Anger over taxes can be addressed through transparency

President Ranil Wickremesinghe has proposed a new tax regime which would in the very least bring revenue in line with pre-November 2019 numbers before the disastrous tax cuts by the Gotabaya Rajapaksa administration. The increase of tax revenue has become imperative after Sri Lanka declared sovereign debt default in April this year and is now seeking a backing from an International Monetary Fund (IMF) and other bilateral partners for debt restructuring and financial assistance.  

According to these proposals anyone who earns more than Rs. 100,000 monthly will have to pay tax. In addition to this, the corporate tax has been increased to 30% from a maximum of 24%. Sri Lanka’s tax to GDP ratio was 12.7% in 2019 which dropped to 8.7% of the GDP in 2021 after President Rajapaksa slashed taxes and started the downward spiral of the economy.

At the outset the new tax proposals seem a re-establishing of the previous tax regime and increasing revenue that is needed. However, the current increases come as the country is facing its worst financial crisis in recorded history. The consumer inflation recorded in September is 68% with salaries and wages being stagnant. The currency has also depreciated above 100% in the past three years since the Rajapaksa tax cuts. All these make the proposed tax increases painful.

Yet, this difficult pill can be made less bitter to swallow if there is transparency in tax collection and Government expenditure. The public sector employment has bloated in recent years with respective governments using public funds to create jobs for their loyalists. The current public sector workforce is estimated at over 1.5 million. Further the large Cabinet of Ministers, numerous ministries and Government institutions that do not demonstrate value for money for the expenditure incurred create increasing resentment among the public. In addition the elected leaders have shown little signs of austerity in expenditure during these difficult times. 

The defence sector which absorbs the highest proportion of Government expenditure, without generating economic activity in return, is an important area to address. The fact that Sri Lanka maintains the world’s 17th largest military does not reflect on the military needs or the national security realities of the country. The other area that needs urgent attention is the loss-making State Sector Enterprises (SOEs). Prolonged losses by SOEs, partly due to unsound decisions made by policymakers, have resulted in large budget deficits; and despite the need to reform critical SOEs, successive governments have failed to achieve this in a genuine and sustainable manner. The lumbering giants such as the Ceylon Electricity Board, Ceylon Petroleum Corporation and SriLankan Airlines have become a burden on the taxpayer and a drain on the country’s finances.

There will be less resentment for increases in taxes if the Government addresses the issue of corruption. The same individuals who were the perpetrators, enablers and beneficiaries of these corrupt dealings during the Rajapaksa administration now continue in positions of power in the Wickremesinghe administration. The individuals from his own party that have been empowered by the president also garner little confidence.

Tax increases in hardworking citizens should go hand in hand with reductions in Government spending and addressing corruption. If not, even the much needed and correct policies on increasing Government revenue will be met with resentment and opposition.