.
Those engaged in tourism, exports, SMEs, construction, education, health and exports pay taxes of 12% on the profit, which is not a high tax. For everybody else, taxes have been simplified and interest rate is at a single digit and is low. “There is a complicated tax table, other than that it is easy. Dividends to be paid after profit, only residual activity. Then file a return and that too is subjected to a maximum tax of 24% on sliding scales,” Jayasundera said. “It is simple.”
Certain taxes have also been removed, he acknowledged. He spoke of VAT, NBT and ESC domestically, and PAL (Ports and Airport Levy), NBT, custom duty, VAT and excise duty on the import sector. All these are imposed for specific purposes – the cess to support certain local activities, PAL for infrastructure development etc, Jayasundera emphasised.
He added that the country must slowly build a base, supported partly by economic expansion. The economy has developed and this can be seen in the new activities and opportunities that have cropped up in the country.
“When the economy grows, this happens automatically,” he commented. “If banks make money, we get 28% of it. No stamp duty and other activities. They were paying a 37% profit tax, sometimes manipulating their balance sheets. It has now come a long way.” The country must now concentrate on this and refine the system further to remove anomalies altogether, he stated.
Having a proper base would make the system more transparent and level the playing field, Jayasundera noted, adding: “Every measure introduced in this budget is either to correct anomalies or to build up that kind of base.”
He pointed out that NBT was applied “everywhere” except to the banks, which will be corrected from 1 January. NBT is broad based and is at a much wider, organised level. “One day, hopefully, when the country moves onto the next stage, NBT and VAT will merge; that is the direction we are heading in.”
People must respect taxes
and Government
We also don’t need manipulation, Jayasundera said. “The country needs to respect taxation. Without taxes, governments can’t profit.”
He noted that unlike in other countries, here, the Government performs, whatever criticism is heaped upon it. The US is deliberating the provision of medical services to the country and even though they have technology, doctors etc., on a matter of principle, they don’t recognise free medicine.
In Sri Lanka, the Government provides free education, healthcare and other services. “People must respect taxes and governments must respect that people can’t pay excessive taxes. This Government has brought down the excessive taxes.”
Real substance of the Budget: Policy objectives
Jayasundera listed the following as key policy objectives aimed at in the 2014 Budget:
1. Sustain growth in a non-inflationary environment
The Government has understood that the country cannot lose control of inflation and has addressed it from the structural, supply and macro/monetary policy side to keep demand under control. The real growth rate which is now higher than inflation must be maintained, he said.
2. Growth must be more globally oriented
“This budget recognises wider production frontiers.” The Budget is now more globally oriented and diversified.
3. To get the country into higher and different rankings
The President wants the country to become famous for exclusive tea, become a top 10 destination for apparel in the world, and reach the top 30 in IT. He wants the country to think along the lines of a professional hub, “like Singapore,” Jayasundera added. “People go there for medical treatment because advanced medical services are provided. Why not do the same here?”
4. Become a transit hub in navigation and aviation
Colombo must be promoted not just as a destination but a connectivity hub.
5. Promoting small entrepreneurship
“They are the big guys ultimately,” Jayasundera pointed out. He said that the President has therefore requested the banking community to provide interest-free capital to at least 500 Divi Neguma families. “A 30% success rate from each bank would amount to a lot, if there is a loss, it would only be a sacrifice of one year’s bonus, if at all.”
Policy direction in the Budget
1. Lower deficit
During the global crisis, Sri Lanka had almost 10% of GDP as fiscal deficit in 2009. The deficit this year has been maintained at 5.8%. “We are very proud and I am optimistic I can hold onto this for the next five weeks. It is difficult, people grumble, and we get blasted and criticised, but we have made that dream a reality.”
The targeted deficit for the next year is 5.2%, followed by 4.5% in 2015 and 3.5% by 2016.
“President Rajapaksa will make public investment throughout to continuously build up an asset base. This will turn into a primary revenue surplus.” In 2016, the President wants to see the EU’s public debt level in Sri Lanka, i.e. 65% of GDP.
2. Create more growth opportunities
Sri Lanka must reduce imports through domestic production, produce renewable energy and create opportunities through value addition in exports, agriculture, shipping and knowledge.
To create growth opportunities, however, the country needs investment – the Budget has underwritten 6% of GDP as public investment: “We need more roads, irrigation system, clean environment, lower income housing, education and health etc.,” Jayasundera explained. 6% is still not enough and the rest must come from the private sector. “Investment alone is not enough, we must create efficiency in the system through simplicity,” he added.
3. Develop skills and create efficiency in people
Knowledge, capacity, commitment, stamina and dynamism must be built into the workforce. He noted that Sri Lanka has created new education systems encompassing more skills, and new faculties to facilitate this change. “There are plenty of proposals in that.”
4. Need to reform the system – legal and financial
Jayasundera observed that in the legal system, tax cases have been heard for centuries. “I can’t see the logic in this because I thought the non-payment of taxes is a criminal offence, but these offences are entertained for years. Everything is appealed and by the time the case is heard, the judge and lawyer has been transferred. Who pays for these? The genuine taxpayer. This must change.” He stated that in line with this, legal and judicial reforms are being introduced.
On the need for financial reforms, he observed that the two development banks in the country were unable to raise US$ 250 million. “What kind of banks are these. The BOC, which is being criticised for being State bank, managed to raise US$ 500 million – because of the size and strength of its balance sheet. NDB and DFCC too are very sophisticated with eminent boards.” He added that the message he received from these dealings is “(And I hope they did as well) is that our financial institutions are too small – are you running microfinance in Sri Lanka – that is the question they ask.”
5. Need for strategic thinking
Everybody can’t have visions, Jayasundera stated. “Management schools teach this. There must be one vision and others must follow. Every priest cannot be a Buddha, even though it is happening here. There must be one leader and the others must follow.”
Can’t lose momentum
Why do we need this budget? Because we cannot afford to lose momentum and/or fall in to the middle income trap, he asserted.
“We can’t neglect risks and we therefore need strong financial systems, system stability in the banking and financial sector, good and strong regulators, a good independent monetary policy, price sensitivity and confidence, and we have to maintain good reserves by mobilising beyond Sri Lanka’s deposit base,” Jayasundera said. “We cannot lose our sustainability, good international reserves and fiscal deficits.”
Need for inclusivity
Even a sustainable system needs inclusivity – we must introduce inclusive policies, he said.
“We need to not only avoid falling into the middle income trap but we also need to ensure that development trickles down to everybody in the economy.” Hence, the importance placed upon rural development, connectivity through 1,000 bridges to villages, road connectivity development programs, recognition of small farmers and three-wheeler drivers in the Budget.
“This is needed to make Sri Lanka unstoppable, to reach 2020 with a massive per capita income, distributed quite well within the economy.”
Jayasundera added: “There will be criticism but the Budget has ensured inclusivity by taking every segment of the economy to the next level and through that, aims to realise the development goals.”
