ECONOMYNEXT – Sri Lanka has collected 1.2 trillion rupees so far this year, showing that a steep tax cut did not result in a linear fall in taxes despite a shock from Coronavirus and an economic slowdown, Treasury Secretary Sajith Attygalle said.
“Clearly it appears the revenue numbers reported to date indicates that we have collected nearly 1.2 trillion so far,” Attygalle told a virtual business forum hosted by Ceylon chamber of commerce on December 02.
“This is in an environment of having low imports activity due to the pandemic.”
The collections are higher than was forecasted by others based on the lowered rates, on a ‘linear’ view, he said.
A Revenue Administration Management Information System (RAMIS) was helping collections and lower rates were encouraging people to pay he said.
“We believe this is partly due to the RAMIS been there, with technology and also because of the reforms introduced by the IRD with the large tax per unit and also because of low tax rates payments and incentives are high.”
“We have managed to save up to almost 75 percent of the end usage revenue in spite of the growth being negative.”
In 2019, Sri Lanka collected 1,734 billion rupees in taxes, down from 2,077 billion a year earlier as the economy slowed.
For 2020, the finance ministry is projecting 1,358 billion rupees in tax collections for 2020, down only 21 percent from a year earlier, and 34 percent lower than two years earlier.
Sri Lanka’s last administration raised income taxes ending an advanced 16 percent proportionate (flat) personal income tax and replacing it with a more leftist exponential rate (progressive) that cost it votes among professional and private sector workers.
A large number of withholding taxes which bring tiny amounts of taxes, akin to nuisance taxes, were also slapped on anybody from singers to musicians, costing the administration more votes.
It was done on the belief that there was some optimum revenue GDP tax rate and ‘revenue based fiscal consolidation’ was needed rather than cutting spending.
Revenue was taken up from 11.6 percent of GDP in 2014 to 14.1 percent by 2016.
With the focus on revenues spending was ratcheted up from 17.3 percent of GDP to 19.5 percent as large volumes of cash taken from the public were transferred to state workers as a salary hike. Subsidies were also raised.
The administration and their advisors seem to have operated on the belief that there was some optimum revenue to GDP ratio. India’s revenue to GDP ratio is about 11 percent.
In 2018 Singapore was 13.2 percent, Malaysia 12.5 percent and Indonesia 11.9 percent according to OECD data. Most OECD countries including Korea have a higher ‘revenue’ rates due to social security contribution.
However the administration also raised value added tax, which is neutral on exports and does not cascade making the country uncompetitive, and was considered a key reform, which was rolled back.
The tax cuts were also made without prior notice or discussion or approval in parliament, which drew criticism for contributing to regime uncertainty.
Attygalle however defended the move.
“The tax reforms in December 2019 were considered bold and necessary,” Attygalle said.
“There are two lessons in this. One is the government lost no time in announcing those measures even though they had been in office for less than two months.”
“The efficiency in the decision making created a business confident in the country that I think continued even during the pandemic.”
In 2020 there was no customary wage hike and some increments promised by the last administration was suspended.
However the central bank has been printing large volumes of money in 2020, not just to raise revenue but to repay maturing debt as rates were targeted. (Colombo/Dec05/2020)