Is wealth tax the solution to Sri Lanka’s low tax revenue collection?
By Sathya Karunarathne
Successive governments have run fiscal deficits. Inadequate revenue collection and unrestrained government expenditure have worsened the country’s fiscal position.
Tax revenue which averaged over 20% of GDP in 1990 has declined to under 10% of GDP in 2020. Ad hoc tax policy changes have significantly eroded the tax base. Weak tax administration has also contributed to the sharp decline in tax collection.
While tax revenue has contracted, government expenditure has ballooned over time. Today, government revenue is not sufficient even to meet its expenditure on salaries and wages and transfers and subsidies to households which include pension payments and social welfare payments such as Samurdhi.
In this context, there are various proposals put forward to raise government revenue. One proposal is the reintroduction of the wealth tax.
A wealth tax is expected to bridge the gap between the rich and the poor, achieving equality. This tax shifts the tax burden to affluent households, taxing an individual’s net wealth, which is the market value of total owned assets. Proponents of wealth taxation argue that this is a progressive system of taxation and is a more powerful tool in comparison to income, estate or corporate taxes as it addresses the issue of wealth concentration.
Moreover, a tax should ideally satisfy basic characteristics of taxation: it should not be distortionary; it should be fair, and it should not be difficult to collect.
The rationale for a wealth tax
One of the earliest proponents of the wealth tax for developing countries was Nicholas Kaldor. Based on his recommendation, a wealth tax together with an income tax, expenditure tax and a gift tax were introduced in Sri Lanka in 1958.1 However, these new taxes yielded little revenue due to difficulties in determining the tax base and problems in administration. Following the recommendation of the Tax Commission in 1990,2 the government abolished the wealth tax from the year of assessment 1992/1993.3
Wealth taxes have mainly been implemented in European countries. In 1990, twelve countries in Europe had a wealth tax. Today, there are only three: Norway, Spain, and Switzerland. Several non-European countries have also imposed wealth taxes from time to time including such as Argentina, Bangladesh, Colombia, India, Indonesia, Pakistan
In recent times there has been renewed interest in wealth taxes. Presidential candidates in the US proposed various forms of a wealth tax. In the UK and France, there were proposals to impose “super taxes” on the rich. The primary justification was to address the increasing inequality in society.
Issues with a wealth tax
Despite renewed interest in the wealth tax as a progressive tax based on equity, it scores poorly on the criteria of efficiency, and administrative feasibility.4
Many factors have justified the repeal of wealth taxes in OECD countries. The reasons cited are related to efficiency costs, risk of capital flight particularly in light of increased capital mobility and wealthy taxpayers’ access to tax havens, failure to meet redistributive goals as a result of narrow tax bases, tax avoidance and evasion, high administrative and compliance costs compared to limited revenues (high cost yield ratio).5
To understand the efficiency costs of wealth taxes one can look at taxing a person’s wealth accumulated through savings. Despite the common consensus that taxing savings is an effective way to redistribute, a person’s saving decisions reveal little about their underlying lifetime resources and wellbeing. It only reveals their preference to consume tomorrow rather than today. Thereby a wealth tax imposes a tax on those who prefer to spend their money later as opposed to taxing the wealthy.6 Efficiency costs refer to the reduction of the welfare of the taxed individuals by more than $1 to generate $1 of revenue.7 Therefore, the efficiency cost of a wealth tax in terms of taxing savings is a reduction of future consumption that can be bought with earnings, reducing incentive to work for those who prefer to consume the proceeds later and reducing incentive for young people to save for their retirement.8
Capital flight is the possibility of holding assets outside of one’s resident country without declaring them.As wealth taxes are imposed on residents it increases the risk of the wealthy reallocating their assets to avoid taxation. Therefore a high tax burden encourages taxpayers to change their tax residence to a lower tax jurisdiction or tax havens.9
Both income-generating and non-income generating assets are taxed under wealth taxation. They can include land, real estate, bank accounts, investment funds, intellectual or industrial property rights, bonds, shares, and even jewellery, vehicles, art and antiques.10 However, this tax base for wealth taxes has often been narrowed through exemptions. These exemptions have been justified most commonly on the grounds of social concerns such as the negative social implications of taxing pension assets. Further liquidity issues (eg – farm assets), supporting entrepreneurship and investment (eg- business assets), avoiding valuation difficulties ( eg- artwork and jewellery) and preserving countries cultural heritage (eg – artwork and antiques) have also been cited as reasons for wealth tax reliefs. While some of these exemptions can be justified, they have led to the reduction of revenue raised from wealth taxes. They have also contributed to wealth taxes being less equitable as the wealthiest such as businesses benefit from these exemptions defeating the very purpose of imposing a wealth tax which is to meet its redistributive goals.11
Narrow tax bases in wealth taxation often leads to tax avoidance and evasion opportunities. For example, Spain’s 1994 wealth tax exemption for the shares of owner managers resulted in wealthy businesses reorganizing their activities to reap benefits of the exemption resulting in a significant erosion of the wealth tax base.12
Further, several other factors have also discouraged countries to sustain a wealth tax. They are namely, the difficulty in determining the tax base or what assets to be taxed, underreporting and undervaluation of assets, difficulty in measuring wealth taxes13, distinguishing between individuals who are asset rich but cash poor, the constant need to value assets and audit returns increasing administrative and enforcement costs .
