Should only private sector employees pay income tax?

By Sanjeewa Jayaweera

Who currently amongst those who receive a salaried income is not on the streets protesting against the need to pay income tax? The obvious answer is only those working in the private sector. The private sector is often slammed for its reluctance to criticise the government for everything wrong with our country. So their reticence may once again result in only private sector employees paying income tax if the government caves into the demands of the public sector employees and trade unionists.

Based on media reports and television visuals, most state sector employees and those working in state-owned enterprises are on the streets demanding that they not be subject to income tax. Yes, a few say they don’t mind paying income tax but at a lower rate and whilst some demand greater transparency regarding how taxpayer money is spent. However, the overall impression created is that state sector employees don’t want to pay income tax.

As someone who worked in the private sector for nearly three decades and paid significant amounts as income tax, I, too, despised the lack of transparency and equity. However, I did not have the luxury of coming to the streets, refusing to pay the tax, or seeking judicial intervention. I had no choice. My employer deducted the tax and remitted the balance to my bank account.

Shockingly, those protesting against paying income tax are not on the breadline. I see there are two segments. The first lot is mostly public sector employees who are at least in middle management. The second is those in state-owned enterprises earning significantly high salaries and overtime despite being overstaffed.

Those working in the public sector who are out on the street are mostly university graduates who benefited from free education, demanded and received a government job, and earned a pension they never contributed to post-retirement. So their reluctance to pay income tax is perplexing, although many would put it down to the entrenched entitlement mindset.

GMOA IS ONCE AGAIN AT THE FOREFRONT

As usual, the Government Medical Officers Association (GMOA) has been the most vociferous of those objecting to increased income tax rates. That is not surprising because even in 2015, they went to the supreme court seeking relief from paying income tax at the highest rate then of 24%. When they failed, they approached the government requesting that doctors be categorised as part of the small and medium enterprises (SMEs) subjected to only 14%!

So it is unsurprising that they do not want to pay income tax at 36%. It amazes me that doctors, despite benefiting from free university education, the right to engage in private practice, and regular car permits have a great reluctance to pay income tax at the same rates as others. Many stories are circulating about how doctors ask patients to settle their fees in cash, particularly post-surgery, to avoid income tax on their fees.

The good doctors have been joined by judges, university professors, university teachers, engineers and bankers. The only lot that has not joined the protests are those working in the department of Inland Revenue! It would be ironic but not surprising if they do.

It is a shocking indictment of our country’s social fabric that the most supposedly educated citizens feel that they should not be paying income tax and that only those employed in the private sector should bear the income tax burden.

THE GOVERNMENT AND PARLIAMENT ARE NOT WALKING THE TALK

Having said that, I certainly endorse those who protest, saying there is a lack of will on the part of the government to reduce state expenditure and, of course, a lack of transparency as to how our taxes are spent and that rampant corruption is going unchecked.

The appointment of cabinet ministers and state ministers well above what is required solely for political expediency is a case in point. That those appointed are inefficient and some stand accused of corruption makes it even harder to digest.

The much-debated expenditure allocation of Rs 200 million for the independence day celebration whilst asking ordinary citizens to tighten their belts is proof of utter insensitivity and an entrenched mindset of political entitlement. Moreover, the explanation given by the President that the world might think that the country lacks the financial resources to celebrate independence day has left me and many other millions totally incredulous.

Several international aid agencies have assessed that over five million of the population cannot adequately feed themselves, and malnutrition among children is at an all-time high. In addition, foreign and local correspondents have filed media reports of the dire situation in our country. As such, the world is aware of our predicament, and this fact should not escape the President and his cabinet. So who are they trying to deceive?

A principle of good leadership is being able to “walk the talk.” In that respect, the President and his cabinet have been woefully lacking. My criticism is not just limited to the current President and cabinet. The parliament, which includes those in the opposition, can easily demonstrate their commitment to austerity measures that they demand from us by voting to curtail their benefits, such as closing down the parliamentary restaurant where it is claimed that sumptuous meals are served. In the overall context of government expenditure, it might be a meagre amount. However, they need to be seen “walking the talk”.

