Widening the tax net | Sunday Observer

Widening the tax net

12 February, 2023

Only two things in life are assured: death and taxes. Indeed, everyone pays taxes literally from the cradle to the grave. Taxes enable Governments to fund services that are essential to run a country. They fall into two broad categories – direct and indirect. Direct taxes include income tax, wealth tax and Pay As You Earn (PAYE) taxes, while indirect taxes include Value Added Tax (VAT) and Goods and Services Tax (GST). The former category directly targets individuals who can afford to pay a portion of their income in the form of taxes while the latter encompasses everyone – for example, if a cake of soap priced at Rs.150 has a tax component of Rs.5, everyone who buys it will automatically pay the tax, regardless of whether it is a beggar or a rich businessman.

Hence, Governments generally try to keep indirect taxes at a lower level and get more revenue from direct taxes. Direct income taxes can reach stratospheric levels in some countries – Japan leads the rankings at 55.97 percent (of the income), while Denmark follows closely with 55.90 per cent. Austria is at third place with 55 percent. With most of the population paying direct taxes, indirect taxes tend to be rather low (or even non-existent) in these countries. On the other hand, the picture is completely different in Sri Lanka, with almost 80 percent of the tax revenue coming from indirect taxes such as VAT. Conversely, this clearly indicates that a lot of people who should be paying taxes are not paying up. Even in developing countries with similar populations, a much bigger percentage pays direct taxes.

Although various Governments tried different formulas to boost tax revenue here, none of the approaches really worked. The rich always found various loopholes to dodge taxes, while State sector employees were not taxed at all. In the end, only a few honest tax payers and private sector workers carried the tax burden. The economy really did not feel the effects of this grave anomaly until the Covid-19 pandemic as well as wrong policy decisions sent it reeling.

The resultant economic crisis hit Sri Lanka so hard that it led to a socio-political upheaval that ended with the resignation of the President in July last year. Fortunately for the country, veteran statesman Ranil Wickremesinghe stepped into that role and managed to stabilise the situation, at least in terms of economic fundamentals and day-to-day requirements of the people. As soon as President Wickremesinghe came to power, he took a decision that should actually have been taken around two years ago – going to the International Monetary Fund (IMF) for a bailout package.

Contrary to the opinions expressed by certain politicians, there certainly is no shame in seeking IMF assistance. Many other countries in our region and elsewhere, including Bangladesh, Pakistan and Argentina have done the same. Besides, Sri Lanka had received IMF packages on 16 previous occasions. Granted, IMF assistance in itself is no panacea for all economic ills, but it is the best option at this precarious moment. But the caveat is that IMF assistance is usually contingent upon the recipient countries fulfilling certain conditions to stabilise and strengthen their economies. For example, ending fossil fuel subsidies is among those conditions.

Likewise, widening the tax net is another IMF recommendation. Even if one leaves the IMF factor alone, this is actually a good proposal to prop up any ailing economy. It was recently revealed that the IMF had wanted the Sri Lankan Government to impose taxes on everyone who draws a monthly salary of Rs.45,000 and above, though negotiations with the IMF increased this ceiling to Rs.100,000. As the President said in his Policy Statement in Parliament on Wednesday, Sri Lankans will have to endure certain painful and unpopular decisions in order to resurrect the economy. The taxation proposals are among those. They have since been heavily criticised by trade unions, political parties and professionals’ bodies.

To the credit of the Government, it has taken the criticism in the correct spirit and made certain adjustments that will bring some relief to those affected by the tax hikes. Accordingly, the taxes imposed on certain non-cash benefits including housing, transport and telephone allowances have been amended to be more wallet-friendly.

This is a step in the right direction and we hope that all taxes imposed on public and private sector employees will eventually be slashed when the economy improves. As the President pointed out, if PAYE tax is abolished, the country will lose Rs.100 billion. If the tax limit is raised to Rs.200,000, the economy will lose Rs.63 billion. The total amount lost will be Rs.163 billion. In any case, those professionals who are seeking greener pastures abroad to evade taxes here should remember that many other countries have much higher income tax rates as mentioned above.

In the meantime, the Government must seek ways and means of getting more wealthy people to pay taxes. Judging just by the number of luxury cars on the road, there are many who can afford to pay more taxes than they do now. Moreover, some payments levied by professionals and others are not taxed at all, including doctors’ channeling fees and tuition masters’ fees. A mechanism must be evolved to include such payments in the tax net.

The online tax collection system too must be modernised so that filling tax returns is not seen as a chore. The monies lost in all tax scams such as the sugar tax scam must also be recovered pronto. The economy will get a major boost if these and other positive steps are taken.