That Nation Building Levy

by Prof. A. D. V. de S. Indraratna

(November 21, Colombo, Sri Lanka Guardian) There has been much debate on the Nation Building Levy (NBL) since its introduction in the 2009 Budget on November 6, to be implemented from the beginning of the next fiscal year. Some have argued that it would throw an additional burden on the tax payer while some others have opined that it would further complicate the already complex tax system. To my surprise, I also read in the print media a couple of days ago, of a well known tax consultant, a chartered accountant objecting to it on the flimsy ground that it would necessitate opening of new tax files. In any event, many do not seem to have either appreciated or understood the purpose and significance of the NBL.

In my view, this levy (or tax if one prefers to call it that), could not have come at a more appropriate time. This budget has set apart for defense, the highest amount ever in the 25 year history of the Ealam war of our country of Rs.170 billion. It works out to nearly 15% of the total budgeted expenditure and to half of the overall budget deficit. The war against terrorism has been successfully conducted during the last three years, culminating in the regaining of Pooneryn and the entire A32 road, a gateway to Jaffna, a couple of days ago. The government is committed to heavy infrastructure expenditure for rehabilitation and reconstruction of the Eastern Province, which has now been liberated from terrorism and where democracy has been re-established. The government has also proposed in this 2009 budget several new expenditure proposals accounting for Rs. 54 billion, more than half of which is for development expenditure towards overall sustainable growth of the economy. These are all part and parcel of nation building, and the government needs money for all them. Even though there are new taxation proposals which are expected to bring in Rs. 76 billion, the net gain would be only Rs. 30 billion because of the anticipated loss in revenue due to the reduction in the VAT rate from 15% to 12% and the increase in taxable income slabs from Rs. 300,000 to Rs. 400,000. The government expects to collect only Rs. 15 billion from the NLB.

As the Tax Advisor of the Ministry of Finance and Planning remarked at one of the telecast interviews, the NLB should not be treated as a burdensome tax, but as one’s voluntary contribution towards the building of our nation. Every patriotic person, those who are paying tax now, as well as all those who have the capacity to pay but do not pay tax now, should make this contribution of 1%. It is on the turnover exceeding Rs. 300,000 for each quarter, for only two years, commencing April 2009. The tax is applicable to service providers, in addition to producers and importers. I shall limit my note to service providers. (The details of producers and importers and the exemptions allowed them are provided by the Ministry of Finance).

The Department of Inland Revenue, it seems, has at present only 400,000 tax files, even from all of which tax revenue may not be derived. Although tax rates have been substantially lowered, expecting less tax evasion and tax avoidance, no significant increase in direct tax revenue as a percentage of GDP is witnessed. However, if one examines the growth of our national income, and its distribution among the population/households of our country, in the last decade, one is bound to ask how and why there should not be as many more tax files as now. Since the opening of the economy, our service sector has expanded much more rapidly than the other sectors. In my view, the number of professionals in our country must be easily around 100,000. The Organization of Professional Associations (OPA) itself has 42 professional Member Associations comprising around 50,000 individual members.

How about the other service providers? One has only to go round our bazaars and along our main streets to get an idea of how many service providers there could be; for example, numbers of Cyber Cafes, Communication Centres, Hair Dressing Salons, Beauty Parlours, Beauticians, Video Photographers, Motor Garages, Cushion Works, Pantry Cupboards and Tutories, to mention a few categories. I am sure almost all of them will be above the turnover threshold.

They should voluntarily come forward, and pay the NBL, without waiting for the tax department to come after them. If all providers of professional and other services pay tax according to their capacity to pay, the government is bound to realise much more revenue than it has budgeted. Apart from national and patriotic considerations, mere equity demands this from the public. At the same time, I maybe failing in my duty if I do not underscore here that the members of the government should set an example to the public by making a sacrifice themselves, by at least cutting down on waste, non-essential and ostentatious and lavish expenditure and luxurious perks and also by helping to eradicate corruption. - Sri Lanka Guardian