the poor: Tax reforms to safeguard poor
A former Min-ister of Finance, Ronnie
de Mel pointed out that the country's revenue proposals were such
that the burden of taxation fell on the poor, while the rich contributed
little. During the Budget debate on the Finance Ministry vote, Mr.
De Mel blamed the government for creating a dangerous trend of economic
and social tension through increasing the disparity between the poor
and the affluent.
out that the budget for next year sought to obtain 70 per cent of
its revenue from both the rich and the poor classes through consumption
taxes, but only 17 per cent would come from the rich through direct
income taxes. Mr. de Mel asked: "Is this fair for any country?
In many countries like Sri Lanka both direct and indirect taxes
are made on an equal basis. I warn the government not to create
economic discontent in the name of a free economy," Former
Finance Minister Ronnie De Mel argued: "How can you have a
free economy and a just society where a major part of the revenue
of the budget comes from the less affluent sections of society and
only 17% from the affluent?"
The low collection
of direct income taxes has been one of the notable features of the
Sri Lankan fiscal system. Owing to this governments continue to
rely heavily on indirect taxes. In 2001 consumption based taxes
accounted for 83 per cent of total tax revenue. In a poor country
like Sri Lanka the burden of indirect taxes fall on the poor, as
taxing those commodities that the rich consume do not yield adequate
revenue. This in spite of the fact that there are variations in
the rate of taxation in the VAT system designed to reduce the rate
on widely consumed items and higher rates on those commodities that
are consumed by the richer sections of society.
But by virtue
of the fact that the rich are a small proportion of the population,
these indirect or consumption taxes do not yield much. In 2001,
for which year we have the figures, personal income taxes accounted
for only 6 per cent of total taxes. Most of these taxes came from
PAYE deductions rather than from income tax declarations. The incapacity
and inefficiency of the Department of Inland Revenue in collecting
direct taxes has meant that the government has to rely on consumption
taxes that are mostly paid by the poorer sections of the population.
Mr. de Mel alleged that the reliance on consumption taxes was due
to these being easier to collect. "But should an entire people
suffer for the inefficiencies and corruption of the Income Tax Department?"
Mr. De Mel asked.
There are two
ways by which the government could remedy this situation. First,
there could be much higher specific taxes on commodities that are
obviously consumed by the very rich. An example of such a tax was
the tax on the use of large motor vehicles, introduced some time
ago and then withdrawn. It is true that such a single tax too would
not bring in large revenue.
Yet a series
of such taxes could bring in more revenue. That is not the only
benefit. It would also reduce the consumption of such items and
reduce imports. The curtailment of " conspicuous consumption"
has both direct economic benefits and indirect social and political
benefits. The social discontent that Mr. De Mel spoke of in the
same speech could also be contained.
The other approach
is the taxation of income at source. Since the income tax authorities
are unable to track down income such taxation at source could be
an effective means of gathering taxes from the better off sections
of the population. Yet these taxes too have been attempted. When
they are resisted by the people the government tends to withdraw
them in order to ensure their popularity. Since we have to accept
the inefficiency and incapacity of the tax authorities to collect
taxes from the affluent, it is a more pragmatic measure to confine
direct taxation to corporate taxes and do away with personal income
taxes. The loss in revenue could be more than made up by all sources
of income being taxed at source.
Such a system
has certain attractions apart from its tax efficiency. Much of the
resistance of people to direct income taxes is the bother of having
to fill forms, keep records and the recognised fact that the tax
department harasses the few who send in their returns. This has
been openly stated at many for and the Finance Minister Chocksy
has himself admitted this. He has recognised this in bringing in
a provision to debar the tax authorities from questioning the tax
returns beyond a few years. He has also taken a step in the right
direction in taxing share incomes at source as the only tax. This
in fact reduces work for the taxpayers, as well as the Department
of Inland Revenue in the processing of tax returns. The bank debit
tax and the tax on interest income were other such taxes. Yet the
government tends to adopt such measures and remove them when there
are objections. If these measures are put in place, direct personal
income taxes could be removed, a larger amount of taxes collected
from the relatively better off and the burdens of indirect taxation
of the poor reduced.