ECONOMYNEXT – Sri Lanka has defended a digital protectionist tax that was hiked to 3.5 percent and expanded, saying it will help domestic companies, in a return to economic nationalism and in a set-back to micro businesses and self-employment using global online exchanges.
Sri Lanka has proposed the online and foreign payments by credit also debit cards, making an existing 2.5 percent tax on credit worse and also applying it to domestic services provided through digital market places like Uber.
Digital Nationalism
"The 3.5 percent tax applies only to buy goods from a foreign country," Finance Minister Mangala Samaraweera said in a debate in parliament.
"It you buy a good over the Internet from China, or a facebook.com advertisement, this tax will be charged. For example if you buy a phone from Takas.lk (a Sri Lanka based online retailer) this will not apply. This NBT at 3.5 percent tax is replacing an existing 2.5 percent stamp duty for foreign purchases. On foreign transactions by credit cards, this is only a 1 percent increase."
The tax also applies to debit cards. But at the point of import, taxes are charged under existing customs, and there is no process for getting a tax credit.
"Take the case of Uber taxi," Samaraweera said. "All Uber revenues go to a foreign country. In Sri Lanka, there is only PickMe. Through this method, we can get some of the money that goes to foreign countries back to Sri Lanka."
But Uber or PickMe operate like a stock exchange or broker, or shop in the Dambulla market, where the actual revenue of the ‘bakki’ owner is only the commission paid by the buyer of vegetables.
The bulk of the revenue of Uber goes to the domestic taxi driver like in the case of sale of stocks. Other existing taxes apply to such revenues.
Substituting NBT for corporate income tax is also a glaring violation of rule of law.
Analysts point out that Uber may or not be making profits and the application of income tax will also depend on a double taxation treaty with the country concerned, which in the case of Uber is The Netherlands.
The NBT as proposed or the existing stamp duty, does not apply only to the revenues of Uber or other online platform but to total turnover of the restaurant, with no credit for taxes already paid.
Rule of Law
However, if there is an NBT applied to taxi fares or other services, it should be charged from all such services in a just society which operates on a rule of law.
In the case of Uber Eats, eligible restaurants already pay value added tax or other taxes on the food they sell.
Digital market places do much the same as traditional markets places, but they are faster at bringing down unemployment, better at creating competition, and therefore consumer protection and lifting the economic well-being of an entire society.
Digital platforms also make it easier to administer existing taxes like NBT which are widely flouted by brick and mortar shops and small entrepreneurs. The revenue receipts from online platforms also make it easier for tax authorities to administer income tax.
Digital market places, and card-based payments, bring the same advantage that self-service supermarkets chains brought to tax authorities in Europe, compared to small shops that operated on cash and is a trend that has to be encouraged by anyone who wants to broaden the tax base.
Etatism and Protectionism
Digital protectionism is a growing trend in European countries, and comes at a time when the harm caused by import duties and tariffs are becoming evident with Trump charging raising border taxes and companies shifting from the UK before Brexit.
European countries pioneered state intervention in business, which eventually paved the way to Nazism and is even now keeping unemployment higher (around 10 percent) than other regions and countries with lower levels of state interventions, which import labour, economists have pointed out.
Import protectionism targeting foreigners became institutionalized in Germany, with German historical economist Friedrich List and ‘socialists of the chair’ advocating heightened economic nationalism, which eventually led to Nazism.
At the time, there were no digital platforms for governments to tilt the playing field towards domestic special interests, though the lack of logic or reason in nationalism was the same.
European philosophers have pointed out is the giving political effect to existing chauvinism or hate against foreigners through a parliament to discriminate against foreigners, automatically led to action against minorities (non-Aryans) who are also different from the major polity (Volksgennossen), generally known as ‘ape kama’ in Sri Lanka.
"In a world in which people have grasped the meaning of a market society, and therefore advocate a consumer’s policy, there is no legal discrimination against Jews," explained economist and philosopher Ludwig von Mises.
"Whoever dislikes the Jews may in such a world avoid patronizing Jewish shopkeepers, doctors, and lawyers.
"On the other hand, in a world of interventionism, only a miracle can in the long run hinder legal discrimination against Jews.
"The policy of protecting the less efficient domestic producer against the more efficient foreign producer, the artisan against the manufacturer, and the small shop against the department store and the chain stores would be incomplete if it did not protect the "Aryan" against the Jew.
Minister Samaraweera, however, is not a nationalist. The budget in general has had less regulations that hampers markets distorts the economy and makes Sri Lanka a lagging nation in the world than in past budgets. (Colombo/Mar12/2019-SB)