Financial Times

Taxes taxing quality of life in Sri Lanka

By Dilshani Samaraweera

Tax experts say unending taxes are actually taxing quality of life of a majority of the people. But the government contends that it has made a tax concession for the people by increasing the tax threshold for income taxes.

“The first income tax slab starts on the first Rs 400,000 taxable income at 5%. Previously it was 5% on the first 300,000. So people have benefited,” said Commissioner of Inland Revenue, Premaratna Banda, speaking at a budget seminar organised by the Society of Certified Management Accountants of Sri Lanka, this week.

However tax experts point out that with the current cost of living, a family requires an income of between Rs 40,000-Rs 50,000 per month, for a decent life. Therefore, the current income tax threshold, which sets income at around Rs 33,000 per month, is actually forcing a majority of people into a lower quality of life.

“The tax free allowance should have been increased further. Because of the current cost of living, Rs 25,000 – Rs 30,000 per month is not enough for a family to live on. The cost of food is pretty high in Sri Lanka compared to other countries. You need around Rs 40,000 to Rs 50,000 for basic quality of life. The tax threshold should have been higher to allow people a basic quality of life and more items should have been included at lower taxes, in the essential goods basket,” said tax consultant, N. R. Gajendran.
In addition, a host of other goods that the government says is ‘non-essential’ are also slapped with tax increases. The Ministry of Finance says these increases in cess are aimed at encouraging domestic production. The ministry also says that input raw materials required by domestic industries, will not face tax increases. Local businesses however, say the exercise will only add to the cost of living. They point out that local producers cannot supply total domestic demand for all of these ‘non essential’ goods. Therefore, people will anyway be forced to buy imported goods, but will now have to pay more, because of the higher taxes.

“These measures will not be required if the government cuts down on wasteful and unproductive expenditure,” said the deputy chairman of the Ceylon Chamber of Commerce, Dr. Anura Ekanayake.
But tax increases on imports is also expected to control outflow of foreign exchange, by reducing demand for imported goods. This is expected to help preserve Sri Lanka’s foreign exchange reserves at a time when export incomes are slowing.

The latest tax introduced by the budget is the 1% on turnover, Nation Building Levy (NBL). The Finance Ministry says the NBL will be used to raise Rs 15 billion to re-build the North and East. The Ministry says the NBL will be stopped after two years.

“The North and East is part of our country and the people living there are our people. So we have to contribute towards rebuilding the North and East,” said senior tax advisor to the Ministry of Finance, R. P. L. Weerasinghe,

But professionals and businesses point out that Sri Lankan governments have a habit of introducing new taxes claiming they are for a short time-frame, but do not act on their word. The National Security Levy for instance, was introduced for a short period in 1991 but went on for 11 years until 2002.
Also, tax money often do not reach intended recipients and is not used for the intended purpose. Therefore, tax increases in Sri Lanka do not generally benefit the public, and instead, hurt the public by increasing the cost of living.

Tax experts say introducing the NBL as a separate tax only helps to make the already messy tax system even messier. The effective date for the NBL is from January 1, 2009 but at this point the administrative aspects of the tax is not yet finalised. The effective date for income tax changes is April 1, 2009.

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