Features
Sri Lanka’s Tax Conundrum – 2022
By Sanjeewa Jayaweera
Despite the old saying, “the only sure things in life are death and taxes,” most of those working in Sri Lanka have never paid direct taxes, and those who pay have been enjoying relatively low taxes rates for several decades. We have also been spared a multitude of other taxes, such as inheritance, wealth and capital gains, that citizens of most developed and developing countries need to pay. So, the publication of the Gazette setting out the proposed increase in changes to tax rates and thresholds to be effective from October 01, 2022, seems to have set the cat amongst the pigeons!
A great deal of indignation and fury as to the impact on their disposable income and lifestyle have been expressed by many over the media and social media. In addition, concern has been expressed that the country will lose many skilled professionals who might migrate to countries with higher tax rates and compliance of nearly 100%!
The corporate sector, which is also being impacted, has demanded from the government greater restraint, accountability, and transparency on its spending. Unfortunately, we Lankans, have, in addition to accepting corruption as part of our country’s DNA, turned a blind eye to the civic responsibility of being a tax-compliant citizen for multiple reasons.
It reached a zenith in the year 2020 when Gotabaya Rajapaksa was elected President and proceeded to be the “Santa Claus” by substantially reducing tax rates, increasing the tax-free threshold for individuals, doing away with certain taxes, and eliminating the well-established means of collecting taxes at source by abolishing PAYE and WHT.
It was absolute madness and a recipe for economic Armageddon which we are, sadly. in the midst of. The impact of the tax cuts is estimated to be around LKR 700 billion. In my article published in the Sunday Island of January 12, 2020, captioned “Sri Lanka’s Tax Conundrum”, I highlighted the inherent risks of the tax cuts and stated, “Based on the Household Income and Expenditure Survey of 2016 and the dispersion of the average household income, the recently introduced tax rates and increase in the threshold will only benefit a smaller segment of the population who in all probability do not need this type of assistance from the government.
I say this at the risk of getting a sharp poke in my ribs from some of my former colleagues still in employment. In my case, had I been in employment, the incremental income would most probably be spent on a few additional overseas trips, buying a few expensive imported branded gadgets and a higher-class BMW.Therefore, I am not sure I would have contributed to the increase in aggregate demand for our GDP. As to how a household spends, the incremental income would certainly depend on their income level. However, there is no doubt the greatest beneficiaries would be those who are not currently struggling to make ends meet.”
Not too many expressed such concerns because many were delighted that they would receive a windfall. But, unfortunately, those irresponsible and hare-brained decisions have seen tax revenue as a percentage of GDP declining to 7.3% inclusive of the covid impact when it should be around 15% for a developing country. So, the need to reverse those irresponsible tax cuts and increase our tax revenue is a fact that needs to be understood and appreciated.
Taxation, Purposes and Justification
“Taxation is when a taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents. Since ancient times, paying taxes to governments or officials has been a mainstay of civilization. The government compels taxation through an implicit or explicit threat of force. Taxation is legally different from extortion because the imposing institution is a government, not private actors. The formulation of tax policies is one of the most critical and contentious issues in modern politics.” (Investopedia)
The most basic function of taxation is to fund government expenditures. Varying justifications and explanations for taxes have been offered throughout history. Before, taxes were used to support the ruling classes, raise armies, and build defences.
Later justifications have been offered across utilitarian, economic, or moral considerations. Proponents of progressive levels of taxation on high-income earners argue that taxes encourage a more equitable society. Higher taxes on specific products and services, such as tobacco or gasoline, have been justified as a deterrent to consumption.
Which Country Has the Highest Income Taxes?
As of 2022, the top 10 countries with the highest marginal income taxes (the rate on the top slab) are:
Ivory Coast – 60%, Finland – 56.95%, Japan – 55.97%, Denmark – 55.90%, Austria – 55.00%, Sweden – 52.90%, Aruba – 52.00%, Belgium – 50.00%, Israel – 50.00%, Slovenia – 50.00%
In South Asia, the highest marginal rates are:
India 30%, Pakistan 35%, Bangladesh 30%. In India, there is a 10% income tax surcharge on certain taxpayers, and the single-person tax-free allowance is INR 250,000 for a year.
