ECONOMYNEXT – Sri Lanka should assess if the existing tax structure used to its optimum to get more revenue before going for new taxes, President Secretary P B Jayasundera said with a goods and services tax targeting large payers to come.
The tax revenue dropped after President Gotabaya Rajapaksa slashed value added tax and corporate and personal income tax with the aim introducing a new tax regime.
Value added tax in particular had deprived hundreds of billions of rupees to the budget.
There are strong expectations of some tax increases in the 2022 given the revenue falls seen in 2020 and 2021.
Not to disturb too much
Jayasundera, the country’s top public official and former finance secretary who is the architect of most of the budgets since 2000 and still has influence on the country’s economic policies, said there should be a cautious approach in introducing new taxes.
“My advice is not to disturb what the country has got,” Jayasundera told EconomyNext in an interview.
“What we have to do is see if we get the optimum yield with the existing tax structure. If we are not getting the optimum yield, adding further layers will only distort,” he said referring to speculation over adding a raft of new taxes in the upcoming budget.”
Sri Lanka’s tax-to-GDP of 8.1 percent in 2020 is one of the lowest in the World. The government revenue in which tax revenue accounts for more than 90 percent was recorded at 9.2 percent of the GDP, the lowest since the country’s independence.
Sri Lanka has one of the weakest tax implementation systems with many taxes and frequent changes to the tax policies with the change of governments.
The tax collection has deteriorated since 1979 after the government revenue-to-GDP reached its post-independence historical highest of 25.5 percent in that year.
“If we keep periodically changing these things, people can’t develop their business plan and can’t work out anything sensible,” Jayasundera said.
“So the country is looking to ease, as the IMF advises, and is concentrating on large taxpayers. So we are working out the special goods and services tax registration to target only with big revenue items. This is not a complicated system,” he said without elaborating.
Former Finance Minister Mahinda Rajapaksa proposed the GST in the 2021 budget. The tax will be imposed on liquor, cigarettes, vehicles, communications, and betting.
Sri Lanka has been already working on digitalization of income tax collection which will be done via online to minimize corruption and individual preference, government officials have said.
“On one hand, investors are asking for tax holidays and tax concessions because it has a cost and it has a nuisance value,” he said.
“To get the investment regime right, tax regime should be one critical component, financing one from the other. That should be there in place. Access to finance both domestic and foreign should be there.”
The government last month passed a tax amnesty bill with the hope that people who have stashed money will use the facility and come into the tax net by bringing in their money for just 1 percent tax.
“Now that should be intentional and forced and that rationalizes further,” Jayasundera said.
“So get the tax rate structure reasonable. Now the issue is whether the base is sufficiently right for these tax foreign exchange amnesty has given opportunity for those who are not coming to the tax system to come.
Thrust of 2022 Budget
Jayasundera said the thrust of the 2022 budget which is scheduled to be presented in the parliament next month will be focusing on post-Covid-19 recovery.
“The likely thrust of the budget is to put the rapid recovery of the post Covid economy to recoup the two-year loss in a much faster period,” he said.
“and learn the lessons of extreme risks that the open middle income, small economy like Sri Lanka face.”
In December 2019, President Rajapaksa cut the value added tax to 8% from 15%, , and to abolish seven other taxes, including a 2% nation building tax paid by businesses.
The proposals also will address many stresses the country is facing at the moment, he said.
“It will address its challenges of debt, the challenges of its fiscal issues, and creating an enabling environment for a more buoyant export oriented economy and it should be in my view the focus of the budget, ” Jayasundera said.
“It should have discipline not to go for an appetite for expensive projects, priority being given to complete the ongoing ones.”
The 2022 budget will be the ruling Sri Lanka Podujana Peremuna’s first full year economic policy document including budget proposals as it only had an interim budget in 2020 and many uncertainties hit the 2020 budget.