Needed: value for the taxes

The Valued Added Tax, increased from 15 to 18% came into effect from the beginning of this year. Along with this tax increase the prices of numerous goods and services have been increased. From next month all adults will be required to submit their Tax Identification Number (TIN) for various transactions. 

While having a TIN doesn’t automatically indicate liability for income tax, it becomes mandatory for specific activities. The introduction of mandatory TIN submission is aimed at enhancing regulatory processes and increasing financial transparency. In addition, several amendments will be introduced to the Inland Revenue Act to resolve tax arrears and tax disputes amounting to Rs. 943 billion, of which the Inland Revenue Department could only recover Rs. 175 billion in 2023.

While increasing taxes is not a desired outcome, Sri Lanka has no choice but to do so to address the significant disparity between income and expenditure. The tax cuts implemented in late 2019 by the previous Gotabaya Rajapaksa administration precipitated the worst economic calamity in Sri Lankan history. In principle lowering taxes can be beneficial if there is corresponding reduction in Government spending and alternative means of generating revenue. If tax concessions lead to greater economic activity and growth, it would justify such a policy. However, that was not the case with the previous tax cuts, which benefited the wealthy while no benefit trickled down to the working masses.

The Rajapaksa administration, while lowering taxes for the rich, embarked on costly expenditure, including a program to recruit 100,000 graduates into the public sector. Let alone the economic sense, the Rajapaksa regime did not have the basic common sense of balancing accounts. The result was the worst economic downturn in Sri Lankan history, eventually leading to a sovereign default.

The introduction of the TIN, even without a mandatory tax paying commitment, would contribute to developing a ‘culture of paying taxes.’ It is necessary that everyone pays taxes, even at the very lowest rate. Such a contribution to the national coffers will give ownership of those ‘tax money’ and the citizenry be stakeholders in the management of the country’s finances. This has not been the case in Sri Lanka and tax revenue in the country is among the lowest in the world as of January 2020, falling from 11.6% of GDP in 2019 to 8.1% of GDP.

This difficult pill of generating taxes can be made less bitter to swallow if there is transparency in Government expenditure. 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.

There will also 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.

Increasing taxes, especially at a time when inflation is increasing significantly is a bitter pill for the general public to swallow. It is essential that the Government demonstrates that the revenue generated through taxes are utilised in the best possible manner. Transparency and addressing the epidemic of corruption within the Government ranks are critical to ensure that taxes can be increased, revenue generated without creating resentment and social unrest.