By Rusiripala Tennakoon –

Rusiripala Tennakoon

Inflation, growing inequalities of the economy, the obligation to address social needs are all interconnected basic factors associated with the structuring of the Tax System in the Government revenue equation. Today in the context of the grim reality of the crisis situation the economy of the country is facing, taxation has become one of the most focused discussions. We are witnessing how political hypocrisy and selfishness dominates at these discussions to rationalise their insincerity to address the issue instead of the desired contributory role towards its resolution.

We have to be mindful about the recent upheavals that we experienced, mostly catalysed by factors involving fiscal concerns dealing with bread and butter of the masses, whatever the ulterior motives of the instigators were. In fact, history evidences that every major uprise had a fiscal revolution at heart. It is a highly democratic expectation of the people to know the share of the resource allocation of a country to common goals such as Health, Education, Unemployment, Social Security, elimination of inequality and sustenance of development etc. This is where the Tax system becomes important. Political conflicts do arise in this context. 

Society consists of people who have inherited wealth, created wealth and those who earn their income from work. There are serious income disparities among these groups and within the groups as well. Those who have inherited wealth have their sins hidden in history while some of those who acquired wealth too have many skeletons in their cupboards. The next category, wage earners who earn their income from work, too, have big disparities of incomes among them. It is from these sectors that the Government get the Tax revenue to play the central role in economic and social life of the country and to fulfil the role of Social State in providing the basic facilities towards common goals.  

Taxation, is neither Good nor Bad in itself, but is often subject to heavy criticism and retaliation. While the guiding and underlying principles are good, the acceptance of a system depends on how taxes are collected and what that income is used for. When the income grow favourably, people will easily agree to share the benefits of that growth for social spending in particular to meet the needs for better education , improved health care and better retirement benefits. Tax payers will be naturally concerned with democratic decision making and a high degree of financial transparency. 

Information on the distribution of wealth in the country remains opaque. Therefore, the tax systems fail to address the dynamics of wealth inequality. One of the cardinal factors in tax policy is to weaken the inequality process. The Central Bank and the Treasury have only a rough idea of the distribution of financial assets especially accumulation of illegally acquired amounts and some lying in the tax havens etc. Even the Laws covering those areas are very weak as was witnessed recently by the number of court cases dismissed due to technical reasons like faults in filing the cases. Genuine tax payers are concerned about these aspects.

Politicians living aloof from the constituents and ordinary folks place their private interests above the general public interests. They only begin to address the realities when subjected to radical shocks. Unless they are made to feel the shock effect, they tend to resort to easy ways for increasing government revenue. Indirect taxes in the form of Excise duties, VAT and tariffs constitute the largest share of tax income. Income tax, PAYE tax and other charges like Development Levy contribute only a low percentage of this income. What follows from this is that the largest tax payers are the ordinary citizens while the more affluent contribute a small percentage towards the tax income of the government. This indirect tax is paid by all and sundry for the goods and services they consume. It is interesting to examine the tax income from these two sources of taxation to see the development of Indirect tax component in the equation.

In 2016, Income tax contributed to 37% of the total tax revenue. The contribution from Indirect taxes was 44%. Since 2015, the collection of Income tax is reduced by 7% while the indirect taxes showed a colossal increase of 33% during this period. When we look at the figures published by the Central Bank  for 2019 we could see the development of an alarming situation. Out of a total tax revenue of Rs. 1734.9 Billion of the government, Direct taxes accounted for only 24.7% while the Indirect taxes accounted for 77.9%. This total tax revenue as a percentage of the GDP is 11.6% and the component of Income tax is 2.8% while the indirect tax component is 8.8%. This increase of the indirect taxes vis-à-vis the direct taxes is seen as a continuing phenomenon ever since. No one seems to be bothered.

This situation calls for an open debate on the tax policy. Those who advocate introduction of ad hoc taxes permitting this aberration to continue un- arrested commit a grave error which should be corrected immediately. This has become essential in the context of growing inequalities, increasing poverty, imminent food shortages, where the rich is becoming richer and the poor falling into the fire from the frying pan. This is happening when the poor has to pay the same price a rich man has to pay when buying a commodity. Isn’t it unfair to make the rich and poor pay the same amount and the rich to pay less as direct taxes? 

Taxation policy has to be addressed in the context of these realities. Steps should be taken to safeguard the social state and the services the government has to provide in the areas of Education, Health and retirement benefits. Tax revenue should be directed to more meaningful and result oriented areas such as to meet the cost of transitions to renewable and sustainable energy production. A changed approach from the mundane orthodox applications is needed in developing new policies. Taxation should address the growing inequalities of the society.       

Policy makers will have to revisit the progressive taxation to make those earning less to pay less and those earning more are taxed more. A realistic tax on capital assets is needed, followed by identification of different types of assets and defining new rules for the valuation of assets, liabilities and net wealth. Banking system should be innovated to cover all financial transactions of the society. It should be made compulsory to revalue all assets indicating the current market value to be reassessed by government authorities taking into consideration the transaction prices compared with property values. Then it will be easy to introduce a reasonable tax on capital which will bring in a significant increase in the direct tax component as against the ever increasing indirect taxes. 

Granting of tax holidays should be an important consideration in the taxation policy to enable the production sectors to play a positive role in raising the living standards of the workers with the concessions so granted. This will be a significant boost in the plantation sector helping to resolve the long standing humanitarian problems of the plantation labour, which will also be an incentive to increase production as well. In the long run such policies would contribute to the economy indirectly better than any tax money collected direct. 

We do not have a Wage policy. The SOEs keep on increasing the salaries and other perks of the employees indiscriminately adopting systems only applicable to them. Recently we saw the Treasury Secretary issuing a circular stopping a practice hitherto followed by the SOEs in donating vehicles to retiring executives as take-home grants. In the same way they get paid very much extra in excess of parallel categories of employees and worse of all get the income tax too paid by the SOE. This is a kind of fraud to siphon state funds. While stopping such practices the government should introduce a cap on the salary as well as the huge pensions they become automatically entitled to, as a result of the high salaries.  A sound tax policy can put an end to such malpractices while at the same time collecting a big tax.