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Saturday May 25th, 2024

Sri Lanka VAT increase is better than killing economic freedoms with income tax

REASONABLE TAXATION: While bringing down the spending to GDP ratio to 15-pct, dependent allowances and inflation adjusted slabs should be brought in

ECONOMYNEXT – Sri Lanka’s plan to hike value added tax to 18 percent to help maintain a large public sector and military is a better option that raising income tax which will kill consumption (killing a recovery), kill investment (killing long term growth).

A hike in value added tax still leaves money in the hands of wage earners and others giving them the freedom to make economic decisions and spend.

A 3 percent hike in VAT to 18 percent is less damaging on the people than a 5 percent inflation tax, which the country’s inflationist central bank imposes on the people at a minimum.

It must be remembered that the central bank’s 5 percent inflation tax or currency depreciation through flexible exchange rate is imposed to on the very poor through higher food prices while foods are exempted from VAT.

Indirect value added taxes are collected after an economic transaction is made. Income and wealth taxes prevent a gainful economic decision from being made.

Value added tax however is somewhat complex for businesses to operate.

Thought retail businesses operate on cash, businesses that operate on credit will have to borrow 18 percent of revenue to pay the tax on the 20th of the next month.

Businesses operating on credit therefore will have to borrow to pay VAT encouraging false accounting or raising costs.

This may not be a problem in countries with legally controlled central banks with tight inflation targets, sound money and low interest rates, but it is problem in flexible inflation targeting countries where inflation and interest rates are high.

Giving Power to Rulers to Decide Through Income Tax

Capital consumption taxes like income taxes and wealth taxes transfers economic decisions to bureaucrats and the political class, and tends to mis-direct the economy.

The US, which is heavily focused on income tax has no VAT and small state level final sales taxes are found.

The IMF, perhaps due it US progressive (read socialist) or New Dealer origins may favour income tax like most socialists.

However, in Sri Lanka people are whacked with both income and value added tax.

All capital consumption taxes destroy investible resources which are then frittered away in bureaucratic current spending.

The very sudden tax hike, involving a low threshold, and no deductions, is also contributing to brain drain.

However, the heavily socialist thinking behind income tax – tax the rich – does not help anyone.

High progressive taxes were a feature of Roosevelts New Deal interventions – which delayed a recovery from the depression, as well as Hitlers program. The Social Market economy architects cut the marginal tax rate.

Post 1980 IMF programs which do not stabilize the currency unlike before the Second Amendment when the agency was less vilified but attempts other reforms, are supposedly based on Thatcher era reforms.

But Thatcher not only stabilized the currency (in parallel US also raised rates strengthening the dollar), reducing fuel and energy prices, helping public acceptance of the power sector privatization (but hurting coal miners).

Giving Freedom for People to Choose through VAT

A key reform was raising VAT while cutting income tax.

Unlike in Sri Lanka, Thatcher campaigned on cutting high progressive taxes and giving freedom for people to choose after they came to power.

This is how Thatcher’s finance minister, Geoffrey Howe boldly gave choice to the people on the street and a boost to economic decisions of the community vs the bureaucrats, hiking VAT and cutting income tax.

“We made it clear in our manifesto that we intended to switch some of the tax burden from taxes on earnings to taxes on spending,” Howe said in his budget speech in 1979, where the clarity of thought, reason and interconnected logic was worthy of any 19th century classical liberal.

“This is the only way that we can restore incentives and make it more worthwhile to work and, at the same time, increase the freedom of choice of the individual. We must make a start now.”

In the late 1970s the UK was also in the same position as Sri Lanka. High income taxes were hitting skilled workers.

In fact the ‘brain drain’ originally started in the UK during its period of monetary instability.
“The upper rates no longer affect only those on very high incomes,” Howe said.

“They apply – and Labour Members may find this surprising – not only to senior executives and middle managers in industry but increasingly to skilled workers, as well as to professional people and the proprietors of small businesses.

“These are the people upon whom so many of our hopes for initiative, greater enterprise and national prosperity must depend.

“Our long-term aim should surely be to reduce the basic rate of income tax to no more than 25 per cent.”
The basic rate is now 20 percent.

This column said before the IMF program started that Sri Lanka should go for 20 percent VAT and eventually 15 percent corporate income tax eventually (The Yellen Tax). If 15 percent tax is given for new companies the IMF cannot object since that is official US policy.

However spending must be brought down.

READ MOREWhat Sri Lanka’s IMF program should look like

Thatcher also raised the slabs to account for inflation. A five percent inflation target should lead broadening tax slabs.