So the Sri Lankan marginal rate of 36% is not as outlandish as it appears, although it is being imposed at a time when inflation is over 70% which is a challenging proposition.Research indicates those living in Nordic countries with the highest rates of taxes are often deemed the happiest!
Why do we hate to pay taxes?
“Because as often as not, tax dollars get spent for things the public neither wants nor needs and would not choose to pay for. I wouldn’t mind taxes so much if all my tax money was spent wisely and in agreement with my perspectives.” (origin of quote unknown)
“No nation grew prosperous by taxing its citizens beyond their capacity to pay. We have a duty to ensure that every penny that we raise in taxation is spent wisely and well.” (Margaret Thatcher)
I believe the above quotes capture most taxpayers’ feelings in Sri Lanka and the world. The word “spent wisely” is a dilemma for all of us as our politicians are everything but wise!
Public Sector Salaries and Pensions
Currently, nearly 80% of government revenue is spent paying public sector salaries and pensions. Although an efficient and lean public service is a must and should attract some of the country’s best talent, successive governments abused their authority by giving jobs to their supporters when there was no vacancy.
In many developed countries, unemployed people are paid an unemployment benefit for a certain period of time. In Sri Lanka, those who govern have given unemployed people jobs for life, including a pension! The net result is that we have a bloated and inefficient public sector that is a drain on taxpayer money.
Defence Expenditure
The appropriation bill for 2023 submitted to parliament requests that LKR 360 billion be allocated to the forces and a further LKR 116 billion to the police; in contrast, only LKR 184 billion and LKR 267 billion are being allocated to education and health.A justifiable question of whether this allocation falls within the definition of “spending wisely” needs to be responded to by the government. Undoubtedly, the bulk of the expenditure is spent on remuneration and not acquiring equipment.
Recently a former cabinet minister, much disliked by the public, raised a question in parliament as to why we need an armed force of 250,000 when there is no ongoing conflict or any such possible threat in the foreseeable future.
This matter was also widely discussed on a TV chat show by several prominent social activists and commentators. The consensus was that the defence budget needed to be reduced and the savings be allocated to education and health.I appreciate that there will be comments that pruning defence spending smacks of ingratitude to soldiers who fought during the civil conflict. However, given that 13 years have passed since the end of the conflict, it is time that the government take steps to demobilize and retrain the excess soldiers.
The Inland Revenue Department (IRD)
The mission statement of the IRD is “To collect taxes in terms of relevant tax and other related laws, by encouraging voluntary compliance while deterring tax evasion and tax avoidance, and to enhance public confidence in the tax system administered by the Department of Inland Revenue by administering relevant tax and other related laws in a fair, friendly and expeditious manner and thereby facilitate a beneficial tax culture.”
Despite this mission statement, most will agree that the IRD has not performed. Voluntary compliance has not worked, and neither has constantly changing governmental tax policies assisted. My own experience is that IRD officers tend to go after those who are currently paying taxes for additional taxes rather than identifying those who are evading taxes.
That the department should be assisted with cutting-edge technology is to state the obvious. Whether the RAMIS system has facilitated this is questionable, although most corporates and a few individuals submit their tax returns through the system. A critical KPI for the department should be how many forced registrations were done during the year and how much tax, including back taxes and penalties, was collected from such registrations.
Tax Avoidance and Evasion
The difference is that tax avoidance is an action taken to minimize tax liability, whereas tax evasion is the failure to pay or deliberate underpayment of taxes. Reducing tax liability and deliberate underpayment of taxes can sometimes be a fine line. My interaction with many small and medium enterprises (SMEs) is that many don’t pay taxes or that what they do pay is minimal. In addition, many professionals are assumed to be non-compliant.
Many years ago, the GMOA and some professional bodies were lobbying the government to reduce their income tax rate from 24% to 16% after the Supreme Court dismissed their plea. The request was for professionals to be included within the definition of an SME who enjoyed a tax rate of 14%!