Low revenue collection as well as the other reasons discussed have led to the abolishing of wealth taxes in most countries (See Table 1 for details) . Tax revenue from individual net wealth taxes in 2016 ranged from only 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. Sri Lanka’s experience with wealth taxation was no different with the tax yielding low revenue as reported by the 1990 Tax Commission.14
Taxing the wealth of the rich to generate income and to eliminate economic inequality sounds promising in terms of political debate. However, wealth taxes have failed to generate adequate revenue, failed to meet redistributive goals as a result of narrow tax bases, proven to have high administrative and enforcement costs, resulted in tax evasion and avoidance due to underreporting and undervaluation of assets, increased the risk of capital flight and access to tax havens and may have contributed to the reduction of investment and employment.
Therefore, imposing a wealth tax may not be the ideal policy response to Sri Lanka’s low tax revenue, especially given the country’s previous experience with the tax yielding low revenue.
Sathya Karunarathne is the Research Analyst at the Advocata Institute and can be contacted at email@example.com. Learn more about Advocata’s work at www.advocata.org. The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute, or anyone affiliated with the institute.
Hela Apparel Holdings completes FY 2022/23 with resilience, amidst a challenging operating environment
The fourth quarter of FY 2022/23 marked the close of a challenging year for Hela Apparel Holdings PLC. While revenue of Rs. 20.5 Bn in Q4 represented a 40.6% increase in the same period of the previous year, this was primarily driven by the impact of the rupee depreciation. In US Dollar terms, quarterly revenue declined by 9.6% year-on-year. The drop in US Dollar revenue, however, is smaller than the 19.7% year-on-year decline recorded during Q3, as consumer demand in the Group’s key export markets remained relatively resilient.
The tentative stabilisation in demand conditions during the fourth quarter, alongside the proactive cost control measures taken by the organization contributed to an improvement in profit margins. The Group’s gross profit margin increased to 13.5% in Q4, compared to 10.0% in Q3, as capacity utilisation rates improved across the Group’s manufacturing facilities. Operating profit margins also improved, supported by greater optimisation of distribution and administration expenses. That said, elevated finance costs driven by the ongoing rise in global US Dollar interest rates were a significant drag on profitability. As a result, the Group recorded a post-tax loss of Rs. 257 Mn in the fourth quarter.
For the full year ended 31st March 2023, the Group’s revenue increased by 69.3% to Rs. 95.1 Bn. Nonetheless, the significant deterioration in market conditions during H2 eroded accumulated profits, and the Group closed the year with a post-tax loss of Rs. 1,038 Mn. Despite this, Hela’s balance sheet remained in a robust position with the Net-Debt-to-Equity ratio closing FY 2022/23 at 1.6, compared to 1.8 at the same point of the previous year, supported by improvements in the working capital cycle.
In a statement accompanying the financial results, the Company noted that it expects the challenging operating environment to continue into the first half of FY 2023/24 as consumers in its key export markets remain under pressure from high inflation. In this context, it will continue to focus on proactively strengthening its strategic customer partnerships based on its long-term value proposition as a leading global apparel supply chain solutions provider.
The organization also intends to remain agile in the evolving operating environment and consider additional proactive steps to manage costs and ensure a return to profitability. Several of the strategic initiatives taken during FY 2022/23, with a precise focus on process improvements, digital systems, and supply chain management are also expected to support the improvements in profit margins in the coming quarters.
Hela Apparel Holdings PLC is a social capital-focused company built on the principles of inclusivity, equity, and climate stability. With over three decades of industry experience, Hela focuses on building strategic partnerships with global brands to provide apparel supply chain solutions with distinctive advantages. The organisation has a global presence with 10 manufacturing facilities across Sri Lanka, Kenya, Ethiopia, and Egypt, as well as design centres in Sri Lanka, the US, the UK, and France, providing direct employment to over 20,000 people. Innovative, ethical, and sustainable apparel manufacturing is at the centre of Hela’s operations. With numerous accolades for sustainability, the organization was recently endorsed as a signatory to the UN Global Compact and was awarded the ISO 14064-1:2018 certification for quantification and reporting of greenhouse gas emissions across the Group for the second consecutive year.
