Tax policy breeding inequality, injustice: DEW

June 9, 2013, 7:47 pm

President Mahinda Rajapaksa has a word with COPE Chairman DEW Gunasekara at the laucn of the
Treasury annual report.

Pic by Jude Denzil Pathiraja

Inequality and injustice is huge in Sri Lanka because of massive tax evasions in the country warned
Senior Minister of Human Resources and Chairman Parliamentary Committee on Public Enterprises
(COPE) D.E.W. Gunasekara. "We can keep borrowing to build infrastructure but we must not forget
that people also have to make end meets," the minister said at the launch of the 2012 annual report
of the Ministry of Finance and Planning in the presence of President Mahind Rajapaksa at the
Treasurys financial studies academy Miloda in Colombo.

"Economic growth has doubled. The per capita income has doubled. But where is the evidence and
can we see the results? Is it in the Treasurys report or can we see an improvement in living
standards?" the outspoken senior minister asked.

"The tax-to-GDP ratio is the lowest since independence and non-direct taxes account for the bulk of
the governments tax receipts. This shows that income disparity is huge. Inequality is rising and this
is a huge injustice to the people of the country," Gunasekara charged. "We need to take a look at our
taxation policy," he urged the President.

"If we fail to reform our three revenue houses, Customs, Excise Department and Inland Revenue
Department, then everything we do becomes pointless. There is massive tax evasion in the country
and it is an injustice to the people of this country that is allowed to continue. We need to increase
investment on education and healthcare but where will the money come from? We can keep
borrowing to build infrastructure but we must not forget that people also have to make ends meet,
they must live!"

He also charged that 28 state-owned enterprises paid PAYE taxes amounting to Rs. 2 billion on behalf
of public officials.

Gunasekara urged direct taxes should increase while in-direct taxes should fall.

President Mahinda Rajapaksa speaking later said there was a problem with the tax system. "We must
come-up with something appropriate. There is a popular saying that we must draw nectar without
smashing the flower, likewise, we must extract taxes from the business sector," a smiling President
said.

The problems that Gunasekara referred have been articulated by top economists in the country and
organisations such as the IMF.

The ratio for direct:in-direct taxation in Sri Lanka is close to 20:80.

"As long as the revenue from direct taxation remains low, this ratio will prevail and this in turn means
that the bulk of the burden of indirect taxation will be felt by the poor people," Dr. Saman Kelegama,
Executive Director, Institute of Policy Studies told a recent forum. He said the ideal was a ratio of
40:60.

In 2012, revenue declined to 13 percent of GDP from 14.3 percent of GDP in 2011, mainly due to tax
revenue declining from 12.4 percent of GDP in 2011 to 11.1 percent in 2012.

Revenue from VAT declined by 0.8 percent of GDP in 2012 compared to 2011 (3.5 percent to 2.7
percent of GDP), mainly due to many exemptions or zero ratings.

Income tax declined from 2.4 percent GDP in 2011 to 2.3 percent of GDP in 2012 due to rate
adjustments not being matched by broadening the tax base in 2012.

"Part of the reason for the slippage is the countrys heavy reliance on indirect taxes, which account
for over 80 percent of total tax revenue. This shifts the burden of taxation onto the poor," a UNDP
report said (Sri Lanka Human Development Report 2012).

"The Government may wish to revisit the balance between direct and indirect taxation for several
reasons: to spread the burden of taxation more evenly, to improve revenue collection, to achieve
better governance and accountability, and to ensure that revenue is in line with growth. Empirical
evidence suggests that governance mechanisms are likely to be more robust in countries where the
government relics heavily upon general taxation for its revenues. At the same time, taxation should
not distort the business environment and force relocation of enterprises," the report said.

According to a recent ILO report income inequality in Sri Lanka has grown significantly and is only
behind China.

"Income disparities have risen in many developing Asian countries, despite remarkable economic
growth and poverty reduction in recent past decades. This trend can undermine economic
sustainability and threaten social cohesion. Among countries with higher income inequality (measured
by a Gini coefficient of 40 or higher), the ratio in China and Sri Lanka increased significantly by 10.0
points and 7.8 points respectively," the ILO said in its April 2012 edition of the Asia Pacific Labour
Market Update.

It also showed that one in five Sri Lankan youth are unemployed, with the number of female youth
out of work 11.7 percent higher than males.

Own-account and contributing family workers accounted for 42 percent of the labour force.

"On the surface, we have seen Sri Lanka achieve good employment growth and economic growth. But
this is only on the surface and if we look carefully there are some concerns and a lot of work needs to
be done," said ILO Labour Economist Phu Huynh as quoted in these pages last December.

"Despite the strong economic growth, we are concerned that formal sector employment is showing
very little growth while Sri Lankas informal sector continues to be large. We have seen employment
increase faster across the informal sector such as in the daily wage category and those working in
households. So the countrys employment growth is not really coming from the formal sector and this
is a concern because it leads to a question as to whether the economic growth was creating enough
quality jobs," Huynh said.

The Opposition has also charged that the 5 percent levy on gambling was absurdly low and aimed at
attracting big players without considering the returns to citizens of the country. "In Macau, the VIP
casino tax is 39 percent while the normal casino tax is also 39 percent. In Singapore the VIP rate is
12 percent and the normal rate is 32 percent. In the Philippines it is 17 percent and 27 percent. The
VIP and normal casino tax rate in Malaysia is 25 percent each," UNP Economic Spokesman Dr. Harsha
De Silva MP said.