There is no doubt that many who should be paying direct taxes are not in the tax net as they should be. It is up to the IRD to ensure that they live up to their mission.
Conclusion
As I write this article, the President has on TV explained the reasons for higher direct taxes and that the IMF program is contingent on these mandated rates. Those conversant with economics and finance will appreciate the need for higher taxes for our country to come out of this self-inflicted economic disaster. But we must grit our teeth, curse the politicians, and pay up.
However, it is vital that the government spend our money transparently and not be profligate. We, the citizens, must be at the forefront of demanding that corruption among politicians cease, expenditures are rationalized, and those responsible are held accountable.
by Dr Gotabhya Ranasinghe
Senior Consultant Cardiologist
National Hospital Sri Lanka
When we sought a meeting with Hon Dr. Ramesh Pathirana, Minister of Health, he graciously cleared his busy schedule to accommodate us. Renowned for his attentive listening and deep understanding, Minister Pathirana is dedicated to advancing the health sector. His openness and transparency exemplify the qualities of an exemplary politician and minister.
Dr. Palitha Mahipala, the current Health Secretary, demonstrates both commendable enthusiasm and unwavering support. This combination of attributes makes him a highly compatible colleague for the esteemed Minister of Health.
Our discussion centered on a project that has been in the works for the past 30 years, one that no other minister had managed to advance.
Minister Pathirana, however, recognized the project’s significance and its potential to revolutionize care for heart patients.
The project involves the construction of a state-of-the-art facility at the premises of the National Hospital Colombo. The project’s location within the premises of the National Hospital underscores its importance and relevance to the healthcare infrastructure of the nation.
This facility will include a cardiology building and a tertiary care center, equipped with the latest technology to handle and treat all types of heart-related conditions and surgeries.
Securing funding was a major milestone for this initiative. Minister Pathirana successfully obtained approval for a $40 billion loan from the Asian Development Bank. With the funding in place, the foundation stone is scheduled to be laid in September this year, and construction will begin in January 2025.
This project guarantees a consistent and uninterrupted supply of stents and related medications for heart patients. As a result, patients will have timely access to essential medical supplies during their treatment and recovery. By securing these critical resources, the project aims to enhance patient outcomes, minimize treatment delays, and maintain the highest standards of cardiac care.
Upon its fruition, this monumental building will serve as a beacon of hope and healing, symbolizing the unwavering dedication to improving patient outcomes and fostering a healthier society.We anticipate a future marked by significant progress and positive outcomes in Sri Lanka’s cardiovascular treatment landscape within the foreseeable timeframe.
by Fr. Emmanuel Fernando, OMI
Jesuit Fr. Aloysius Pieris (affectionately called Fr. Aloy) celebrated his 90th birthday on April 9, 2024 and I, as the editor of our Oblate Journal, THE MISSIONARY OBLATE had gone to press by that time. Immediately I decided to publish an article, appreciating the untiring selfless services he continues to offer for inter-Faith dialogue, the renewal of the Catholic Church, his concern for the poor and the suffering Sri Lankan masses and to me, the present writer.
It was in 1988, when I was appointed Director of the Oblate Scholastics at Ampitiya by the then Oblate Provincial Fr. Anselm Silva, that I came to know Fr. Aloy more closely. Knowing well his expertise in matters spiritual, theological, Indological and pastoral, and with the collaborative spirit of my companion-formators, our Oblate Scholastics were sent to Tulana, the Research and Encounter Centre, Kelaniya, of which he is the Founder-Director, for ‘exposure-programmes’ on matters spiritual, biblical, theological and pastoral. Some of these dimensions according to my view and that of my companion-formators, were not available at the National Seminary, Ampitiya.
Ever since that time, our Oblate formators/ accompaniers at the Oblate Scholasticate, Ampitiya , have continued to send our Oblate Scholastics to Tulana Centre for deepening their insights and convictions regarding matters needed to serve the people in today’s context. Fr. Aloy also had tried very enthusiastically with the Oblate team headed by Frs. Oswald Firth and Clement Waidyasekara to begin a Theologate, directed by the Religious Congregations in Sri Lanka, for the contextual formation/ accompaniment of their members. It should very well be a desired goal of the Leaders / Provincials of the Religious Congregations.
