They say that only two things are inevitable in life – death and taxes. Taxes are an integral part of our lives, whether we like it or not. In countries such as Sri Lanka, where the number of direct tax payers is low in terms of the total population, the State primarily depends on indirect taxes to raise revenue. Value Added Tax (VAT) is one such indirect tax, levied in both developing and developed countries such as UK and Australia.
A huge controversy has arisen in the light of the Government’s decision to increase the VAT rate from 11 percent to 15 percent from this month, though exceptions have been made for several essential items and utilities such as electricity. This was not unexpected given the debt burden of ‘white elephant’ projects inherited from the previous regime and also a weakening global economy.
Experts say tax increases as well as changes in the tax regime will be inevitable as the Government faces a future of slow economic growth and decreasing government revenue. The current increase in the VAT rate, which is usually passed on to the consumer, will see a rise in the prices of many goods and services. While it is a politically unpopular decision to take, alternatives such as cutting expenditure on health education to keep the tax rates low are even bleaker.
The UN Economic and Social Survey of Asia and the Pacific (ESSAP) Report 2016 launched recently expected growth in the economies of Asia and the Pacific to plateau at 5% in 2016 and 2017. The Government however expects an economic growth of 6 percent in 2016 and to decrease its budget deficit to 3.5% of GDP by 2020.
VAT is a necessary evil in the absence of a more streamlined direct tax collection system. However, the authorities should aspire to depend more on direct taxes. In some countries, direct income tax is as high as 43 percent – and the income is used for development and welfare of other less privileged segments of society.
While such high income tax rates may not be possible here due to much lower incomes and purchasing power than the developed countries, the authorities should strive to widen the tax net to cover more people. There are many affluent persons who do not pay any kind of direct taxes at all and some vocations such as tuition are yet to come under the tax net. If at least one million more people can pay direct taxes (out of a total population of 21 million), the Government will be able to earn more revenue. Shortcomings in the tax laws must also be covered through changes to tax legislation.
As a senior Central Bank official explained, tax evasion, tax avoidance (there is a subtle difference), excessive concessions and tax exemptions had led to a decline in Government revenue over the years. There should also be stricter fiscal discipline. Moreover, the hiding of funds in offshore accounts by the elite of the society and rogue politicians has also affected the finances. The Government should continue its efforts to track these funds down and channel them for development.
Greater attention should be paid to developing trade which should help earn more export revenue. In this context, the Government’s plan to sign Free Trade Agreements with several countries including China is very significant. Experts have proposed greater integration with regional economies to fuel growth in Sri Lanka since domestic economic growth alone is not sufficient given the small size of our market. The Government also needs to take bold decisions with regard to certain Government institutions which are a drain on the economy – the plan to find a strategic partner for the loss-making SriLankan Airlines is a good example.
In today’s world, it is impossible for any country to grow economically without the help of multilateral lending agencies and Sri Lanka is no exception. The International Monetary Fund (IMF) has now agreed to a US$ 1.5 billion loan for Sri Lanka in support of economic reforms aimed at reversing a two-decade decline in tax revenue and reviving growth.
The International Monetary Fund's chief for Sri Lanka, Todd Schneider, has said a staff-level agreement was reached to release US$ 1.5 billion under an Extended Fund Facility (EFF) over a three-year period in support of the island. An EFF is designed to help countries resolve serious balance of payment problems brought on by structural weaknesses in the economy.
This will no doubt be a shot in the arm for the Sri Lankan economy, which is facing challenges on multiple fronts. While Opposition critics will certainly attack the Government for seeking an IMF facility, every Government has sought help from it - in 2009, Sri Lanka received US$ 2.6 billion from the IMF to boost its financial reserves. What matters finally is that these funds should be used pragmatically for the benefit of the people without being squandered.
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