Taxation should be a partnership where citizens see their taxes as investments in better healthcare, education, infrastructure, and affordable energy.
by Raj Gonsalkorale
The United Nations Development Programme (UNDP) in Sri Lanka, in collaboration with the Ministry of Finance, Inland Revenue Department, University of Moratuwa, and the National Innovation Agency of Sri Lanka, co-convened the first-ever National Tax Dialogue to address contemporary issues surrounding taxation and fiscal policies on the island.
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| [ Photo: Micheile Henderson/ Unsplash] |
According to the above news report, after 76 years of independence, Sri Lanka has, for the first time, had a national dialogue on taxation to address contemporary issues surrounding taxation and fiscal policies on the island. While it is better late than never, it is disturbing that such a dialogue took so long to materialise. Tax revenue is a major source of income for the country, and in 2024, the government expects revenue of Rs 4,106 billion, of which 93% is tax revenue. According to CEIC data, Sri Lanka’s tax revenue was 10.8% of GDP in December 2023.
The fiscal numbers for 2023, recently released through the Central Bank of Sri Lanka’s Annual Economic Review, reveal that the Government of Sri Lanka’s total expenditure for 2023 was LKR 5,357 billion. Total government expenditure for 2022 amounted to LKR 4,472 billion. Out of this, total revenue and grants could only cover 45% of spending, while the remaining 55% was financed via borrowings.
The importance and dependence on tax revenue to meet government expenditure are unquestionable. As mentioned above and as many are aware, the country has been borrowing heavily to bridge the gap between recurrent expenditure and income, in addition to funding capital projects, some of which were not astutely evaluated and costed. Consequently, such accumulated borrowings have taken the debt-to-GDP ratio to almost 130% now.
Sri Lanka has few choices as to how it can reduce the gap between income and expenditure without resorting to borrowings. It can reduce expenditure, or it can increase income. Reducing expenditure is a politically unpopular decision as stakeholders associated with major areas of expenditure are bound to oppose expenditure cuts, except perhaps token cuts.
Increasing income appears feasible on paper, but considering that the country is already so dependent on tax revenue, it will be difficult to raise more taxes. One key avenue that can and should be explored is the fairness of the tax system, reportedly a topic of the National Dialogue on taxation. A fairer system could potentially yield greater income for the government. The lack of confidence in how governments of all persuasions have managed expenditure makes it difficult to convince the public that they have to pay higher taxes to increase government income.
Increasing exports and investments are talked about by all political parties, although few detailed strategies have yet been made known. These are areas that must be improved along with industrialisation, agriculture, and sustainable energy projects. However, these are long-term projects, and they all require long-term strategic policies and plans, something Sri Lanka has not effectively and efficiently implemented.
Regarding increasing tax revenue, while definitive statistics are not available, tax evasion by high-earning individuals and companies, through underreporting or not reporting income, is reportedly very substantial. Among high-earning individuals, several professional categories have been mentioned as operating in a cash economy.
It is more than likely that such individuals either do not declare their income or underreport their earnings, resulting in tax avoidance or minimisation using illegal means. It is not an insurmountable challenge to collect fair tax revenue from tax evaders if there is a will to do so. The lack of such a will is perhaps the reason for not having a dialogue on tax.
A tax system must be fair to low- and middle-income individuals as it is to high-income individuals. Excessively high taxation is unfair irrespective of income levels, as all individuals work hard to earn money. Sri Lanka is not a socialist country where individual enterprise has limitations imposed by the State. It is a free country with a market economy. High levels of taxation are also a disincentive for investment and, therefore, a counterproductive measure in the context of increasing tax revenue, as it can close opportunities for expanding business enterprises.
The State has a responsibility to look after the less fortunate but does not and should not have a responsibility to curb free enterprise. However, every citizen should also have a responsibility to look after the less fortunate and contribute towards fundamental values of the country. These include a universal healthcare system provided free to all its citizens and a free education system.
Looking at taxation, fairness and reasonableness also need to be considered from a different perspective, and models of taxation need to be examined. Taxation should be viewed as part of a social contract between a government and the people who pay tax. It is part of a partnership between the government and the public, and it must give a sense of ownership to the public that their money is being used judiciously for the benefit of all. Besides this, they must believe that their taxes are investments, not just expenses, and that they will see returns on their investment. Better hospitals, better schools and universities, better roads, better transport, and more affordable energy costs are some returns they should be able to expect from their taxes.
In this context, rather than imposing high taxes, individuals could be encouraged to invest in specific government or semi-government ventures where their investments are tax-deductible. Investments that have the capacity to provide more productive employment opportunities will have the added benefit of increasing tax revenue, as an increase in employment numbers will lead to higher tax collections.
Sri Lanka has yet to learn any lessons from Singapore’s experience and how they have managed their economy so well. It has three investment entities with the Government of Singapore Investment Corporation (GIC) responsible for managing Singapore’s foreign reserves. Their portfolio was reportedly worth USD 770 billion in 2023. In comparison, Sri Lanka’s foreign reserves have never exceeded USD 9 billion and in 2021, they had dropped to less than USD 1.5 billion.
The other two entities responsible for investments in Singapore are the Monetary Authority of Singapore (MAS) and Temasek. MAS is the Central Bank of Singapore, and their mission is to promote sustained non-inflationary economic growth and a sound and progressive financial centre. Temasek Holdings (Private) Limited, or Temasek, is a Singaporean state-owned enterprise established as far back as June 1974. Wikipedia states that “Temasek had a net portfolio of US$287 billion (S$382 billion) as of 2023, with S$27 billion divested and S$31 billion invested during the year. Headquartered in Singapore, it has 13 offices in 9 countries around the world, including in Beijing, Brussels, Hanoi, London, Mexico City, Mumbai, New York City, Paris, San Francisco, Shanghai, Shenzhen and Washington D.C. It is an active shareholder and investor, with four key structural trends guiding its long-term portfolio construction—Digitisation, Sustainable Living, Future of Consumption, and Longer Lifespans. Temasek’s portfolio covers a broad spectrum of sectors. Its key focus investment areas include Consumer, Media & Technology, Life Sciences & Agri-Food, and Non-Bank Financial Services.”
Even at this late stage, Sri Lanka could set up state-owned investment entities where the public could make tax-deductible investments and be rewarded with annual dividends, besides the social rewards accruing from the investments that these state-owned entities will be making in the country and overseas.
Paraphrasing George Bernard Shaw, Sri Lankans should not continue to look at things as they have been all these years, always asking why, but should look at things as they never have been and ask why not? Unlike a brand-new experiment with a possible high-risk element, Sri Lankans have the advantage of studying and knowing the path to success of the above-mentioned state entities in Singapore.
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