Besides being a formator/accompanier at the Oblate Scholasticate, I was entrusted also with the task of editing and publishing our Oblate journal, ‘The Missionary Oblate’. To maintain the quality of the journal I continue to depend on Fr. Aloy for his thought-provoking and stimulating articles on Biblical Spirituality, Biblical Theology and Ecclesiology. I am very grateful to him for his generous assistance. Of late, his writings on renewal of the Church, initiated by Pope St. John XX111 and continued by Pope Francis through the Synodal path, published in our Oblate journal, enable our readers to focus their attention also on the needed renewal in the Catholic Church in Sri Lanka. Fr. Aloy appreciated very much the Synodal path adopted by the Jesuit Pope Francis for the renewal of the Church, rooted very much on prayerful discernment. In my Religious and presbyteral life, Fr.Aloy continues to be my spiritual animator / guide and ongoing formator / acccompanier.
Fr. Aloysius Pieris, BA Hons (Lond), LPh (SHC, India), STL (PFT, Naples), PhD (SLU/VC), ThD (Tilburg), D.Ltt (KU), has been one of the eminent Asian theologians well recognized internationally and one who has lectured and held visiting chairs in many universities both in the West and in the East. Many members of Religious Congregations from Asian countries have benefited from his lectures and guidance in the East Asian Pastoral Institute (EAPI) in Manila, Philippines. He had been a Theologian consulted by the Federation of Asian Bishops’ Conferences for many years. During his professorship at the Gregorian University in Rome, he was called to be a member of a special group of advisers on other religions consulted by Pope Paul VI.
Fr. Aloy is the author of more than 30 books and well over 500 Research Papers. Some of his books and articles have been translated and published in several countries. Among those books, one can find the following: 1) The Genesis of an Asian Theology of Liberation (An Autobiographical Excursus on the Art of Theologising in Asia, 2) An Asian Theology of Liberation, 3) Providential Timeliness of Vatican 11 (a long-overdue halt to a scandalous millennium, 4) Give Vatican 11 a chance, 5) Leadership in the Church, 6) Relishing our faith in working for justice (Themes for study and discussion), 7) A Message meant mainly, not exclusively for Jesuits (Background information necessary for helping Francis renew the Church), 8) Lent in Lanka (Reflections and Resolutions, 9) Love meets wisdom (A Christian Experience of Buddhism, 10) Fire and Water 11) God’s Reign for God’s poor, 12) Our Unhiddden Agenda (How we Jesuits work, pray and form our men). He is also the Editor of two journals, Vagdevi, Journal of Religious Reflection and Dialogue, New Series.
Fr. Aloy has a BA in Pali and Sanskrit from the University of London and a Ph.D in Buddhist Philosophy from the University of Sri Lankan, Vidyodaya Campus. On Nov. 23, 2019, he was awarded the prestigious honorary Doctorate of Literature (D.Litt) by the Chancellor of the University of Kelaniya, the Most Venerable Welamitiyawe Dharmakirthi Sri Kusala Dhamma Thera.
Fr. Aloy continues to be a promoter of Gospel values and virtues. Justice as a constitutive dimension of love and social concern for the downtrodden masses are very much noted in his life and work. He had very much appreciated the commitment of the late Fr. Joseph (Joe) Fernando, the National Director of the Social and Economic Centre (SEDEC) for the poor.
In Sri Lanka, a few religious Congregations – the Good Shepherd Sisters, the Christian Brothers, the Marist Brothers and the Oblates – have invited him to animate their members especially during their Provincial Congresses, Chapters and International Conferences. The mainline Christian Churches also have sought his advice and followed his seminars. I, for one, regret very much, that the Sri Lankan authorities of the Catholic Church –today’s Hierarchy—- have not sought Fr.
