New Tax Structure

By Sanath Nanayakkare

A new tax policy is a timely need for Sri Lanka, but the government should be careful not to throw the baby out with the bath water, because then, the cure would be worse than the disease, Chaminda Wanigaratne – Director Automotive at Ideal Motors (Pvt) Ltd. told The Island Financial Review.

‘Raising high levels of revenue from an anti-industrial tax policy may be the easiest way to pay the salaries of government servants, state-sector pensions, meet huge loan and interest payment liabilities payable by the government, and also to keep the loss making state-owned-enterprises (SOEs) flying their flag above the water. But the government should evaluate the repercussions of this move before it backfires,” he said.

“The government of Gotabaya Rajapaksa gave effect to substantial tax cuts without a mandate from the people, and we all know the repercussions it brought to the country at large. Now the current administration’s policy decisions led by President Ranil Wickremasinghe are going to give effect to historically-high corporate and personal income taxes of which the repercussions are going to be grave on the industrial sector and thereby on the overall economy ,” he says.

He further said::

“If the new tax bill is passed in parliament, it will definitely discourage export-oriented companies and companies that are engaged in the production of import substitutions. In addition to that, it will no doubt discourage the country’s top talent in the fields of manufacturing, technological, finance, marketing, sales, innovation etc. This scenario will create a pervading effect of dismay and disappointment among local manufacturers, business owners, shareholders, C-suite personnel and middle level executives who are collectively the driving force behind the private sector, which is undoubtedly the engine of growth.”

“We are not saying that taxes shouldn’t be levied. In this country, we need to have a minimum of 15% tax to GDP ratio because Sri Lanka doesn’t have alternative earnings. But it should be levied in a strategic and meaningful way. It should be fair by the people and the society. Further, taxes collected should be well spent to improve education, healthcare, infrastructure, power and energy sector etc. But we don’t hear anything from the government whether it is going to use the tax funds for such purposes.”

“It’s clear that the government’s bull’s eye target is raising revenue to meet public expenditure at any cost. They want to have a surplus in the primary account as in 2018-2019 and show the IMF impressive numbers in the balance of payments and budget deficit. In my view, this is just not feasible in the medium to long term in an environment of high inflation, high interest rates and ultra-low growth. Levying corporate taxes of 30%-36% and personal income taxes from 6%-30% would be like robbing Peter to pay Paul. What the government should do is not transferring money from the well-managed corporate sector to the ailing public sector possibly allowing both sectors to collapse. Instead they should make public institutions more efficient and productive by making reforms such as retrenchment and reallocating existing human resources appropriately, and cutting back expenses. Placing the whole burden of loss-making SOEs such as CPC, CEB, SriLankan Airlines, CGR, CTB etc., on the private sector is a shortsighted strategy. Even if the corporates and salaried personnel pay high taxes, it won’t make our lot better. One-third of the potential tax collections will be consumed by public sector salaries, another one-third will be used to pay interest on the loans the government has taken. And the balance one-third will be channeled to fund the reeling SOEs. Not a single tax rupee is likely to be allocated for the wellbeing of the people. So, we will end up paying high taxes like in Scandinavian countries or Europe and live like poor people in North Korea. Instead of becoming another North Korea, we should take a lesson from what India did in 1990s when it encountered a similar crisis. India made the right policies at the right time boldly, and turned it into an industrial country. They established all kinds of technology manufacturing in India and the country today is a leading manufacturing hub for automobiles and automotive components in the world.”

“But unfortunately, here in Sri Lanka we don’t see such policies being conceptualized by the Government or the Central Bank or the Treasury.”

Talking about repercussions of the new tax policy he said, “With high tax rates, dollar-earning ICT sector companies that operate online, may obtain overseas business licenses, and instead of operating from Sri Lanka, they will base their stations in Dubai or Singapore. Changing online operational platforms is a matter of hours for these companies. Then their real business jurisdiction will be one of those countries and will pay taxes to those countries depriving Sri Lanka of any taxes at all. Further, export-oriented manufacturers will find the trading sector more lucrative and they too will convert into trading because the prevailing operational conditions are biased towards trading companies such as supermarket chains and fast-food chains and not import substitution companies. The high personal income taxes will affect our private sector talent pool from middle managers to cluster heads to directors. They have a lifestyle which they have not deliberately embraced but one that circumstances have compelled them to accept. Because of the nature of their jobs, they have enrolled their children in private schools, bought houses in close proximity to Colombo, maintain a car as they need their own transportation. All these mean many financial commitments at the end of each month; therefore, they can hardly take this unexpected tax hit. These skilled young people will have no other option but migrate to other countries where personal income taxes are fair and living conditions are much higher. Thus no-one with professional career prospects would want to stay in Sri Lanka. A confluence of all these will lead to even weaker external sector performance by Sri Lanka in the months ahead making the current situation bleaker.”

“So we should all unite and raise our voices to prevent this tax bill from getting passed in parliament, or otherwise, a second Aragalaya will soon ensue from the widespread frustrations triggered by this unfair tax structure,” he said.