Economic Security in the Face of High Tax Burden in Sri Lanka
July 26, 2023by Kalpani Gunathilaka
Published on Ceylon Today on 16th June 2023.
The current tax system is the topic of everyone’s discussion in the country and it is at a critical juncture. A country’s taxation system is identified as a key determinant of macroeconomic development and sustainable economic growth. Taxes are the main source of revenue for the Government in Sri Lanka. According to the financial report of the Central Bank of Sri Lanka (CBSL), the total revenue of the Government is Rs 1,457,071 billion in 2021. Of that, Rs 1,298,019 billion has been earned from tax, and the rest (Rs 159,052 billion) from other non-tax sources. Accordingly, taxes account for 89.1 per cent of total government revenue. This reveals how important tax revenue is to Sri Lanka.
However, deep direct and indirect tax cuts arbitrarily enacted in early 2020 by the then Government, were a massive challenge to the Sri Lankan economy. They are: economic service charges, debit tax on banking and financial institutions, capital gain tax on the share market, Value Added Tax (VAT) on the sovereign property, Pay as You Earn (PAYE) tax, withholding tax on interest income, and credit service tax were eliminated while Value Added Tax (VAT), Nation Building Tax (NBT) and tax on telecommunication Tariffs were reduced by the Government. Consequently, approximately one million taxpayers lost to the economy between 2020 and 2022. Compared with BIMSTEC nations, Sri Lanka had lower tax revenue to Gross Domestic Product (GDP) ratio in the Asian region.
Nepal, Bhutan, Thailand, and India showed higher tax revenue and Bangladesh and Myanmar showed lower tax revenue as a percentage of GDP among BIMSTEC countries compared with Sri Lanka. However, these arbitrary tax-cutting policies in 2020 created significant and negative consequences directly and indirectly to the economy such as an increase in the budget deficit, an escalation of the total debt-to-GDP ratio of the Government, an increase in inflation, and exchange rate depreciation.
The Government took steps to hike the tax rate for attracting revenue when the recession caused by the Covid-19 pandemic was unbearable. In view of that, VAT and Corporate income tax were escalated while payment of withholding tax on employment was made compulsory and exemptions on individual tax payments were reduced at the end of May 2022.
Recently, President Ranil Wickremesinghe issued an Extraordinary Gazette Notification on 31 May as Finance Minister by announcing specific groups of people as compulsory to open tax files since 1 June 2023. It is comprised with all the practitioners registered with the Sri Lanka Medical Council (SLMC), members of the Institute of Chartered Accountants of Sri Lanka, members of the Institute of Certified Management Accountants (CMA) of Sri Lanka, members of the Institution of Engineers Sri Lanka, members of the Association of Professional Bankers, members of the Sri Lanka Institute of Architects, members of the Institute of Quantity Surveyors Sri Lanka, Attorneys-at-Law of the Supreme Court of Sri Lanka, individuals who have registered their businesses in Divisional Secretariats, individuals who are in possession of vehicles registered (other than three-wheelers, motorcycles and hand tractors) with the Motor Traffic Department, individuals who have purchased or acquired, by virtue of Deeds Transfer, of any immovable property in Sri Lanka on or after 1 April 2018, employees whose monthly contribution from both employee and employer to any Provident Fund which is more than Rs 20,000, any individual who obtains approval for a building plan from a Local Authority, any other individual who receives payment of Rs 100,000 per month or Rs. 1,200,000 for a 12-month period for providing any services in Sri Lanka. Individuals who are 18 years or more as of 31 December 2023, or who attain the age of 18 years on or after 1 January 2024, are also mandatory to open tax files by registering themselves with the Inland Revenue Department.
How it burdens people and affects their economic security
According to the International Labour Organization (ILO), economic security refers to the “people’s access to basic needs infrastructure related to education, health, social protection, dwelling, information and work-related security”. This concept is vital for individuals and nations as it is one of the determinants in assessing national security. As well as it directly connects with the economic well-being of people. The International Committee of the Red Cross has presented five key livelihood outcomes to measure economic security, food consumption, food production, living conditions, income and the capacity of civil society organisations and the Government to meet people’s needs. However, higher tax implementations by the Government create negative effects on the above dimensions in different ways.
Due to the implementation of higher tax rates, the disposable income of every individual reduces. Especially, the increase in VAT is the most common tax that can create a huge influence on people in the upper, middle and lower classes. The most common taxes in society are Income Taxes and VAT. Income Taxes lessen the disposable income of individuals and it affects mostly professionals and people with higher incomes. All the people in society need to pay VAT directly or indirectly when they are purchasing goods and services.
With the increase of VAT in 2022 from 8 to 12 per cent, prices of all goods and services escalated to higher rates. People, especially in the lower and middle classes, were severely affected by this tax policy as they were financially exhausted due to the Covid-19 pandemic and the subsequent economic crisis. According to the Department of Census and Statistics (DCS), approximately one out of every six people in Sri Lanka is multidimensionally poor.
Therefore, since the poverty level in Sri Lanka is relatively high when a tax like VAT is suddenly increased by a significant percentage and imposed on everyone it affects them very severely. With the impact of the Covid-19 pandemic and economic crisis, most people lost their jobs; their salaries and wages were drastically reduced. Although the Government imposed a tax on people with the aim of economic upturn, it was a huge burden on them during that worsened period. It brought people to a situation where even their basic needs could not be fulfilled.
Further, it caused many people to leave the country. In addition, due to the unfair tax policies, many people had to give up and delay their ‘dreams and hopes’ like purchasing and/or repairing vehicles, houses, starting a new business etc. Consequently, there was a higher level of ‘economic insecurity’ among people whose way forward was stalled, especially in the middle and lower classes in Sri Lanka. Their ability on access to education, health, dwelling and social protection was almost at a standstill.
Measures to be taken
During this hard time, the Government should target only the ‘rich and affluent’ for collecting taxes without burdening the poor. There are various other ways to find revenue such as encouraging Exports, Foreign remittances etc. Subsidising on one side and taxing on the other is not very appropriate for the Sri Lankan poor. Therefore, it is vital to expand the immediate social protection measures for the poor and/or vulnerable sections of society who are most impacted by the pandemic, while the Government must make the tax collection systems more robust to increase revenues in the medium to longer term.
Economic security is a less-talked-about topic in Sri Lanka as it is threatened due to various environmental, social, political and financial reasons. Heavy tax burden creates a significant negative impact on economic security especially for the poor and middle classes. Hence, further studies need to be conducted to identify the impact of the tax burden on peoples’ economic security and thereby implement remedial measures to ensure economic security.
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* Mrs. Kalpani Gunathilaka is a Research Assistant at the Institute of National Security Studies (INSS), the premier think-tank on National Security established under the Ministry of Defence. The opinion expressed is her own and not necessarily reflective of the institute or the Ministry of Defence
-The Ministry of Defence bears no responsibility for the ideas and views expressed by the contributors to the Opinion section of this web site-