By Rusiripala Tennekoon –

There is a fundamental principle that deserves greater consideration when determining the taxation of employment income.

A salary is the remuneration an individual receives in return for services rendered. It represents the agreed compensation for the employee’s time, knowledge, skills, experience, responsibilities and contribution to the organisation. An employee earns what he or she receives through the service provided. The amount of remuneration may differ according to professional qualifications, experience, the nature of responsibilities and the value attached to the service.

However, the fundamental character of that income remains the same. It is remuneration earned through employment.

Why should the nature and tax treatment of such earnings be progressively altered merely because the amount of remuneration is higher?

Recognising differences in salaries is one thing; using those differences as the sole basis for progressively changing the tax treatment of employment remuneration is another.

The argument is not that all employees should receive equal salaries or that higher earnings should be exempt from taxation. It is that remuneration earned through employment should be recognised as a distinct category of income and subjected to a consistent and predictable tax principle.

The fact that an individual earns a higher salary does not change the fundamental nature of that income as remuneration for services rendered.

This distinction deserves recognition in the design of a fair taxation system.

A practical alternative: A uniform rate for employment income

In the light of these considerations, I propose that employment income be treated as a distinct category for personal income taxation, with a simpler and more predictable method of assessment.

The proposed arrangement would rest on three basic principles:

A common tax-free threshold: Every employee should enjoy the common personal tax-free threshold applicable under the general tax framework.

A uniform rate thereafter: Any employment income exceeding that threshold should be subjected to a single predetermined rate of taxation, irrespective of the level of salary earned.

Separate assessment of other income: Employment income should not thereafter be aggregated with income from other sources for the purpose of determining the progressive tax rate applicable to those other sources.

Income from investments, rental properties, business activities and other sources could continue to be assessed under the relevant tax provisions, with appropriate safeguards to ensure that the common tax-free allowance is not duplicated.

Such an arrangement would introduce greater simplicity and predictability into the taxation of employment income.

It would also prevent an employee’s remuneration from being pushed into a higher marginal tax bracket merely because the individual happens to receive additional income from another source.

The proposal does not seek to exempt employees from their responsibility to contribute to public revenue. On the contrary, it seeks to establish a more rational and transparent method of determining that contribution.

The appropriate uniform rate would, of course, need to be determined after careful fiscal analysis, taking account of revenue requirements, distributional consequences and the overall tax structure.

Taxation must encourage productivity, not discourage it

Another important consideration is the relationship between taxation and economic growth.

Sri Lanka is undergoing a demanding economic adjustment process. The continuation of economic reforms requires public confidence, private investment, increased exports, employment generation and the expansion of productive economic activity.

It is important to recognise that households have already experienced considerable pressure through higher living costs and taxation. The sustainability of economic reforms cannot be secured through fiscal consolidation alone.

There must also be visible progress in creating economic opportunities, expanding production, attracting investment and improving the earning capacity of the population.

A tax system that is perceived as unreasonable or unpredictable can weaken public confidence and discourage individuals from undertaking additional productive activities.

The objective should therefore be to broaden the revenue base through economic expansion rather than rely excessively on increasing the burden on existing taxpayers.

Borrowing, expenditure and fiscal responsibility

The question of taxation cannot be considered in isolation from government expenditure and borrowing.

Borrowing may be necessary for a country facing extraordinary economic circumstances. However, it cannot become a permanent substitute for sound revenue management or a means of financing unlimited expenditure.

Equally important is the quality and productivity of public expenditure. Borrowed funds and tax revenue should be directed towards activities that strengthen the economy, improve productive capacity and generate sustainable returns.

Fiscal discipline must therefore be accompanied by expenditure discipline, transparency and accountability.

The public is entitled to expect that the sacrifices demanded through taxation will be matched by responsible management of public resources.

A timely appeal ahead of the Budget

As the Government prepares to present the 2027 Budget, there is an opportunity to reconsider certain aspects of the existing taxation framework.

The purpose of this appeal is not to question the Government’s legitimate need to raise revenue or to undermine the economic reform programme. It is to encourage a more balanced and equitable approach to achieving those objectives.

A taxation system must command public acceptance not merely because it is imposed by law, but because the principles underlying it are reasonable and defensible.

The proposed separate treatment of employment income, with a common tax-free threshold followed by a uniform rate, is one such reform deserving serious consideration.

A good Budget is not measured solely by the amount of revenue it collects, but also by the fairness of the methods through which that revenue is raised and the economic value generated by its expenditure.

The ultimate objective of taxation should be to strengthen the state without weakening the people and the productive economy that sustain it