CAN SRI LANKA REDUCE ITS TAXES BY 20 PERCENT?
Posted on June 21st, 2018

BY EDWARD THEOPHILUS

Recently, Mr Mahinda Rajapaksa, former president of Sri Lanka made a controversial public statement that when he comes to power again he would reduce taxes of the country by 20% and this statement has become a highly debatable announcement among the government and opposition members. Mr Rajapaksa highlighted a concrete example in support of his communique that when he was in power some members of the opposition at that time challenged that he could not be ended the civil war creating a freely moveable environment with an ability to going to Killinochchi. In fact, the civil war ended and created a free environment, now anybody could move from one place to other and people in the South travel to North without hindrance and enjoy trips. It has also setup economically feasible atmosphere sell products of North East to the South and dynamism in the economy.

Taxes are most imperative factor that ordinary people are suppressed and if Mr Rajapaksa can redeem people from this suffering, there is no doubt that he would be the most reliable national leader ever governed the country and most probably he will be respected by generation to generation in Sri Lanka. It is worthy to analyse whether the promise of Mr Rajapaksa is workable or a mere political rhetoric.

Tax revenue has an unshakable relationship with the economy of a country like skin to a tree.  In simple words, the tax system is the source of funds for spending of the government. According to statistics given in the annual report of the Central Bank of Sri Lanka in 2017, the contribution of taxes to the government revenue in 2016 was 12.3% (Rs 1463690 Million) while the Central Bank of Sri Lanka has estimated to be 14.3% (Rs 1539000 Million) in 2018. However, the contribution rate of taxes to the government revenue in developed countries is higher than Sri Lanka and it accounts to three times of the contribution of Sri Lanka. Non-Tax revenue added to the government revenue in 2016 of Sri Lanka was 1.9% (Rs 222374 Million) which estimated that non-tax revenue in 2018 would be 1.3 % (Rs 183000 Million), this situation is shameful compared to the non-tax revenue contributes to the national budget in many other countries.

What is a tax? Webster Dictionary defines that tax is a compulsory contribution levied upon persons, property or business for the support of government, by extension, any proportionate assessment as on the members of the society.  In 1930, Chief Justice Hotham in Victoria (Australia) Supreme Court defined a tax as compulsory extraction of money by public purposes enforceable by law and not a payment for service rendered (Mathews Chicory Marketing Board (Vic) 1930 60 CLR 263). These definitions are based on the concept of justice in relation to charging taxes from public by the government.  A highly respected American Economist, H.C. Simons (1939) had broadly discussed the charging taxes from the point of view of equity and the choice of tax base.

The imposition of taxes by the government should be a proportionate exercise which imply that a tax system must be consistent with the ability to pay principle or the assessment of taxable income for payment of tax should be founded in proportionately payments, which means that when revenue of a person increases the tax payment too shall be increased.  Simons states that how tax burden should be apportioned among individuals has no doubt being the subject of discussion and controversy since the beginning of political organizations.  It is quite clear that Mr Mahinda Rajapaksa, former president of Sri Lanka concerns with this equity principle and he needs to give justice to people, who have no ability to pay taxes as the government designed.

When charging taxes on the basis of personal income, it should be based on the affordability of a person, otherwise it would lead to avoiding the payment of taxes. However, the charging taxes on goods and services or value added in production process would regard as regressive tax system, as it decrees to charge tax disregard of the capacity to pay by a person.  For example, an equal amount of tax is charged, when purchase a loaf of bread by a rich billionaire and a beggar on the road.  Mr Rajapaksa may have considered the taxation policy of the government, which was set by the outsiders (IMF consultants), who have no understanding the income structure and affordability of majority in Sri Lanka.  The proposal of Mr Rajapaksa has merit as he has an ample of experience on the society of Sri Lanka. The most important point in regard to this proposal is whether it could be practically implemented and how should be structured the idea in the environment of Sri Lanka.

Before I go to a practical analysis, it needs to consider a vital point.  Taxes are charged by the government with a view to meeting spending requirements, but it does not regard as a payment for services rendered.  The government in any country provides a massive volume of services to the community, some of these services are subject to direct charges and others are free or partly charged by the government.  In the modern world, taxation has auxiliary purposes such as allocation of resources, distribution of revenue, economic stabilisation and the distribution of power.

Although there are many reasons for the justification of taxes, people do not like to pay tax, because in terms of economics, the payment of tax is considered as a reduction of revenue or wealth of a taxpayer. Nobody like to reduce the revenue or wealth; the choice of people is to accumulate revenue or wealth.  Therefore, taxing people is an unpopular measure, but there are many people in the community, who consider the payment of taxes is an obligation and supporting to the economy.