Eliminate the Social Security Contribution Levy

In the next tax reform, the cascading social security levy should be eliminated and the VAT raised to 20 percent.

The SSCL should be eliminated simultaneously with the raising of VAT so that market prices will remain the same and the government will recoup some of the money lost from the cascading tax.

Charge VAT on Fuel and Electricity

Value added tax should also be charged on electricity and the turnover taxes the excise taxes on diesel and coal should be removed or reduced.

Fuel taxes are in the nature of road taxes and should not be charged from electricity. Import duties on fuel should not be passed on to exporters. Zero rating and charging VAT will eliminate the problem.

This will allow exporters to reclaim VAT on energy, making the country competitive.

As a result, industries will not have to be given a different electricity tariff.

Vat should not be charged on electricity while excise taxes on diesel remains. Import duties on coal should be converted to VAT.

Brain Drain and Dependents

Sri Lankan politicians and politicians look at East Asia with envy, but does not follow their policies either on central bank control, or taxes.

Countries in East Asia that have good monetary regimes and do not go to the IMF regularly tend to have low value added taxes (about 10 percent) and corporate tax rates (about 20 percent).

Anecdotal evidence show that professionals are migrating because they are unable to pay school fees and medical expenses in addition to being unable to make mortgage and lease payments.

In social media there are posts of migrating families seeking good homes for pets.

Though politician claim that people are taxed for education and health, income tax payers end up sending their children to private schools and they go to private hospital.

One way out is to give tax credits for dependents and housing mortages like in East Asian countries, whose policies IMF countries do not follow.

The state should be limited to 20-pct VAT

World Bank and IMF claims that 20 percent spending to GDP is not a problem should be rejected.

Sri Lankans know how the state was bloated due to giving jobs to unemployed graduates by both the JVP ideology and the Rajapaksa regimes which put them to practice.

After raising VAT to 20 percent and with income tax at 20 percent, the rulers will take about 40 percent of a persons’ income.

That should be enough for the rulers and state workers to survive.

The state should be limited to the taxes than people can pay.

The government should also impose a 2 percent inflation target on the central bank. Putting on inflation tax on top of VAT increases is an invitation to disaster.

The 5 percent inflation tax is to be imposed on the people every year. An annual 5 percent inflation tax is worse than a one time VAT hike.

However unless the central bank is restrained printing money for growth, preferably with an exchange rate target as it is simple and transparent, no other reform in taxes will either stop the out-migration nor investment driven growth. (Colombo/Nov08/2023 – Update IV)

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Sri Lanka power outages from falling trees worsened by unfilled vacancies: CEB union

HEAVY WINDS: Heavy rains and gusting winds have brought down trees on many location in Sri Lanka.

ECONOMYNEXT – Sri Lanka’s power grid has been hit by 300,000 outages as heavy winds brought down trees, restoring supply has been delayed by unfilled vacancies of breakdown staff, a union statement said.

Despite electricity being declared an essential service, vacancies have not been filled, the CEB Engineers Union said.

“In this already challenging situation, the Acting General Manager of CEB issued a circular on May 21, 2024, abolishing several essential service positions, including the Maintenance Electrical Engineer in the Area Engineer Offices, Construction Units, and Distribution Maintenance Units,” the Union said.

“This decision, made without any scientific basis, significantly reduces our capacity to provide adequate services to the public during this emergency.

“On behalf of all the staff of CEB, we express our deep regret for the inconvenience caused to our valued customers.”

High winds had rains have brought down trees across power lines and transformers, the statement said.

In the past few day over 300,000 power outages have been reported nationwide, with some areas experiencing over 30,000 outages within an hour.

“Our limited technical staff at the Ceylon Electricity Board (CEB) are making extraordinary efforts to restore power as quickly as possible,” the union said.

“We deeply regret that due to the high volume of calls, there are times when we are unable to respond to all customer inquiries.

“We kindly ask consumers to support our restoration teams and to report any fallen live electrical wires or devices to the Electricity Board immediately without attempting to handle them.

The union said there were not enough workers to restore power quickly when such a large volume of breakdowns happens.

“We want to clarify that the additional groups mentioned by the minister have not yet been received by the CEB,” the union said.

“Despite the government’s designation of electricity as an essential service, neither the government, the minister in charge, nor the CEB board of directors have taken adequate steps to fill the relevant vacancies or retain current employees.

“We believe they should be held directly responsible for the delays in addressing the power outages due to the shortage of staff.”

