Sri Lanka’s political rhetoric, bureaucratic resistance may drag ‘escape if you can’ tax strategy
By Shihar Aneez
COLOMBO – Return of rhetorical politics after the last year’s mass protests and unprecedented economic crisis along with bureaucratic resistance may delay some reforms expected to boost tax revenue, analysts and legislators say.
Sri Lankan authorities have increased the government tax revenue to a significant level, but less than the target agreed with the International Monetary Fund (IMF) for its $3 billion loan. The state tax revenue has increased by 51% in the first 9 months of this year compared to the same period last year, the government has said.
People have already started grumbling about increased Pay As You Earn (PAYE) tax, Value Added Tax (VAT), Corporate taxes, withholding tax on interest return, and a raft of other taxes.
After failing to achieve the IMF target this year, President Ranil Wickremesinghe’s government has decided to increase the VAT to 18% from the current 15% with effect from January 1, 2024, to achieve the next year target.
“However, tax collection targets agreed with the International Monetary Fund have not yet been accomplished,” the government conceded in a Cabinet decision document on Tuesday (31) when it announced the VAT hike.
Sri Lanka’s ambitious tax strategy is planned to come out of its current unprecedented economic crisis.
However, the move has dragged on by normalizing rhetorical politics and usual bureaucratic resistance which are likely to delay its economic recovery and possible foreign investment, analysts say.
The IMF has already delayed its second tranche of the $3 billion loan due to several lapses including lower than expected tax revenue, strong actions to curb corruption, and some delay in debt restructuring.
President Wickremesinghe’s government’s plan was to digitize asset ownership including owners of vehicles, lands, houses, apartments, and other assets and then force them to open tax files, a top government official who has the knowledge on the strategy said.
“That is the idea behind the new unique identity card as well. Once the new ID comes, it would be much more convenient to digitize the asset ownerships,” the source said on condition of anonymity.
“It will be also helpful to assess the declaration of the income by taxpayers. The country has over 50 million bank accounts whereas our population is only 22 million.”
“It has also been noticed that the majority of those who own SUVs (Sports Utility Vehicles) do not have tax files. So, with the digitization after a unique ID, we expect the tax system to change from the current ‘catch me if you can’ to ‘escape if you can’. But it is not easy.”
Kanaka Herath, the State Minister for Technology earlier this month said digitization was expected to be completed before the end of this year.
“Then there is a chance of gathering all the data. In addition to this, we expect all the data to be collected through the digital identity card we intend to introduce,” Herath told reports in Colombo this month.
The government also has proposed a tax revenue authority to address the underperformance of the three tax collection bodies: Inland Revenue Department (IRD), Excise Department, and the Customs.
The island nation’s tax revenue to GDP recorded one of the lowest in the world last year after the former leader reduced the taxes on ill-advised policies.
Though the government has formulated tax policies to increase the revenue, it has failed to expand the tax net or the amount of taxpayers.
The concerns over lower tax files prompted President Wickremesinghe to ask every citizen above 18 years to open a tax file and the government’s estimation was one million total tax files by the end of this year.
But the reality was shocking.
The official data showed that only 161 Company Income Tax (CIT) files, 8,533 Individual Income Tax (IIT) files, 14 Partnership files, 104 Value Added Tax (VAT) files, and 2,094 Social Security Contribution Levy (SSCL) files have been opened in the eight-month period through August 31 this year.
After the popular ‘aragalaya’ protests ousted the former president and his government last year, most Sri Lankan politicians stopped their usual rhetoric statements, knowing such moves would make the public angrier when they are desperate to make ends meet.
President Wickremesinghe was elected by the Parliament backed by the ruling Sri Lanka Podujana Peramuna (SLPP) after the former leader Rajapaksa fled the country in the face of mass protests outside the presidential palace.
Most politicians mainly from the SLPP faced resistance from the public last year and could not even visit their constituencies.
The economic crisis has compelled Sri Lankan politicians to postpone their usual rhetorical politics and back Wickremesinghe for some unpopular decision to lead the country in the recovery path, political analysts have said.
