ECONOMYNEXT – Sri Lanka can sharply boost state revenue with a lower uniform import tariff, as evidenced from other countries also showed that complex and cascading levies led to massive revenue loses, at top trade economist has said.
Sri Lanka’s tax revenues are far below the levels suggested by published rates, Athukorala told a forum organised by Advocata Institute, a Colombo-based free market think tank.
"People think higher tariffs bring more government revenue," Athukorala said. "It is the not the case. There is evidence to suggest that a more uniform, lower tariff system will generate more revenue, simply because the system becomes much more transparent."
Actual revenues were about a third of what was implied by the published rates, he said.
Sri Lanka’s policymakers should study the issue closely, Athukorala said.
Sri Lanka only saha few quantitative restrictions covering about 2 to 3 percent of trade, which was good, but rates were high in some cases.
There were also cascading taxes, where higher rates were charged for goods that were ‘more finished’ than others.
Cascading taxes were also ‘feeding grounds for corruption’, he said.
Even without corruption, import protection and tax cuts are given to import components for final assembly, leading to ‘tax arbitrage’ businesses, where as Adam Smith said an ‘absurd tax’ is paid by the general public.
But the money goes to the pockets of a politically savvy Mercantilist producers, who had lobbied for the tax to limit competition, instead of the government, giving birth to industries that are engaged in collecting the tax difference or arbitraging rather than engaging in actual competitive production.
Meanwhile, Athukorala said a former customs chief in Sri Lanka had as a test reduced taxes on floor polishers, vacuum cleaners and phone handsets from 45 percent to 15 percent from a few months.
Revenues had gone up three times, he said.
"Smugglers also have costs. They have to pay customs officials and all that," Athukorala said.
Athukorala said in Chile where tariff were cut to a uniform single rate, revenues had increased three fold.
"Secondly, the customs system became much transparent, because corruption is less."
During the ousted Rajapaksa regime, trade freedoms of poor consumers were restricted with import duties to give extra profits to powerful business and producer lobbies. Monopolies were built in buidling materials with the help of state backed import duties. (Colombo/Sept04/2016)