New challenges ahead in run-up to ‘middle income’ status: Tax consultant

27 November 2013 08:32 am - 0     - {{hitsCtrl.values.hits}}

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Budget 2014 is widely deemed to be progressive and consistent with previous targets of reaching middle-income status by 2016, however Sri Lankans must now gear to face new challenges such as current, fiscal and democratic deficits faced by the country, according to Gajma Tax Consultant Senior Partner, N. R. Gajendran.

“The year 2016 has been defined as a strategic year for Sri Lanka, the year that the country will, in fiscal terms come of age, with US$ 4,000 per capita income and a current account surplus.

This is the first step in becoming a middle income country and these will be fundamental indicators of macroeconomic stability.

If we can achieve this culture of surplus, it will leave a defining mark on the country.

Once this tide is turned, every successive government will be forced to maintain a surplus and this has huge implications for the country,” Gajendran observed.

He added that further components of macroeconomic stability include a higher tax to GDP ration of over 20-25 percent against a current 13.5-14 percent and a debt to GDP ration below 65 percent.

“Such tax revenues cannot be achieved at present because Sri Lanka is being incentivized through reduced taxes or exemptions. My complaint in this regard is with tax holidays which will bring about a total distortion to the country and the people at large.

Tax is still a significant component of the cost of running a company. When you take taxes out of the picture, it’s not a big deal to survive and make money and this is a challenge. So the challenge then is to see how these tax revenues can then be increased.”

Meanwhile commenting on Sri Lanka’s democratic deficit, Gajendran warned that the country’s current position would not be conducive to growth as a middle income country.

“We also have a noticeable non-fiscal issue in that we live in a democratic environment but the strength of a democracy is not in the strength of the government but in the strength of the opposition.

The opposition is missing in action. If opposition is not opposing the government then it is opposing itself so that factor needs to come in otherwise you do not have the proper checks and balances within the system as a whole,” he pointed out.

Gajendran’s observations about a dearth of democracy in Sri Lanka also tied in to later remarks he made on budget proposals calling for the merger and consolidation of Sri Lanka’s banking and financial services industry.

“There is a tendency to get smaller banks to merge into larger banks. This definitely creates an oligopoly but I think its being encouraged in order to get these banks onto a stronger footing.

However in a democracy you must have choices, if you don’t have a choice there will be a problem.

Banks should be offered the choice of either merging or finding ways to raise capital instead since the goal of these proposals is to strengthen the sector,” he noted.

Meanwhile commenting on the imposition of a 2 percent Nation Building Tax on the banking sector, Gajendran stated that given it effectively acted as a sales tax, costs would almost certainly be passed down to customers unless preventative legislation were passed. He added that with finance companies facing particular difficulties following the crash in gold prices and the vehicle market, would be extremely hard-pressed to absorb the cost of NBT.

Gajendran further noted that lowering of the threshold on value-added tax through Budget 2014 was also likely to be passed on to the customer likely generating some inflationary pressure, however given the moderating inflation trends over the last few years and recent political goodwill generated among the general public through the hosting of the Commonwealth Heads of Government Meeting (CHOGM), such measures are likely to proceed.

Ultimately Gajendran concluded that Sri Lankans must shift out of the debt mentality and get into a “revenue mentality” in order to fully gear for middle-income country status.

“Whether its corporate sector or businesses in general, everyone wants to borrow when they want to expand instead of using their own revenue.

Many times when people borrow they start spending as if they own the money but that is money that has to be repaid so this debt needs to be converted into permanent income.

The only way to do this is through converting these debts into exports revenue, foreign direct investment and portfolio investment into the capital markets.”

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