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Melco’s Nuwa hotel to open in Sri Lanka in mid-2025

ECONOMYNEXT – A Nuwa branded hotel run by Melco Resorts and Entertainment linked to their gaming operation in Colombo will open in mid 2025, its Sri Lanka partner John Keells Holdings said.

The group’s integrated resort is being re-branded as a ‘City of Dreams’, a brand of Melco.

The resort will have a 687-room Cinnamon Life hotel and the Nuwa hotel described as “ultra-high end”.

“The 113-key exclusive hotel, situated on the top five floors of the integrated resort, will be managed by Melco under its ultra high-end luxury-standard hotel brand ‘Nuwa’, which has presence in Macau and the Philippines,” JKH told shareholders in the annual report.

“Melco’s ultra high-end luxury-standard hotel and casino, together with its global brand and footprint, will strongly complement the MICE, entertainment, shopping, dining and leisure offerings in the ‘City of Dreams Sri Lanka’ integrated resort, establishing it as a one-of-a-kind destination in South Asia and the region.”

Melco is investing 125 million dollars in fitting out its casino.

“The collaboration with Melco, including access to the technical, marketing, branding and loyalty programmes, expertise and governance structures, will be a boost for not only the integrated resort of the Group but a strong show of confidence in the tourism potential of the country,” JKH said.

The Cinnamon Life hotel has already started marketing.

Related Sri Lanka’s Cinnamon Life begins marketing, accepts bookings


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Sri Lanka to find investors by ‘competitive system’ after revoking plantations privatizations

ECONOMYNEXT – Sri Lanka will revoke the privatization of plantation companies that do not pay government dictated wages, by cancelling land leases and find new investors under a ‘competitive system’, State Minister for Finance Ranjith Siyambalapitiya has said.

Sri Lanka privatized the ownership of 22 plantations companies in the 1990s through long term leases after initially giving only management to private firms.

Management companies that made profits (mostly those with more rubber) were given the firms under a valuation and those that made losses (mostly ones with more tea) were sold on the stock market.

The privatized firms then made annual lease payments and paid taxes when profits were made.

In 2024 the government decreed a wage hike announced a mandated wage after President Ranil Wickremesinghe made the announcement in the presence of several politicians representing plantations workers.

The land leases of privatized plantations, which do not pay the mandated wages would be cancelled, Minister Siyambalapitiya was quoted as saying at a ceremony in Deraniyagala.

The re-expropriated plantations would be given to new investors through “special transparency”

The new ‘privatization’ will be done in a ‘competitive process’ taking into account export orientation, worker welfare, infrastructure, new technology, Minister Siyambalapitiya said.

It is not clear whether paying government-dictated wages was a clause in the privatization agreement.

Then President J R Jayewardene put constitutional guarantee against expropriation as the original nationalization of foreign and domestic owned companies were blamed for Sri Lanka becoming a backward nation after getting independence with indicators ‘only behind Japan’ according to many commentators.

However, in 2011 a series of companies were expropriation without recourse to judicial review, again delivering a blow to the country’s investment framework.

Ironically plantations that were privatized in the 1990s were in the original wave of nationalizations.

Minister Bandula Gunawardana said the cabinet approval had been given to set up a committee to examine wage and cancel the leases of plantations that were unable to pay the dictated wages.


Sri Lanka state interference in plantation wages escalates into land grab threat

From the time the firms were privatized unions and the companies had bargained through collective agreements, striking in some cases as macro-economists printed money and triggered high inflation.

Under President Gotabaya, mandating wages through gazettes began in January 2020, and the wage bargaining process was put aside.

Sri Lanka’s macro-economists advising President Rajapaksa the printed money and triggered a collapse of the rupee from 184 to 370 to the US dollar from 2020 to 2020 in the course of targeting ‘potential output’ which was taught by the International Monetary Fund.

In 2024, the current central bank governor had allowed the exchange rate to appreciate to 300 to the US dollar, amid deflationary policy, recouping some of the lost wages of plantations workers.

The plantations have not given an official increase to account for what macro-economists did to the unit of account of their wages. With salaries under ‘wages boards’ from the 2020 through gazettes, neither employees not workers have engaged in the traditional wage negotiations.

The threat to re-exproriate plantations is coming as the government is trying to privatize several state enterprises, including SriLankan Airlines.

It is not clear now the impending reversal of plantations privatization will affect the prices of bids by investors for upcoming privatizations.

The firms were privatized to stop monthly transfers from the Treasury to pay salaries under state ownership. (Colombo/May25/2024)

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