ECONOMYNEXT – Sri Lanka’s quarterly income tax filed for the 2020 last final quarter had exceeded the 2019 number, despite lower rates showing that economic activity was starting to pick-up and some tax payers had also opened new files, Treasury Secretary S R Attygalle said.

Corporate and personal income taxes collected in February 2020, relating to incomes earned in the fourth quarter of 2019 had been 61 billion rupees.

But income taxes paid in February 2021, relating to the earnings of the December 2020 quarter had risen to 65 billion rupees, he said.

The 2019 final quarter was a ‘normal’ period before Coronavirus hit the economy whereas the 2020 December quarter was during the Covid-19 second wave he said.

Compliance

In 2019 corporate was 28 percent, which had been reduced to 24 percent in some cases, and in manufacturing to 18 percent from 28 percent.

“Profits and turnover had both grown in 2020 last quarter,” Attygalle told reporters. “Now rates are lower, there was the Covid second wave, so it shows that there is some growth in the economy.”

He said the number of tax files had also increased. He believed at least 3,000 new files had been opened.

“I think when the rates are brought down, people are also encouraged to pay tax,” Attygalle said. “Compliance is improving, that is also what we want.

“If you increase rates people try to avoid paying. In this case there is an increase. I hope that will continue.”

Sri Lanka cut taxes in 2019 hoping for a ‘fiscal stimulus’ following an output and consumption coming from a currency crisis in 2018 from a so-called ‘flexible’ inflation targeting and a ‘flexible’ exchange rate involving unusually discretionary monetary policy.

The currency crisis had been triggered in the wake of an attempted monetary stimulus to target an output gap, despite the central bank law requiring it to maintain “price and economic stability”.

Socialism

Sri Lanka’s last International Monetary Fund program went on an unusual direction in a socialist or statist track involving so-called ‘revenue based fiscal consolidation’ or bringing the deficit down by taking the tax take (revenue to GDP) to some arbitrary number, and putting the entire burden on the private sector instead of also cutting state spending.

Under the Robinhood ‘revenue based fiscal consolidation’ revenue to GDP was raised from 11.6 percent in 2014 from to 13.8 percent by 2017 in a radical departure from the classical economic concept of limited government and state spending was raised from 17.3 percent to 19.3 percent transferring large volumes of money to state workers.

Meanwhile the GDP was also revised upwards raising more questions about the arbitrary plucking of a socialist or ‘Robinhood’ revenue to GDP number as the ultimate fiscal target instead of the deficit.

In another blatantly socialist-New Dealer style move, personal income tax which was previously capped at a proportionate 16 percent was made steeply progressive.

A large number of withholding taxes were also slammed including ‘nuisance taxes’ on royalties of artistes who worked as independent entrepreneurs, who then returned the compliment at the ballot box, while raising the salaries of state workers, who did not.

New Dealer State Expansion

New Dealers raised the US marginal income tax rate and a series of wealth tax though several laws (Revenue Act of 1935 and Revenue Act of 1936 also known as the Wealth Tax Act), prolonging the depression, eventually taking the higher tax bracket to 91 percent, critics say.

The New Dealers, Keynesians who believe in so-called ‘price effects’ also depreciated the US dollar from 22 to 35 dollars an ounce, barred the citizenry from holding gold to protect themselves in a surge of authoritarianism and delivered a series of interventionist shocks including a ‘100-day program’.

Meanwhile Sri Lanka’s last IMF program also gave the central bank free reign to print money, giving an inflation ceiling as high as 8 percent, and removing any external anchor restraint with a ‘flexible exchange rate’, triggering a currency collapse as soon as the economy and credit system started to recover in 2018.

Analysts have warned that under the current ‘Modern Monetary Theory’ of printing unprecedented volumes of money, any recovery of the economy and stronger loan demand would tip the credit system further over the edge exacerbating reserve losses and currency pressure.

The targeting of fuel prices by cutting taxes and filling losses at energy utilities or foregone state revenues with new credit would also worsen the trend, analysts say.

The last IMF program also raised value added tax which brings steady revenues and also captures spending of any undeclared money or earnings that has evaded taxes, and does not destroy employment generating investible capital unlike direct tax.

As part of tax changes in December 2019, VAT rates were also brought down along with direct taxes, hurting the budget and raising pressure on borrowings and interest rates and ultimately currency pressure and forex losses when rates are controlled with printed money.

Related

Sri Lanka domestic borrowings exceed deficit, repays Rs352bn to foreign lenders by Oct 2020

Sri Lanka prints 505 billion rupees in 2020, bank borrowings top 11-pct of GDP

There has been record domestic borrowing from the banking system, backed by printing money amid a loss of external confidence after ‘flexible’ exchange rates in 2020. (Colombo/Mar02/2021)