Budget expectations

This week opens on high expectations as the nation awaits the first full-fledged Budget of the National Government. At the core of these new reforms will be tax proposals, which will be the driving force behind economic growth. 

Weekend reports have indicated Finance Ministry sources saying at least 60% of the affluent class who were not paying taxes would be brought under the tax net. Revenue proposals would be devised to increase direct taxes while bringing down indirect taxes for the benefit of middle and low income groups.

New measures are on the cards including a shift in the fertiliser subsidy scheme. Cash vouchers would be provided to farmers to buy fertiliser from the market instead of the current scheme of getting it straight from nominated suppliers, a proposal aimed at providing farmers with the choice of getting good quality fertiliser.

Currently, the Government spends Rs. 50 billion to provide thousands of farmers with 50 kg bags of fertiliser at the rate of Rs. 350 each.

Successive governments have raised money by taxing essential goods and services, which puts a disproportionate amount of pressure on vulnerable sections of society. Commodities have remained expensive when compared to the income levels of the poor. This not only hinders taxation but also reduces Sri Lanka’s changes of sustainable development.

With tax revenue at an all-time low of about 11% of GDP, officials have insisted payment of debts and investment would become prohibitive in the long run if the cumbersome structure was not corrected immediately.  As many as 30 types of taxes are currently levied, complicating the tax system and making it easier to evade taxes. Simplifying the tax system also means giving resources to Inland Revenue Department officials so they can effectively collect taxes. Under the present system, the Government simply increases the percentage to increase revenue, thus adding pressure on corporates and individuals who already pay taxes. 

Another problem with taxation is the significant tax exemptions given, not just to investors but also to individuals. The bulk of Sri Lanka’s 1.3 million civil servants are not taxed, making the island perhaps the only country in the world to give public employees a free pass. Successive salary increases mostly given as election promises have resulted in the gap between public and private salaries reducing but this has not been mirrored by officials being absorbed into the tax net.  Discounting corporates, less than 600,000 individuals pay income tax in Sri Lanka, far below the actual number of well-paid professionals on both sides of the divide. Two major reasons for this disinterest is lack of easy payment methods. The Inland Revenue Department and the Central Bank are trying to put together an online system for tax payments but it will have little success unless tax expenditure by the Government is made more transparent. Unless people see their taxes spent in a way that benefits them they will not be inclined to follow the law. For this stronger reforms are needed where the Government opens up its financial records, including money haemorrhaged by State-Owned Enterprises, ends political patronisation of the rich and stops midnight slapping of taxes without public engagement. 

In fact the tourism industry is already up in arms about the possibility of the VAT structure changing and has insisted the sector will be crippled if its taxation system is changed. These are concerns that should be openly and quickly addressed.

Transparency in Budget expenses and reduction of public expenditure on Parliament members would also go a long way in winning the trust of taxpayers.

So far the Government has done little to solve any of these issues and, as the Governor himself pointed out, taxation will “make or break” Sri Lanka’s prospects.