In the modern era, international financial and economic organizations have focused on controversial issues in relation to charging taxes.  In the history, taxes were based on direct income of a family and corporate institutions, later the system (1976) changed to assess individual income. The revenue collected by the government from direct income taxes was not sufficient to meet government expenses and the taxing policy directed to reconsider charging indirect taxes, especially collecting taxes from business, which can shift the cost of taxes to customers or public, goods and services or value added tax are the best example for changes.  However, the calculation of Value Added Tax to a production process is a quite complex task as it involves the calculation of value added to a product in various stages of the process.  There are many criticism and miscalculations in the system.

An issue in modern era is how should the government balance the total tax revenue allocating a ratio for direct and indirect.  For example, this controversy remains in many countries and in Sri Lanka too this issue has become a point of debate among economists and policy planners.  The experience encountering in many countries that GST or VAT rate has been an increasing trend to expand government revenue and tax experts regard that there is no justice in goods and service or valued added tax increasing to more than 10% because it would badly impact on lower income earners and poor.  Mr Rajapaksa may be considering this point.

The volume of expenditure in Sri Lanka could be dramatically reduce if there is a government with twenty cabinet ministers and the tax could be reduced further, if the executive presidency and the 13th amendment to the constitution shall abolish under the Rajapaksa regime, however, there may be legal hindrance to such actions.  The current government cannot commit such a radical change as it has promised many commitments to the international community despite the wishes of people of the country

The following table is a summary of the fiscal operations in Sri Lanka, which clearly demonstrate that

Tax Revenue and Government Expenditure – Value in SLR Billion

  2012 2013 2014 2015 2016 2017
Tax Revenue 90.89 100.58 105.03 135.57 146.36 167.01
Non Tax Revenue 14.3 13.2 14.4 9.0 22.2 16.1
Grants 1.6 1.5 0.09 0.06 0.07 0.08
Total Revenue 106,79 115.28 119.52 144.63 168.63 183.19
Total Expenditure 155.64 166.93 179.58 299.03 233.38 257.30
Budget Gap (48.85) (51.65) (60.06) (154.4) (64.75) (74.11)

 

Source: Annual Report Central Bank of Sri Lanka 2017

According to statistics given in the above table, if the tax reduced by 20% and the expenditure level has no changes, the government has to face serious repercussions and the current economic structure and policies would not permit to reduce tax by 20% as the entire fiscal operations indicates that the government expenditures in the country are heavily depending on the tax revenue and the borrowing for covering for the budget gap   However, Mr Rajapaksa has several options to do it and in brief I would like to highlight them.

  • Reduction of government expenditure by microeconomic reforms in General public service, civil administration, defence, public order and safety, social services, transport and communication. Microeconomic reforms permit to save about Rs 60 billion from the government expenditure, which seems that focuses on unproductive purposes.
  • Non-tax revenue of the government should be increased to more than 15%, managing public enterprises to generate excess over the expenses. For this purpose, it is essential productivity enhancement policy in public enterprises and sharing the management responsibility and the capital structure with private sector. Certain public enterprises need to be closedown opening the way for domestic and foreign investors.
  • Initiating more economic projects related to production and service area with the support of China. New projects would generate more employment opportunities and shift employees in the government sector to new projects reducing the burden of the government.
  • The changes in political administration through reducing the representatives of parliament, provincial councils and many other public administrations by 50%. The political administration has created a mess in the country and has become a joke in the name of democracy.

Reforming current administration, changing government policies and invention of new policies permit to reduce tax and to abate the budget gap to less than 5% of GDP and improve the foreign value of Sri Lanka’s currency unit. The productivity of public sector as well as in private sector is lower in Sri Lanka and need to think about how to improve it.

These are very easy policy actions but the current government cannot give the leadership as it is acting on the advices of NGOs and foreign forces with a misguided philosophy.

2 Responses to “CAN SRI LANKA REDUCE ITS TAXES BY 20 PERCENT?”

  1. Christie Says:

    Tax collected depends on the economy.

    A growing economy will bring in more taxes.

  2. Ananda-USA Says:

    Please watch this VERY IMPORTANT VIDEO, about the MISMANAGEMENT of Sri Lanka’s ECONOMY by the YAMAPALANAYA!

    https://www.youtube.com/watch?v=OlBgWyBJNeY

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