Aloy’s expertise for the renewal of the Catholic Church in Sri Lanka and thus have not benefited from the immense store of wisdom and insight that he can offer to our local Church while the Sri Lankan bishops who governed the Catholic church in the immediate aftermath of the Second Vatican Council (Edmund Fernando OMI, Anthony de Saram, Leo Nanayakkara OSB, Frank Marcus Fernando, Paul Perera,) visited him and consulted him on many matters. Among the Tamil Bishops, Bishop Rayappu Joseph was keeping close contact with him and Bishop J. Deogupillai hosted him and his team visiting him after the horrible Black July massacre of Tamils.
Sri Lanka-Singapore Free Trade Agreement
By Gomi Senadhira
senadhiragomi@gmail.com
“You might tell fairy tales, but the progress of a country cannot be achieved through such narratives. A country cannot be developed by making false promises. The country moved backward because of the electoral promises made by political parties throughout time. We have witnessed that the ultimate result of this is the country becoming bankrupt. Unfortunately, many segments of the population have not come to realize this yet.” – President Ranil Wickremesinghe, 2024 Budget speech
Any Sri Lankan would agree with the above words of President Wickremesinghe on the false promises our politicians and officials make and the fairy tales they narrate which bankrupted this country. So, to understand this, let’s look at one such fairy tale with lots of false promises; Ranil Wickremesinghe’s greatest achievement in the area of international trade and investment promotion during the Yahapalana period, Sri Lanka-Singapore Free Trade Agreement (SLSFTA).
It is appropriate and timely to do it now as Finance Minister Wickremesinghe has just presented to parliament a bill on the National Policy on Economic Transformation which includes the establishment of an Office for International Trade and the Sri Lanka Institute of Economics and International Trade.
Was SLSFTA a “Cleverly negotiated Free Trade Agreement” as stated by the (former) Minister of Development Strategies and International Trade Malik Samarawickrama during the Parliamentary Debate on the SLSFTA in July 2018, or a colossal blunder covered up with lies, false promises, and fairy tales? After SLSFTA was signed there were a number of fairy tales published on this agreement by the Ministry of Development Strategies and International, Institute of Policy Studies, and others.
However, for this article, I would like to limit my comments to the speech by Minister Samarawickrama during the Parliamentary Debate, and the two most important areas in the agreement which were covered up with lies, fairy tales, and false promises, namely: revenue loss for Sri Lanka and Investment from Singapore. On the other important area, “Waste products dumping” I do not want to comment here as I have written extensively on the issue.
1. The revenue loss
During the Parliamentary Debate in July 2018, Minister Samarawickrama stated “…. let me reiterate that this FTA with Singapore has been very cleverly negotiated by us…. The liberalisation programme under this FTA has been carefully designed to have the least impact on domestic industry and revenue collection. We have included all revenue sensitive items in the negative list of items which will not be subject to removal of tariff. Therefore, 97.8% revenue from Customs duty is protected. Our tariff liberalisation will take place over a period of 12-15 years! In fact, the revenue earned through tariffs on goods imported from Singapore last year was Rs. 35 billion.
The revenue loss for over the next 15 years due to the FTA is only Rs. 733 million– which when annualised, on average, is just Rs. 51 million. That is just 0.14% per year! So anyone who claims the Singapore FTA causes revenue loss to the Government cannot do basic arithmetic! Mr. Speaker, in conclusion, I call on my fellow members of this House – don’t mislead the public with baseless criticism that is not grounded in facts. Don’t look at petty politics and use these issues for your own political survival.”
I was surprised to read the minister’s speech because an article published in January 2018 in “The Straits Times“, based on information released by the Singaporean Negotiators stated, “…. With the FTA, tariff savings for Singapore exports are estimated to hit $10 million annually“.
As the annual tariff savings (that is the revenue loss for Sri Lanka) calculated by the Singaporean Negotiators, Singaporean $ 10 million (Sri Lankan rupees 1,200 million in 2018) was way above the rupees’ 733 million revenue loss for 15 years estimated by the Sri Lankan negotiators, it was clear to any observer that one of the parties to the agreement had not done the basic arithmetic!
Six years later, according to a report published by “The Morning” newspaper, speaking at the Committee on Public Finance (COPF) on 7th May 2024, Mr Samarawickrama’s chief trade negotiator K.J. Weerasinghehad had admitted “…. that forecasted revenue loss for the Government of Sri Lanka through the Singapore FTA is Rs. 450 million in 2023 and Rs. 1.3 billion in 2024.”