A media report reported that Rs 800 million had been spent on refurbishing a residence occupied by former President Mahinda Rajapaksa. If this report is indeed correct, then it is an abominable act by someone who keeps repeating that he is with the common person.

A recent report that the Kurunegala Municipal Council has spent Rs. 60 million to remove a stone at a construction site where a building was being constructed for a Maternity and Child Clinic, whereas the approved cost was Rs. 9.3 million reflects the corruption that permeates all state institutions. That none will be charged and jailed for this offence is guaranteed.

I have highlighted a few minor examples of taxpayer money being robbed and wasted. It is, therefore, not surprising that some feel that being subjected to income tax is unfair.

WIDEN THE TAX NET AND IMPOSE A 10% WITHHOLDING TAX ON INTEREST INCOME

There is no doubt that the tax net should be widened. Many liable to tax are not doing so as they are wilfully avoiding tax payment, with many not having a file at the IRD. It was recently reported that as many as 113 members of parliament do not have tax files. In many conversations, a question is raised whether all traders in Pettah have a tax file. From my experience in the private sector, I know that most wholesalers and distributors are either not paying taxes or what they pay is significantly understated. It is generally believed that most of the 500,000 grocery stores are not within the tax net. The IRD is at fault for not forcing these miscreants to register.

An eminently sensible proposal by Dr Nishan De Mel, head of the research agency Verite is to increase the withholding tax (WHT) on interest income to 10 per cent. He has argued that the additional tax collected would enable the government to give a tax reduction to those earning salaries above Rs 100,000 to maybe Rs. 500,000 per month. His suggestion is based on the assumption that most of our country’s “super rich” are underpaying taxes. Taxes collected as the source is guaranteed income for the state. An argument that may be put forward against this is that it will penalise pensioners who may not be liable for tax. The IRD issuing a tax direction can resolve this by confirming that the recipient is not liable for tax. The reluctance of the government to adopt the suggestion is perplexing, if not surprising.

THE NEED TO INCULCATE PAYING OF INCOME TAX AT A YOUNG AGE

Returning to why most state sector employees are reluctant to pay income tax, I believe that the reluctance has been ingrained in their DNA by successive governments by exempting them from income tax. This is because so many good social attributes are taught, and people are exposed to them at a young age.

In my case, my parents inculcated in me that I have a social responsibility to those underprivileged and, of course, the need to adhere to the law of any country I live. At 18, when I worked part-time as a petrol station attendant in the UK whilst studying, my salary was subject to income tax. Despite my nominal wage, I was conditioned to the need to pay income tax. It is the same discipline I adhered to during my working career, and even after my retirement pay my taxes every quarter without any underpayment or delay. It is the same for all private sector employees in our country, where the employer deducts income tax from the salary. So they are conditioned at an early age to the proverb, “Nothing is certain in life other than death and taxes.”

Those employed in state-owned enterprises have gotten used to the employer bearing the tax on their behalf. So the new rule that the employer will no longer be allowed to absorb the tax is causing them much distress. Yet, shockingly, such a scheme has been in existence. The mindset of state employees was illustrated when recently, an employee of the Ministry of Finance justified this practice by saying, “What does it matter whether the employer bears the tax? After all, the IRD receives the tax” It is a shocking reflection of the prevailing attitude.

It is a universally accepted social principle that those better off must contribute a fair share towards maintaining those less well off and other services that the state provides, either free or at subsidised price levels. The responsibility of paying income tax is even more critical in a society that has accepted free education and free health care should be a right of every citizen. It is, therefore, difficult to comprehend why our supposedly educated citizens who have immensely benefited from free education are now unappreciative of the need to repay the state and the citizens a fair share of their income. I am shocked that university professors and teachers, who are assumed to be a fountain of knowledge and appreciate social responsibilities, are also out on the street protesting against the increase in income tax rates. The same applies to those at the Central Bank, who should understand our economy’s perilous state more than others.