- If the tax system becomes more equitable, it wouldn’t be a big burden for people in low income segments
- We have to break down protectionist walls and create industries and jobs
- We are one of the lowest countries in the world in terms of tax revenue to GDP
The proposed tax revisions which will come into effect from January 1 (2024) have raised eyebrows of the public. While some have been confused about how the 18% Value
Added Tax (VAT) would be imposed, economic experts are critical of the government’s approaches to generate more revenue in 2024 while trying to agree to criteria set out by the IMF. Economist and Samagi Jana Balawegaya (SJB) MP Dr. Harsha De Silva believes that Sri Lanka should do away with its inward-looking, statist, populist and unsustainable economic policies if the country is to prosper from an economic standpoint.
In a candid interview with the Daily Mirror, Dr. De Silva elaborated on how regressive, indirect taxes would affect the common man, why the tax administration should be improved and how the SJB’s social market economic policy could drive the country towards economic prosperity.
Excerpts:
Q People are worried about the recently announced tax revisions and confused about what would be taxed and what will not. Could you explain how this would affect expenses of ordinary people from January 1?
There are three things. One is that there has been a whole bunch of taxes that were previously not exempt from VAT which are going to come within the VAT net. Secondly, the VAT threshold is being brought down from Rs. 80 million a year to Rs. 60 million. That means companies that were not paying VAT earlier will have to start paying VAT. The third is that the threshold for the social security levy which the cabinet passed recently was brought down from Rs. 120 million a year to Rs. 60 million. So all three things are going to hit at the same time. In the VAT also while you remove the exemption list going from 0 to 18%, at present the VAT is at 15%. So those will go from 15%-18%. Regressive, non-direct taxes would certainly affect people in low income segments. How it happens is that if you take two people earning Rs. 50,000 and Rs. 5 million, the basic needs of the person earning Rs. 50,000 would be taxed. Whereas someone earning Rs. 5 million can still pay 10% tax and invest the remaining money on property or anything else. But if the tax system becomes more equitable, it wouldn’t be a big burden for people in low income segments. Therefore this country needs to impose direct taxes which are more progressive. Taxes are paid to be able to get social services. In Singapore you hardly pay any tax. People have to pay for doctors, education. But these are different models. But the social market economy model that we propose is somewhere in the middle. People are not willing to pay 60% taxes, but they expect a lot of things from the state. They are more willing to pay around 10% tax, but then they can’t expect all those services from the state. People should be taxed in an equitable manner.
“You need to earn at least Rs. 150,000 if you create jobs. This can be done by integrating with global production networks. We have to belong to certain groupings, liberalize your trade and investment regimes, enter into agreements with nations such as Singapore, India.
Q 2024 is going to be an election year and this is an unpopular decision by the government. Why do you think the government was forced to do this?
It is an unpopular decision. Which government would want to increase taxes? No one wants to increase taxes. But we saw what happened when taxes were being cut. We went bankrupt. 93-94% of government revenue is tax. At least 18% of the GDP should be in taxes. Our expected taxes is Rs. 4.1 trillion. Ideally it should at least be Rs. 5700 billion as opposed to 13%. It has to be increased by another 5 percentage points to be comfortable. We need to spend a lot more money on education, teacher salaries, science and computer labs, healthcare etc. We need to spend more money on infrastructure. But we don’t have the money. Governments don’t want to increase taxes because they are populist. There are some political parties who seem to think that they have some magic wand and that we need not reform taxes, reform SOEs and that we can continue to give people everything they want without the pain. Even though it is unpopular there’s no other option. We are one of the lowest countries in the world in terms of tax revenue to GDP. So you can’t run a country like this. You can if nothing is given free. If we say no free healthcare, no free education, then we can run it. It is a very difficult situation for the current government as they’re going to get hammered mercilessly at the election. People have been dealt a massive blow. This was done by the populists. This whole inward looking, statist, socialist ideology has existed ever since the assassination of President Premadasa. In 1994, the Chandrika-JVP alliance started doling out jobs, starting more loss making state-owned enterprises, cutting taxes, giving tax breaks, not focusing on exports, taking money from all kinds of people and building useless infrastructure projects, getting further and further into debt. But our competitors at the time, Vietnam, Thailand and Malaysia continued the momentum Mr. Premadasa had. Mr. Wickremesinghe was his industries minister. This momentum came from Mr. Jayewardene’s ideological shift that we have to look outwards and create efficiencies in the market, give the private sector the space to play and an outward looking private enterprise driven economy.
Q Economists say that the IMF hasn’t specified on which tax to be increased. Do you think increasing VAT can be justified?
