ECONOMYNEXT – Sri Lanka’s new tax-on-tax social security contribution levy which undermines value chains goes against the stated policy of the country and should be consolidated into Value Added Tax or removed as soon as practicable, opposition legislator Harsha de Silva said.
Sri Lanka’s parliament passed the tax with 91 voting for and 10 against, losing an opportunity to reform the country’s tax system in a graphic display of what usually happens in the country where bad policies get worse.
The 2.5 percent tax was proposed by ex-Finance Minister Basil Rajapaksa when Value Added Tax was 8 percent.
“If you look at it like VAT a minimum of 5 percent (will add to retail prices),” de Silva said.
“This is an ‘achcharu’ tax. You now have VAT and (cascading) turnover tax. When this was proposed by Basil Rajapaksa, VAT was 8 percent. It was increased to 12 percent in May and 15 percent,” de Silva said.
“This tax can add 5 or 7 percent to the final tax at sale.”
The tax went against the principles set out by Minister Manusha Nanayakkara in his opening speech which said indirect taxes should be reduced and the tax system simplified.
“Minister Nanayakkara, you talked about tax administration, how people do not pay,” de Silva said. “If you impose taxes like this it will get further complicated.
“It is VAT is should be VAT. If there is turnover tax, it should be turnover tax.
“If you want to put VAT at 22 percent, then make it 22 percent.
“You mentioned that the world is going in this direction. That is right. But tell me which country is progressing with has both types of taxes? It is very difficult.”
Minister Nanayakkara said he agreed.
“I agree as a policy that the tax system should simplified.”
De Silva said the tax should be ended after a time.
“Then you should put a sunset clause. In the next budget give a time frame when it is ended. This is like a NBT.”
De Silva who heads the parliament’s Public Finance Committee had said earlier the tax was cleared due to the economic crisis the country was facing, though it was fundamentally flawed.
He said when taxes are sent to the committee for approval a proper analysis should be followed.
Meanwhile condominium developers had said the tax should not be applied to buildings already started.
De Silva said he was tabling the document.
Taxes in generally should not be applied retrospectively as it undermines the rule of law and the predictability of the business environment where decision are made.
Allowing legal changes to only apply to the future and exempting existing practices or projects known as “grandfathering” is practice followed in fast growing countries where people are free and prosperous. (Colombo/Sep09/2022)