Christmas, it seems, has come early to Sri Lanka after the new administration announced sweeping cuts in taxes, offering goodies to the people. This was on my mind as I sipped my cup of morning tea and watched Kussi Amma Sera and her friends – Mabel Rasthiyadu and Serapina – amusing themselves at the gate, [...]

Business Times

Pleasing the masses


Christmas, it seems, has come early to Sri Lanka after the new administration announced sweeping cuts in taxes, offering goodies to the people.

This was on my mind as I sipped my cup of morning tea and watched Kussi Amma Sera and her friends – Mabel Rasthiyadu and Serapina – amusing themselves at the gate, watching a young girl playing with her dog on the road.

After a while they walked to the margosa tree and were engaged in a conversation, with the topic being the tax breaks offered by the new government headed by the Rajapaksa brothers.

“Meva visala sahana. Namuth meva nisa jeevana viyadama adu weida? (These are great concessions. But will it bring down the cost of living?)” asked Serapina.

Mama ese balaporottu venava (I hope so),” said Kussi Amma Sera.

Mama hithanne anduwa mila adu karai kiyala. Ethakota boho denekuta sahanayak wei (I would think it would reduce prices. It would be a relief to many people),” noted Mabel Rasthiyadu.

At this point, as I walked to the computer, the phone rang. It was my jolly-mood economist friend, Sammiya (short for Samson) on the line. I relished a ‘jolly’ conversation with Samson as the ‘feel-good’ season had arrived with all these pre-Christmas goodies being presented to the people.

“I say … good news on the tax breaks,” said Sammiya. “You bet, it is,” I said.

“Removing the PAYE tax and reducing VAT will help people enormously to have a great Christmas and New Year,” he said, but then asked: “But looking at the bigger picture, this would mean a sharp drop in tax revenue. How will the government manage this?”

“You have a point. However, the new administration must be having a plan to recover taxes from other sources,” I said.

The tax breaks came after the new Cabinet of Ministers met for the first time on Tuesday. The relief measures included revising the threshold on the Pay-As-You-Earn (PAYE) tax in which individuals will have to pay a tax only if their monthly income exceeds Rs. 250,000 compared to Rs. 100,000 now. This is effective from January 1, 2020.

The maximum rate of personal taxation was reduced to 18 per cent from 24 per cent. The income generated from agriculture, fishing and livestock; foreign currency earnings by Sri Lankans providing professional services; provision of information technology (IT) services and other enabling services, has been exempt from taxes.

The construction industry has benefitted with the tax rate reduced to 14 per cent from 28 per cent. The VAT (Value Added Tax) on goods and services was reduced to 8 per cent from 15 per cent, while the VAT on businesses engaged in the tourism sector was reduced to 0 per cent, provided that 60 per cent of the turnover is sourced from local supplies i.e., local agriculture and locally manufactured goods.

The current NBT (Nation Building Tax) of 2 per cent imposed on liable turnover was removed in respect of goods and services supplied and also on banking, financial services and insurance was also removed.

The Telecommunication Levy has also been reduced which brings down the cost of telephone call charges. Some analysts said that these developments have a far reaching impact on all categories of taxpayers.

“Further, these also indicate that the Government is focusing on increasing the tax base for tax compliance purposes,” said a brief commentary by the audit firm EY.

“Phew,” I said, continuing my conversation with Sammiya after a brief pause, adding: “These are real goodies.”

“Yes. But there is a bit of concern; are these measures sustainable?” he asked, repeating the earlier query. “Good question. Maybe they (administration) have an answer of getting tax revenue from some other source,” I replied.

It seems the loss in revenue might amount to billions of rupees unless there is another way to recover taxes lost as a result of these new measures. On the other hand, there appears to be an effort to bring back the old GST (Goods and Services Tax) which was first introduced in 1998.

Winding up my conversation with Sammiya with a ‘merry Christmas’ and ‘happy New Year’ greeting (in case we don’t have another chat before the end of the year), I reflected on these latest developments which are meant to assuage the population which gave a sweeping mandate to Gotabaya Rajapaksa, the new President.

Goodies apart, the new administration has a not-so-easy task ahead in settling local and foreign debt – much of it being carry-forward debt from the earlier Mahinda Rajapaksa-led administration.

The new President has also announced that the deal with the Chinese on the Hambantota port will be renegotiated. The former Maithri-Ranil government, instead of paying a Chinese loan of US$1 billion taken to build this facility, had negotiated a lease payment of the same amount from the current Chinese operator of the port. How the new government aims to renegotiate this deal and whether it means having to pay the loan and Sri Lanka taking control of the port, remains to be seen.

Goodies, no doubt, but coming at a price. The same applies to the slew of concessions – how will the government recover these lost taxes?

For the record, tax revenue in 2014 (when the Mahinda Rajapaksa-led government was in power) was Rs. 752,180 million and seen rising to an estimated Rs. 1,240,942 million in 2019. On the expenditure side, expenditure in 2014 was Rs. 1,326,694 million and rising to an estimated Rs. 3,149,000 million in 2019.

The debt numbers are daunting. The total external debt of Sri Lanka increased to $55.47 billion in the second quarter of 2019 from $54.22 billion in the first quarter of 2019. The total interest burden for 2019 is Rs. 913 billion and Rs. 1,000 billion for 2020.

These numbers, however frightening, mean nothing to the largely, voting population in the countryside, who have other issues to worry about like fertiliser subsidies, water for irrigation, good education and health, government jobs for youngsters among other concerns.

As I pressed the button, completing the column and sending it to my chief editor, Kussi Amma Sera walked into the room with my, now routine second cup of tea, saying: “Sahana labuna eka loku deyak (Getting the concessions is a great thing).” “Ov… ov,” I replied, in deep thought, wondering whether these are short-term measures with a stricter tax regime to come after the next parliamentary poll. I hope I am wrong.

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