IMF basically says that we have to bring in a primary account balance. This means annual revenue minus annual expenditure minus interest payment. Interest payments cannot be changed as they were agreed upon previously. Between 2015-2019 they took a lot of loans. A Verité Research study indicates that 89.8% of all loans taken between 2015-2019 were to pay the interest of loans obtained prior to 2015. Therefore when you look at the efficiency of a government you take out that interest component because you have nothing to do with it. You’re not getting into burrowing to get your day-to-day operation going. To keep that going you need to have a surplus. This is the real challenge to the government in terms of agreeing to the IMF. There they don’t specify which taxes to be increased and which expenditure to be reduced. That is for the leadership to decide and work with IMF to agree on a game plan. If the primary surplus is to go up, one of three things can happen; revenue goes up, expenditure falls or revenue goes up and expenditure falls. What we’re trying to take is the third option. The expenditure outside of interest to be cut is to cut the losses of state-owned enterprises (SOEs). What happens is you tax people and collect money and that money is paid to cover the losses of some SOE like SriLankan, Mattala Airport etc. Therefore by cutting down on losses incurred by SOEs you help to improve the primary balance.
Q How does improving tax administration help to establish transparency?
If the government collects taxes from people, which they have to pay to the government, then there’s no need to increase interest rates. But the issue is that these are not being paid. Let me give an example of the corruption that happened in the alcohol sticker business. Instead of the money going to the treasury as tax revenue it is being shared by some unscrupulous crooks. Whether it is the sugar or the garlic scam it’s money which is being siphoned out. Therefore you need to improve the tax administration. Digitizing, making the RAMIS system work, improving transparency, removing discretion between the tax office and the taxpayer, all those things need to be strengthened.
Q With the IMF programme coming in it became clear that successive governments have misused public money including the UNP which you represented earlier, resulting in the country having to obtain loans at high interest rates. What are your observations in this regard?
This country was in a precarious situation at the change of the last government. I recall sitting with Mangala Samaraweera even though I was never in cabinet and working with him on the real issues he had to face, thinking outside the box, bringing in the new Inland Revenue Act. All that was done because the situation wasn’t looking good. But still the debt was sustainable. The IMF report dated November 9 said the debt was sustainable. It was the February IMF report which said that the debt was unsustainable. So what happened between November and February was Gotabaya Rajapaksa’s idiotic decisions on cutting taxes. That triggered the collapse and led to bankruptcy. But why was the Government which was in a vulnerable position going for elections? From 1994 onwards there was a change in ideology. From 2004 onwards it got worse. We were progressing reasonably well. During Mr. Premadasa’s time even while fighting two wars, one in the south and one in the north he went through two IMF programmes. However at the same time he got the World Bank to give him free money. He did Jana Saviya, gave free uniforms and lunch to every child, he did the housing project etc. He did all that because he had 21% of GDP as revenue. But Gotabaya brought it down to 7%. Interest rates were soaring, confidence was falling but Mr. Premadasa created 200 garment factories in the country. We were stepping up to be the next success story. Several leading apparel brands were created during Mr. Premadasa’s time. But at the time there was a quota system and now it is more competitive. But the ideologies are the same. There’s something called integrating with the world and that’s the only way we as a small country can develop. Mr. Premadasa believed in exports. But that was forgotten with the introduction of an inward-looking, statist, populist, unsustainable, socialist policy. We left the global market place. The way to measure it is by looking at trade openness where you add import and export and divide by the GDP. We were around 80- 85% and now we’re at 45-46%. But other countries that were competing with us, from being less than 80-85% have gone up to 200-350%. One example of Vietnam, Bangladesh and Sri Lanka is that around the time Mr. Premadasa was assassinated there were some big projects. Each of these countries exported around USD 3.5 billion in goods. This year we probably will export around USD 11 billion, but Bangladesh will export around USD 80 billion and Vietnam will export around USD 400 billion. But each of these countries started at the same place and those countries then followed Mr. Premadasa’s policies. That was the ideological position of the then UNP. The UNP has never had a government since 1993. Currently the Rajapaksa’s run the country. RW is trying to bring that ideology as much as he can. But he’s sitting with a bunch of criminals. We saw the SC determination on the economic criminals. For the last 30 years these introvert, inward-looking, statist, socialist, populist, give-people-no-tax kind of convoluted ideology made Sri Lanka the sick man of Asia, the only bankrupt country in Asia, that made Sri Lanka go to Bangladesh with a begging bowl!
“This country needs to impose direct taxes which are more progressive. Taxes are paid to be able to get social services. In Singapore you hardly pay any tax. People have to pay for doctors, education. The social market economy model that we propose is somewhere in the middle”
Q If a SJB Government comes into power do you have an alternative to what the RW Government is following to recover from this economic crisis?
