By Harsha Gunasena –

Harsha Gunasena

There are protests against the decision of the government to increase income tax. Although all including the private sector are affected, the main resistance comes from the government employees and the employees of the government affiliated institutions. There are many aspects of this issue and the intention of this  article is to view the problem in different angles.

The protests are coming mainly from the employees who are subject to pay Advance Personal Income Tax (APIT). This was previously named as Pay As You Earn (PAYE) and it was first introduced in 1971 by the then Finance Minister NM Perera who introduced several novel taxes and schemes.

PAYE or APIT are not final taxes. Rather than paying taxes for each quarter after the end of that quarter PAYE scheme provides an opportunity to the employees to pay the taxes at the time they earn the income. For the tax collector it is an easy method of collecting the tax.

The PAYE tax scheme was abolished by the Gotabaya Rajapaksa government along with the slashing of several other taxes with the blessing of the private sector of this country which was the starting point of the present economic disaster. Some argued that tax benefits would have triggered economic expansion but due to Covid, which was a scapegoat for many mishandlings, it has not taken place. On the contrary rating agencies downgraded Sri Lanka, realizing that with the slash of government revenue the ability to repay the loans also will be slashed. Unike in a western developed country, the Sri Lankan private sector is not capable enough to turn the economy with tax cuts expeditiously. 

The reason for the current economic crisis is that the twin deficits, i.e budget deficit and the balance of payment deficit, the successive governments entertained over the years triggered by the foolish decisions taken during the Gotabaya Rajapaksa regime. Therefore, the government now has to increase the revenue and reduce the expenditure and facilitate an export led economy.

In order to increase the revenue the government increased the taxes but the government is not expediting the reduction of expenditure. Government recruitments were stopped and the allocations were restricted but the restructuring/privatization of the government business entities are not taking place. 

It was proposed by the interim budget in August 2022 that to establish an State Owned Enterprise Restructuring Unit with an allocation of Rs. 200 million. In January 2023 the Cabinet decided to establish  a parent company affiliated to the Treasury with 100% equity ownership by the Secretary of the Treasury and to make necessary arrangements to register the State Enterprises identified for restructuring as subsidiaries of the said parent company. However, the actions are getting delayed. 

Government policy was to first deal with the revenue side and the expenditure side could be dealt with later. This is the main reason for the protests against the tax increases. If the president could come forward and said that he would suspend the independence day celebrations in line with the expenditure cuts of the government, it would be appreciated by many including the protesters against the tax increases.

On the other hand if the government digitized the activities of the government and create a database of information based on the NIC while strengthening the Inland Revenue Department, it would help to get more people to the tax net and taxes could be collected on a justifiable basis.

However the taxes imposed are not so exorbitant as claimed by many. In the Table, the taxes for the income brackets of Rs. 50,000, 100,000, 150,000, 200,000, 300,000 and 400,000 are given. Tax to be paid by a person of income of Rs. 500,000 is Rs 106,500 which is 21% of the salary whereas a person with an income of Rs. 200,00 have to pay Rs. 10,500 which is 5% of the income. These taxes can be compared with the taxes to be paid in the years of assessment 2015/16 and 2018/19 which are given in the Table. Interestingly a person with Rs. 500,000 income had to pay Rs.6,000 more in 2018/19 compared to 2015/16 whereas  persons in all other brackets had to pay less in 2018/19 compared to 2015/16. In the year of assessment 2020/21 we can see the drastic reductions of income taxes promoted by the economic advisors of Gotabaya Rajapaksa.

The other aspect is the exorbitant increase of interest rates. According to the Central Bank the Average Weighted Prime Lending Rate for six months of commercial banks in January 2023 was  27.11% whereas in January 2022 it was 7.34%. Therefore if a loan was taken on flexible interest rates, the increase of the interest rate was 19.77%. If a person has taken a loan the additional burden to the pay packet is unexpected. This also contributed to this unrest. Commercial banks should take steps to restructure these loans wherever possible. The biggest hit persons of this problem are the small and medium entrepreneurs of this country who are an essential element of reviving the economy.

Although the Central Bank is criticized heavily for increasing the interest rates it had to be done in order to curtail the exorbitant inflationary trend. Annual inflation based on Colombo Consumers Price Index was 1% in August 2015 and it has peaked in September 2022 to 69.8%. Since then, it started to decline and in January 2023 it was 54.2%. Increase of Interest rates have contributed to this reduction and more importantly there is less demand from the people for goods and therefore price levels are declining. Especially the people in low-income bracket cannot afford to pay even for the essentials. There are no indices to reflect this fact.

The biggest burden to the pay packet is the inflation. According to the Central Bank in the public sector nominal wage rate was 133.1 in November 2022. The corresponding real wage rate was 59.1 which means a slash of 44.4%. This was based on 100 in 2016. In the private sector, based on 100 in 2018, nominal wage rate in November 2022 was 164.8 and the real wage rate was 80.5. As far as the nominal rate is concerned, private sector is more generous than the public sector.

Based on the public sector wage rate, in the Table nominal wages were converted to the real wage to find out the inflationary effect. We can see the biggest issue there. Even with out any taxes the salary of Rs. 100,000 and Rs. 50,000 have reduced to Rs. 44,400 and Rs. 22,200 respectively. It is the duty of the government let alone the moral duty, to look after these people which was emphasized by the IMF as well. The person with the income of Rs. 500,000 who gets an after-tax salary of Rs.393,500 gets a real wage of Rs.174,714. I have not considered other statutory deductions such as provident fund in this exercise.

In respect of the allowances, if there is a fuel allowance it will be taxed but if the fuel which is used for official work is reimbursed it will not be taxed. There is an issue of non-cash benefits. The circulars were  intact for a long time. After the protests there were reductions of the taxable amounts of these non-cash benefits. 

GMOA says that their members are leaving the country due to high taxes. In response I suggest that to allow the private medical universities to come up. 

According to World Bank data tax revenue In Sri Lanka to GDP was 19% in 1990 and it was reduced to 9.7% in 2014. It was increased to 10.9% in 2019 and was reduced to 7.7% in 2020.  Maximum personal tax rates are of Australia 45%; USA 37%; India 42%; China 45%; Japan 55%; and  Singapore 22%. Maximum rate of Sri Lanka is 36% which is applicable for the monthly salary over Rs 322,200.

The President in his “Throne Speech” said that in 2021 in India direct tax was 50%; in Bangladesh 32%; in Nepal 31%; in Indonesia 40%; in Vietnam 31%; in Thailand 37%; and in Malaysia 66%. In Sri Lanka it was 21% and the rest was indirect taxes. We should change our tax system at least of 40% of direct taxes. Leftists in Sri Lanka should advocate this process since it reduces social inequality to a great extent.

Viewing from the National point of view, these tax increases should be supported since we have to protect the State first. The people come next and can forget about the interests of the government. The members of the government including the President should show their solidarity with the process by exemplifying  their intentions of reduction the expenses even at the personal level. That is the missing point. This is not the time to bring popular politics by the opposition parties and claim that “when we will be in power we will reduce the taxes” which has led this country to the present disastrous situation.