ECONOMYNEXT –Sri Lanka’s lower-income households spend 10 percent of their income on value added tax (VAT), while the richest households contribute some 95 percent of pay-as-you-earn (PAYE) and personal income tax (PIT), the Institute of Policy Studies (IPS) said.
Speaking at an event on Tuesday October IPS Research Economist Priyanka Jayawardena noted, however, that tax evasion remains a problem.
While PIT revenue for 2023 was estimated at 131 billion rupees, only 48 billion appears to have been collected in 2023, a statement from the IPS quoted her as saying.
Jayawardena pointed out that VAT revisions – from 15 percent to 18 percent – along with removing exemptions have hit the poorest hardest, with the bottom 10 percent of households paying around 10 percent of their income in VAT compared to 6 percent for wealthier households.
The poor has been hardest hit by the collapse of the currency by macro-economists in 2022 which has pushed large sections of the population into poverty by imposing a massive inflation tax on poor households, including on foods which are exempt from tax.
Macroeconomists, by printing money to target interest rate or the growth, busted the rupee from around 200 to 360 in 2022 with inflationary policy, and has since appreciated it to 300 with deflationary policy.
The inflation tax of caused by macroeconomic policy is the most regressive of all taxes, critics say. The central bank has won the legal right to create 5 to 7 percent inflation a year from the political leadership, though the agency it is running deflationary policy from around September 2022.
In contrast, excise taxes on alcohol and tobacco are more progressive, with wealthier households paying nearly half of all excise taxes. The wealthiest 20 percent pay nearly half of alcohol (43 percent) and tobacco taxes (44 percent), while the poorest 40 percent contribute less than 20 percent on both.
Some of the poorest households however no longer consumer legal alcohol, due to high excise taxes.
Reforming VAT while increasing excise
taxes was suggested to create a healthier and fairer tax system.
Tuesday’s discussion also touched on the imbalance in welfare benefits. According to IPS, public service pensions (PSP), for instance, overwhelmingly favour wealthier households, with the top 20 percent receiving half of all pension benefits. “The bottom 40 percent only gets 11 percent of these benefits,” Jayawardena said, suggesting a gradual shift to a contributory pension scheme to reduce the fiscal burden and ensure long-term sustainability.
President Anura Kumara Dissanayake told a visiting team of International Monetary Fund (IMF) officials last week that his government plans to provide income and VAT relief to people who are struggling.
There is, however, a school of thought that a targeted VAT increase is preferable and, perhaps counterintuitively, more beneficial to the poor and vulnerable than a hike in income tax.
Related:
Sri Lanka VAT increase is better than killing economic freedoms with income tax
(Colombo/Oct11/2024)