Business Times

Tax reduction will cause problems to the state


In management we often refer to "POISON PILLS". The recent tax reduction appears to be a carefully crafted sugar coated poison pill given towards causing problems for the government.

The whole country and the business community seem to be enjoying the sweetness of the poison pill at the moment.

Imports grew by 60% this year while exports grew only by 20% and it widened the trade deficit by over 1 billion dollars. This reduction of taxes will definitely contribute towards further widening it on a mega scale as vehicles are one of the most expensive consumer items we import.

This will compel the government to go for a devaluation of the rupee at least by 25% (in my personal view as an economist) within about a year and a devaluation would be a mandatory condition to get further loan installments from IMF (not the one which is forthcoming and it is likely that the government reduced the duties to fulfill a condition imposed on it in order to get the next loan installment from IMF). Sri Lanka imports 50% of its consumer goods and 63% of the consumer items have an imported component in it.

Therefore, the price of consumption goods will skyrocket after a devaluation and the ultimate consequence would be a rapid erosion of the government's popularity.

Ajith Colonne, Colombo.

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