They kept quiet when the country faced hyperinflation and economic contraction.
They justified the decision of increasing electricity tariff, which has been increased by more than three fold. They also justified an increase in water tariff as well as prices of all other goods and services.
But now the SLPP politicians have started to change their tones ahead of the 2024 election year. President Wickremesinghe has promised to hold a presidential poll in 2024 before the general election.
“Gotabaya Rajapaksa was scared of less than 100,000 protesters. When they came, he should have beaten them with poles. Now Ranil is doing this properly,” SLPP legislator Rohitha Abeygunawrdena said this week at a public meeting.
“If we can’t form the government, we should be a strong opposition. I know that all of you can’t bear the electricity bills.”
The SLPP’s criticism over President Wickremesinghe had been there since the start, but it exploded after he changed the health minister last week, replacing SLPP legislator Keheliya Rambukwella with Ramesh Pathirana from the same party.
Sources close to the president say the SLPP’s reaction comes after Wickremesinghe rejected their repeated request of cabinet portfolios for some of their members who have lower public approval.
Some top SLPP members have expressed their disapproval for the move as well as for Wickremesinghe’s decision to give ministerial posts to centre-left Sri Lanka Freedom Party (SLFP) members,
“The current president is a person who did not support (the then government) during the war. We are not scared to tell it. The current president is a leader who closed his eyes and ears when there was the central bank looting,” Sagara Kariyawasam, the SLPP Secretary told reporters on Monday (30).
“Despite all that, we selected him as the president because we know he had the ability to restore democracy and rule of law.”
Kariyawasam said the SLPP will assess the proposal by the president in the next budget before taking a decision as a party if they should support or not.
Analysts, however, say the economic recovery under Wickremesinghe has helped rhetorical politics to return after last year’s unprecedented mass protests. They say many legislators do not want to go with tax reforms fully and may want to criticize the move in the future if the reforms fail.
The tax reforms have been also dragged by strong resistance from government officials who are responsible to carry out the government policies.
Government leaders say most of the reforms and decisions that would help the country to come out of the economic crisis are delayed by government officials
The bureaucratic delay has dragged the World Bank-funded Aswesuma welfare benefit program and the implementation of a highly efficient tax collection strategy called Random Access Management Information System (RAMIS).
Sources have said there had been resistance to the government’s ambitious welfare benefit program from Grama Niladhari level to District Secretariat officials because the government used an unconventional selection method to choose the beneficiaries within a short period.
They have also said the move has led to eliminate some previous beneficiaries of Samurdhi poverty alleviation scheme who are not under the poverty line anymore.
“There was some resistance from trade unions for the (Aswesuma) program from the start,” State Finance Minister Shehan Semasinghe said when asked about bureaucratic resistance.
“We still hope senior government officials will support this program.”
Legislators also have said the inefficiency and resistance for changes also have dragged the reforms and revenue increase from tax.
They say there are more than 2,500 employees in all three revenue collection bodies. However, they have been able to collect a dismal amount of revenue compared to the target.
“Sadly, we have to state that the Inland Revenue Department with a capacity of 2,500 employees only collects taxes from 494 institutions. If we can address the irregularities, we can raise the tax by 500 billion rupees,” Mahindananda Aluthgamage, the chair of the Parliament Sectoral Oversight Committee on National Economic and Physical Plans, said earlier this month.
“We have identified the daily loss at the Customs is ibe billion rupees and 360 billion per annum. In the Inland Revenue Department, we lose 500 million rupees per day and 180 billion rupees annually. We lose this due to inefficiency and corruption.
“So, if we can stop irregularities and corruption in these (three) state institutions, we can increase the tax revenue by 500 billion rupees.
“Every time people find fault with the government and ministers. But the reality is that this is due to the fault of the state officials in these institutions. This is due to inefficiency in the Inland Revenue Department, inefficiency in Customs, and inefficiency in the Excise Department,” he elaborated.