Sri Lanka 2018 tax law will give dividends over mid to long-term: think tank

State of the Economy

ECONOMYNEXT- Sri Lanka’s current Inland Revenue Act, which is giving more clarity and stability, will pay dividends in the medium to long term, an economist at the Institute of Policy Studies (IPS), a think tank, said.

The new tax law, which came into effect in April 2018,  is phasing out ad-hoc tax adjustments, Executive Director Dushni Weerakoon, a contributing author for the IPS’ flagship publication State of the Economy 2019, said.

However, the tax to gross domestic product (GDP) had fallen to 11.9 percent in 2018 from 12.4 percent a year earlier.

Weerakoon said this was due to the curb in vehicle imports causing a fall in excise revenues and a few hiccups in the automated Revenue Administration and Management Information System.

“Alongside more clarity and stability on the tax policy front, after the initial teething problems of an automated system are resolved, the revenue reforms will pay off dividends in the medium to longer term,” she said.

“Automated tax collection systems are important in the efforts to strengthen tax administration, compliance and broadening the tax base,” Weerakoon said.

The new tax law came as a part of a US$1.5 billion Extended Fund Facility (EFF) from the International Monetary Fund (IMF) to help manage a peak in debt maturities.

Weerakoon said the IMF program did not prioritise national income, and therefore hit Sri Lanka’s medium-term growth.

“Sri Lanka’s efforts to clawback fiscal stability from mid-2016 under the three-year EFF arrangement with the IMF has taken its inevitable toll on medium-term growth prospects,” she said.

However, she said that fiscal management has shown visible improvement under the IMF program, with the budget recording a primary surplus since 2017.

“A primary surplus is the first step towards achieving debt stability; debt begins to stabilise when the interest payment is exactly off-set by the primary balance,” she said.

“In 2018, Sri Lanka was able to record a primary surplus of 0.6 percent of GDP, albeit well below the total interest payments incurred of nearly 6 percent of GDP.”

Despite these improvements, Weerakoon said there were little improvements in cutting losses at state-owned enterprises.

“In fact, losses of most SOEs doubled in 2018, with some such as the CPC being hit hard particularly by the sharp depreciation of the rupee by nearly 20 percent.”

Weerakoon said the government is limiting public expenditure, even below budgeted, in years when budget deficit targets have come under pressure.

She said this has hit even critical areas such as education and health, where spend as a share of GDP has declined.

However, she also said that Sri Lanka requires debt sustainability.

“Excessive government debt impacts growth in multiple ways; it raises ucertainty on the future course of policy including tax and interest rate policy measures that are necessary for course corrections on debt sustainability.

She said there is little room for fiscal stimulus to boost growth in the short-term, and higher taxes dampen aggregate demand, similar to a fall in public expenditure.

“Other things being equal, this can depress the rate of growth of debt burdens. This is the usual criticism directed at ‘fiscal austerity’ measures that come with the IMF programmes,” Weerakoon said.

She said this could be offset by strong private investments and a stable growth in private consumption, but in Sri Lanka, political and policy uncertainty has continually undermined these, with little signs of a pick up until election uncertainties are cleared. (Colombo/Oct29/2019)

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