We have written our Economic Blueprint 1, updated it to two and I’m writing the next update which we will bring in February or March. There are two things; one is fight corruption broadly. We want to erase corruption. But politicians cannot do it. We think that there must be an independent, powerful agency to fight corruption. And have an independent prosecution office separate from the Attorney General’s office. There are countries that have done this. Sri Lanka’s biggest issue is corruption. The Attorney General files a case and a few months down the line he has withdrawn the case. Thereafter the criminal is released and claims that he has done nothing wrong. This is due to political interference. If there are technical issues for whatever the reasons the AG can certainly refile those cases. But why isn’t he doing that? There has to be an independent powerful body which isn’t controlled by the political establishment with no political authority to fight cases till the end. SJB believes in an independent prosecutor’s office to fight corruption. The other option is with regards to Stolen Asset Recovery. We have been realistic about it. Some claim that by recovering stolen assets we can pay the debt and everything can be settled. But this is nonsense. It is a long process and you end up getting very little of what is expected. We will also create what we call a social market economy. It’s a synthesis of what we call economic and political liberalism. Economic liberalism is where we believe in markets for goods and services. This is different to what is being presented to the people. They say they do not believe in markets for services. Only markets for goods. They also say that money cannot be commodified. Which means some political element will determine interest rates. This is the right direction for dooms day and disaster. Our political liberalism is about social justice and equity. It is about not letting the market run crazy. It is to ensure that the government intervenes to prevent monopolies, oligopolies, to create competition and establish transparency; also to ensure that equity and equal opportunity is provided to the people. A marriage of these two ideas is what we think would fix this country. We totally focus on external markets. We believe that breaking walls and building bridges is a way out of this mess. Production happens because you need land, labour, capital and entrepreneurship. That’s a fundamental. What we’re lacking is capital. We’re borrowing every day. How do you create space for investors to come in? How do you build that ecosystem? What kind of reform do we do? We have to go in for massive trade and investment reforms. We have to break down protectionist walls and create industries and jobs. If I were in office my primary objective would be to create jobs. Not the kind of jobs where you earn Rs. 20,000. You need to earn at least Rs. 150,000 if you create jobs. This can be done by integrating with global production networks. Production is sliced these days. We have to belong to certain groupings, liberalize your trade and investment regimes, enter into agreements with nations such as Singapore, India. These will create a dynamic economy in this country where people will enjoy life. This is the kind of life we want to create in this country. But we can’t do this by looking inwards and having some nonsensical socialist policies. The social market economy will provide opportunities from the farmer to the CEO.
Q There has been public criticism that economic experts like you didn’t come forward when the country was declared bankrupt. Your comments?
It is true that RW did invite us to join him. But it was never going to happen. We were never going to sit with the same criminals who destroyed the country and be directed by them what to do. It is an oxymoron. It is like water and oil. If he was going to get rid of them and then make a genuine proposal then that’s another story. As a matter of fact it was myself, Kabir Hashim, Eran Wickremaratne and Ranjith Maddumabandara who met Gotabaya Rajapaksa on May 10. We were discussing it. People blame Sajith for running away. But he never ran away. We were discussing the proposal issued by the Bar Association of Sri Lanka. What RW said about Saliya Pieris is unwarranted. It was a non-partisan proposal. There was a plan to bring the 19th Amendment in two weeks time, then the 20th Amendment, deciding on the abolishing of the Executive Presidency where all parties agreed to. But he didn’t come back to us. On Thursday night he addressed the nation and mentioned most of what was in the document that we discussed. On Friday we referred to that and we wrote him a letter to discuss the next steps based on the plan. But on Friday afternoon Mr. Wickremesinghe became President, but subsequently we found out that the deal was done one and a half days prior to that. But he never ran away. We had to have conditions that the rascals who destroyed the country cannot be around. Various allegations are being made, but that’s not true. As for me, I was not going to do it in government. I don’t want to be in a cabinet. But I said I will take responsibility as Chairman of the Public Finance Committee. I have taken a massive responsibility in getting this country out of this mess. I have analytically been able to bring both the government and opposition together to do tough reforms. It’s easy to oppose everything, but I don’t want to. I’m doing politics to not just be a minister. I want to fix this nation. So I feel I have done a lot more than sitting in some cabinet office as Chairman of the Public Finance Committee and directing the legislature to agree to tough reforms. Even though I have failed to make the government understand the pain that some of these reforms would have on people. I will completely reject that allegation that I hadn’t helped. I chaired the most important committee in Parliament. I do all these for zero. I don’t need anything and I’m fine the way I am. I have done this without any perks and without spending one rupee of government money.
Q A recent Supreme Court judgement named several individuals in the former regime who were responsible for the prevailing economic crisis. But this matter received limited attention in Parliament. Now the experts and the public demand punishment and recovery. Shouldn’t that happen soon?
We have said that these people have to be dealt with. They have been convicted. So what’s the next step? The President first has to make his stand clear. I have been very critical of him in every speech he made during the Budget. But he hasn’t uttered one word. It’s very clear that he’s protecting these people. This is not about one family. It’s about 5 million families in this country. To protect one family that brought misery to 5 million families. How equitable is that? People are angry. They are openly saying that they’re not at fault. This shows that from justice to the whole system is aligned to the Rajapaksa mechanism.
Q It looks like the next election will have many coalitions. If a government led by or represented by RW invites you to develop this country would you join?
It is not about me. It’s never about me. I cannot do anything by myself. I’m not important. What is important is the ideology. Not only RW, if they are not crooks, racists and if they believe in our economic ideology we will join with all good people in Parliament.