Calais Dentelles announces the sale of ‘NOYON’ – Noyon Lanka acquires 100 years of lace heritage
In groundbreaking industry news, Noyon Lanka (Pvt) Ltd., a subsidiary of MAS Holdings, and DESSEILLES CALAIS, a subsidiary of the CALAIS DENTELLES holding company, announced the sale of NOYON CALAIS’ IP rights and other intangible assets to Noyon Lanka.
NOYON CALAIS is a French lace manufacturer known for a 100+ years of heritage in the industry. This Intellectual Property (IP) acquisition now positions Noyon Lanka as an industry leader in lace manufacturing, combining the legacy and heritage of NOYON CALAIS SAS and MAS Holdings’ technical competency and manufacturing excellence. This sale gives the opportunity for the French business DESSEILLES CALAIS to focus on their main luxury core market.
The IP and other assets acquired enable Noyon Lanka to draw inspiration, create and commercialize lace products and manufacture lace products under the trademark ‘Noyon’. Additionally, Noyon Lanka will now be the owner of all ‘Noyon’ trademarks belonging to Noyon Calais and will own all their archives of sketches, drafts, and samples of lace and embroidery fabrics from the 19th and 20th centuries.
With the acquisition, Noyon Lanka enhances its ability to provide high-quality lace products to customers worldwide, drawing upon and preserving the rich history and heritage of lace manufacturing in France.
Noyon Lanka’s CEO, Ashiq Lafir, commenting on the acquisition, said, “This acquisition will enable us to expand our product design offerings and strengthen our leadership position in lace manufacturing globally. We are humbled and proud to take ownership of NOYON CALAIS’ remarkable legacy and combine it with our technical expertise to create beautiful, innovative lace products for our customers”.
Sébastien Bento Soares, the Directeur Général – CEO of CALAIS DENTELLES, the parent company of NOYON CALAIS, added that “This asset sale enables DESSEILLES CALAIS to focus on our core luxury market and ensures that the rich history and legacy of Noyon’s lace continues to effectively serve its long-time customers, who have come to rely on Noyon’s heritage in lace to provide some of the world foremost brands with the finest lace designs that their customers have adorned over many generations”.
Noyon Lanka was established in 2004 when Noyon Calais France, an industry expert in knitted and leavers lace, partnered with MAS Holdings. Today, Noyon’s lace creators and designers launch over 450 designs each year, with collections ranging from multi-way stretch, high tenacity lace to engineered lace for fabric.
In addition to its production facilities in Sri Lanka, the company has a global footprint with a manufacturing presence in Indonesia and China.
In the image from left to right: Sébastien Bento Soares (Directeur Général – CEO of Calais Dentelles), Pascal Cochez (Chairman of Cochez group and Calais dentelles), Olivier Noyon (Shareholder – Noyon Lanka) and Ashiq Lafir (CEO – Noyon Lanka Pvt. Ltd.).
Nippon Paint Lanka sponsors painting of Sri Lanka’s tallest Buddha statue
Nippon Paint has donated the paint required to paint the tallest Buddha statue in Sri Lanka. Built by the Methsaviya Sansadaya, it is located at the Mahiyangana Purana Rajamaha Viharaya.
“History records Mahiyanganaya as the first place visited by the Lord Buddha nine months after receiving enlightenment,” said Vidyakeerthi Prof. Chandana Jayaratne, President of the Meth Saviya Sansadaya. “It is also recorded that the Lord Buddha donated a lock of hair to the leader of those who heard his preaching and embraced the noble path. This leader who was known as King Saman (Known today as Saman Deviyo), enshrined the relics and built the first Dagoba in Mahiyanganaya. This has been gradually increased in height during later years. On completion, this will be the tallest Buddha statue in Sri Lanka at 84-feet. The statue was unveiled on Sunday May, 28, 2023.”
Nemantha Abeysinghe, General Manager, Nippon Paint Lanka, said they were very happy to be associated in such a noble venture. “It is an honour for us to be able join the Meth Saviya Sansadaya to have the statue painted with high-quality, weather-resistant, and long-lasting Nippon Paint. Buddhism is the religion of the majority in Sri Lanka and we consider this as a contribution from Nippon Paint to the propagation of religion and culture in Sri Lanka.”
“We are deeply grateful to Nippon Paint Lanka for their noble gesture in donating not one but five coats of paint to withstand the heavy rains, winds and sunshine at this location,” Prof. Jayaratne said.
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