By Chandeepa Wettasinghe
Tax reforms in Sri Lanka will be very hard to achieve, as decades of damage have pushed the system almost beyond repair, the International Monetary Fund (IMF) Resident Representative told a recent forum in Colombo.
“Effectively every year, your budget cycle preceded by an annual lobby cycle or a proposal collection cycle, and then these new proposals are injected into the budget. So if you keep injecting every year for 40 years, they accumulate and you reach a saturation point,” Eteri Kvintradze said.
“For what purposes are you using the tax system? Are you using it for incentivising? Or are you using it for revenue generation? It no longer works in collecting revenue.
It works for incentivizing individual business sectors, professionals, you name it. It’s very hard to collect something when it’s not designed for collection,” she added.
Kvintradze further noted that reducing tax rates would not increase revenue. She pointed out that reducing rates work if you’re expanding your base or removing exemptions by bringing people into the tax net by the law.
Sri Lanka is banking on an electronic tax collection system for increasing the tax base, of which Kvintradze expressed her doubts, as accounting for the incentives and exemptions would cancel out any additional revenue raised online.
Meanwhile Kvintradze brought into notice that some of those enjoying tax incentives utilize them for tax evasion instead of growth purposes.
“At this point, the business community and the leadership of this country have to ask if they want to continue this way or do they want to collect taxes. Tax reforms are extremely difficult, because the business community and the people have to come along and be a part of the system” she said.
Her comments come in the wake of Prime Minister Ranil Wickremesinghe requesting the IMF for expertise in tax reforms and a possible bail out package.
The Budget 2016 had painted a rosy picture, saying taxes which fell to 10.2 percent of GDP in 2014 have provisionally increased to 11.4 percent in 2015 and will increase to 12.7 percent in 2016. Experts say that long-term investments in health, education and infrastructure will be reduced if the revenue targets are not met.
“The questions that are raised now, are how implementable is this Budget is going to be? How credible is the future path of fiscal consolidation going to be?” Kvintradze asked.
She said that the Budget saw fiscal expansion instead of the expected fiscal consolidation, and therefore, debt would pile up, which would make it difficult to reach the Prime Minister’s 3.5 percent of GDP budget deficit projected for 2020.