16 May, 2022

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A Call For Fundamental Taxation Reforms

By Sandaru Ileperuma

Sandaru Ileperuma

The dominos have started falling on Sri Lanka, with the worst-case scenario yet to come. If we default on the upcoming loan payments we will be faced with the further deterioration of our country and face similar repercussions that Lebanon underwent in March 2020 for defaulting on their own loans. The next few months will be critical and will most likely make or break Sri Lanka for decades to come. There have been many calls for the diminishment of the executive presidency brought forth by the 20th amendment and while this is a necessity in preventing a similar situation in the future it is not by any means a solution to the current economic problems facing the island.

It has become common place for the Sri Lankan government to run a budget deficit, which can at times be beneficial for governments to open up spending for social welfare and infrastructure developments, however, this is dependent on the notion that the economy continues to grow generously to account for increased government spending. After the 2019 presidential elections President Gotabaya Rajapaska made true on his campaign promise and decapitated taxes by eradicating the PAYE, NBT, Withholding tax, Capital Gain tax, Bank Debit tax and by reducing the VAT tax rate from 15% to 8%. Creating a massive shortage in government revenue, this weakened government spending powers and created a economy built on pillars of sand. When it collapsed, it collapsed spectacularly, a foreign reserve shortage coupled with a worldwide pandemic caused the import of crucial supplies into the country almost impossible and weakened the means for the government to save itself.

The motives behind the 2019 taxation reforms of Sri Lanka were to create a friendly environment for business to operate, in-turn helping bring foreign investments in projects such as the port city and encourage entrepreneurship among locals, though there are those that argue it was to further develop the avenues of corruption, that may very well be true. Putting corruption aside for a second, I myself am a big advocate for a low tax regime environment and support free-market principles but there has to be a limit in any given situation. Sri Lanka was already on the lower end of the spectrum when it comes to taxation and has a long history of reducing taxation while simultaneously increasing government expenditure. Even though our GDP increased substantially after the civil war, taxation revenue increases were not in line with government spending. This is especially problematic when the government is constantly increasing its social welfare spending without collecting more tax.

The problem of low tax revenue has remained a problem and consecutive governments would rather cut tax revenues in the hopes of winning votes rather than face the bitter truth that we can’t afford such cuts. Promises of taxation reform have yet to materialize and so long as we don’t address this issue, governments will keep buying foreign loans to address shortages in their balance sheets. It’s a bitter pill to swallow since an increase in taxation will surely hit the layman before the aristocrats of Sri Lanka. Public debt is after all simply that, the debt carried by the public, and they’re the ones that must pay for it in the end. The rich will lobby against such policies and when put in place and will simply find ways to avoid taxation through loopholes that can happen in any country.

Simply increasing taxes is not enough, a fundamental rethink on how the government collect taxes will be crucial if reform is to work. Sri Lanka’s taxation system has long been plagued with inefficiencies and remains a fossil when it comes to modern methods of collecting taxes in a country.

Policy should be aimed at increasing Sri Lanka’s tax base and cutting down on unnecessary administrative bureaucracy. While at the same time adequate funding should be provided to the tax collection services so that they may hire a talented and competent workforce. Streamlining Sri Lanka’s overly complicated taxation system will also set a good precedence for international businesses to set up shop since the free markets desire consistency and stability in a country above all else. Some might argue that the low tax regimes of Hong Kong or Singapore have helped make those economies successful, I would agree with you, but we aren’t in the same position as them and thus the same principles will not apply to us. We are a country on the verge of complete economic collapse with a deteriorating and incompetent financial environment. We lack the crucial stability international businesses look for. We need to address proper taxation legislation if we want to lure in such investments and deal with loan repayment

None of this will ever materialize if the people don’t back this. As much as the government is to blame for this crisis the people have a say in it too, a stubborn will to reform these systems has precipitated in elected officials whom are also reluctant to address such issues. I write this article in the hopes of spreading the word that such reform will be a key cornerstone in Sri Lanka’s reemergence in South Asia. Pressure elected officials to make the necessary reform and accept that the low taxes that you’ve enjoyed so far has helped create the current economic environment to a degree. The government that introduces such reform may become unpopular with the people but nonetheless would have helped save the country from bankruptcy.

*Sandaru Ileperuma – University of Alberta-BSc Student

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    In UK, everybody who has an income, apart from part time workers earning less than 12K annually, pay tax, with many paying at the upper rate of 40%. Everybody also pays National Insurance at 12% that funds health care & pensions, to which everybody is entitled to. Then we have 20% VAT on everything apart from food. If you have other income which is not taxed at the source, you are expected to declare your earnings. Cost of living is high but taxation is accepted as a civic duty. Recently,it came to light that the finance minister’s wife, who has an Indian passport, does not pay UK tax, which can amount to a few millions, from dividends received from her old man’s business. It is perfectly legal as she has ‘non dom’ status but politically, it was disastrous for the man who was tipped to be Boris J’s successor.

    In SL, it is the poor mercantile employee who paid taxes as PAYE while most avoided their fair share. Some years ago, a friend of mine who ran a small but successful spare parts business, employed a ‘tax consultant’ who charged him an annual retainer of Rs 300k but ensured he didn’t pay a cent in taxes. He was a tax assessor moonlighting as a tax consultant. Any surprises that this tax avoidance culture in SL can be reformed?

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