If these numbers are correct, as tariff liberalisation under the SLSFTA has just started, we will pass Rs 2 billion very soon. Then, the question is how Sri Lanka’s trade negotiators made such a colossal blunder. Didn’t they do their basic arithmetic? If they didn’t know how to do basic arithmetic they should have at least done their basic readings. For example, the headline of the article published in The Straits Times in January 2018 was “Singapore, Sri Lanka sign FTA, annual savings of $10m expected”.
Anyway, as Sri Lanka’s chief negotiator reiterated at the COPF meeting that “…. since 99% of the tariffs in Singapore have zero rates of duty, Sri Lanka has agreed on 80% tariff liberalisation over a period of 15 years while expecting Singapore investments to address the imbalance in trade,” let’s turn towards investment.
Investment from Singapore
In July 2018, speaking during the Parliamentary Debate on the FTA this is what Minister Malik Samarawickrama stated on investment from Singapore, “Already, thanks to this FTA, in just the past two-and-a-half months since the agreement came into effect we have received a proposal from Singapore for investment amounting to $ 14.8 billion in an oil refinery for export of petroleum products. In addition, we have proposals for a steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million), sugar refinery ($ 200 million). This adds up to more than $ 16.05 billion in the pipeline on these projects alone.
And all of these projects will create thousands of more jobs for our people. In principle approval has already been granted by the BOI and the investors are awaiting the release of land the environmental approvals to commence the project.
I request the Opposition and those with vested interests to change their narrow-minded thinking and join us to develop our country. We must always look at what is best for the whole community, not just the few who may oppose. We owe it to our people to courageously take decisions that will change their lives for the better.”
According to the media report I quoted earlier, speaking at the Committee on Public Finance (COPF) Chief Negotiator Weerasinghe has admitted that Sri Lanka was not happy with overall Singapore investments that have come in the past few years in return for the trade liberalisation under the Singapore-Sri Lanka Free Trade Agreement. He has added that between 2021 and 2023 the total investment from Singapore had been around $162 million!
What happened to those projects worth $16 billion negotiated, thanks to the SLSFTA, in just the two-and-a-half months after the agreement came into effect and approved by the BOI? I do not know about the steel manufacturing plant for exports ($ 1 billion investment), flour milling plant ($ 50 million) and sugar refinery ($ 200 million).
However, story of the multibillion-dollar investment in the Petroleum Refinery unfolded in a manner that would qualify it as the best fairy tale with false promises presented by our politicians and the officials, prior to 2019 elections.
Though many Sri Lankans got to know, through the media which repeatedly highlighted a plethora of issues surrounding the project and the questionable credentials of the Singaporean investor, the construction work on the Mirrijiwela Oil Refinery along with the cement factory began on the24th of March 2019 with a bang and Minister Ranil Wickremesinghe and his ministers along with the foreign and local dignitaries laid the foundation stones.
That was few months before the 2019 Presidential elections. Inaugurating the construction work Prime Minister Ranil Wickremesinghe said the projects will create thousands of job opportunities in the area and surrounding districts.
The oil refinery, which was to be built over 200 acres of land, with the capacity to refine 200,000 barrels of crude oil per day, was to generate US$7 billion of exports and create 1,500 direct and 3,000 indirect jobs. The construction of the refinery was to be completed in 44 months. Four years later, in August 2023 the Cabinet of Ministers approved the proposal presented by President Ranil Wickremesinghe to cancel the agreement with the investors of the refinery as the project has not been implemented! Can they explain to the country how much money was wasted to produce that fairy tale?
It is obvious that the President, ministers, and officials had made huge blunders and had deliberately misled the public and the parliament on the revenue loss and potential investment from SLSFTA with fairy tales and false promises.
As the president himself said, a country cannot be developed by making false promises or with fairy tales and these false promises and fairy tales had bankrupted the country. “Unfortunately, many segments of the population have not come to realize this yet”.
(The writer, a specialist and an activist on trade and development issues . )
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