Property tax is not a good idea

Few weeks ago, there was a huge hullaballoo over the Government’s move to introduce a property tax as part of IMF recommendations. Rumours and false information were disseminated through the social media that everyone who owns a house in the country would have to pay a tax irrespective of income/wealth disparities. In response to such misinformation, the Treasury disclosed the envisaged property tax was in an advanced stage of design and therefore, pointed out it was premature to outline specific details of rates and thresholds. Further, the proposed tax would be levied on high-wealth individuals who own multiple properties and not on average income earners as per the Government.

Already people are paying taxes based on their properties to the local council authorities, thus, imposing another type of tax would tantamount to double taxation. Some might recall that almost a decade ago, the then ineffectual Finance Minister Ravi Karunanayake proposed a so called Mansion Tax via his disastrous 2015 Budget, which intended to impose a Rs. 1 million annual levy from owners of all residences valued over Rs. 100 million or spanning over 5,000 square feet. What happened to that ill-conceived tax and how much income was earned from it is still a mystery. Even the Treasury has acknowledged that a significant amount of administrative work is required to be done in terms of improving valuation mechanisms and databases in order to implement this proposed tax measure. When imposing a new tax, its administrative costs need to be taken into account and given the lethargy and inefficiency of tax authorities in Sri Lanka, question marks arise about the effectiveness of this unpopular tax proposal.

Ironically, the property tax is contemplated when the country is led by the leader of the Centre-Right political party in Sri Lanka which supposedly favours the rich and affluent. In addition to the property tax, the IMF has also suggested to introduce an Inheritance Tax which imposes a levy on individuals to whom the ownership of wealth is transferred. Republicans in the US angrily call this Death Tax as recipients need to pay it upon the death of their parents/loved ones. The neighbouring India implemented an inheritance tax, known as estate duty, in 1953, but it was abolished in 1985 by Rajiv Gandhi’s government. India also previously had a wealth tax and a gift tax, which were done away with in 2015 and 1998, respectively. Doubts exist whether a substantial amount of income could be raised through property and inheritance taxes. Certain countries have removed inheritance/property taxes after realising the meagre revenue generated through such levies cannot be justified given their complexity and the high administrative costs.

The use of inheritance/property tax is advocated by some as a tool for the redistribution of wealth as well as to address income inequality. Nevertheless, others could argue that inheritance and property taxes discourage those who pursue generation of wealth and as a result discourage the spirit of entrepreneurship and initiative. Particularly, in Sri Lanka, the entitlement culture is endemic within the social fabric of the country, and there is a view among many in the country that the Government must offer everything they need from birth to death. In such a context, there has to be a limit on redistribution of income and the State must not unnecessarily penalise hardworking individuals who want to create wealth for themselves and their succeeding generations. Also, there is a section in this country who are fond of living like parasites by merely anticipating money for jam.

Instead of administratively cumbersome taxes, the Government could increase tax revenue by eliminating the extensive tax holidays granted to certain corporate investments in a non-transparent manner by repealing the Strategic Development Projects Act in addition to digitalising revenue collection agencies such as Customs, Excise, and Inland Revenue. Burdening the masses with a plethora of taxes is counter-productive apart from being politically fatal.