COLOMBO: Sri Lanka has a population of over 20 million with about 13 million in the employable age-group. However, less than a million of its residents pay income tax.
According to Finance Minister Ravi Karunanayake, there are tax files on only 694,000 in the Inland Revenue Department.
He told parliament on Wednesday, that the government hopes to increase the number of direct tax payers to about 1.4 million.
He was speaking on the Bill to increase VAT from 11 percent to 15 percent, a measure which had drawn heavy flak from the opposition as well as a section of the government’s allies.
However, the Bill was passed by parliament on Wednesday with a margin of 53 votes, enabled by 65 abstentions. Prior to that, the Supreme Court had certified the bill as being in accordance with the constitution.
With a 4 percentage point incease in VAT government hopes to mop up LKR 10 billion (US$ 68 million) a year.
Karunanayake said that the four percentage point increase in VAT was necessitated by the requirement to repay the huge unproductive loans taken by the previous government headed by President Mahinda Rajapaksa.
Listing the losses inflicted by the projects executed by the Rajapaksa regime, the Finance Minister said that the Mattala airport (the world’s emptiest international airport) is running at a loss of LKR 13,600 million (US 92.5 million) an year; the Hambantota port is running at a loss of LKR 37,000 million (US$ 251.8 million); the Hambantota Conference Centre is losing LKR 850 million (US$ 5.7 million).
Karunanayake said that the present government has got a Chinese company to convert the US$ 1.1 billion debt in the case of the Hambantota port into equity, and run the facility as a commercial venture to earn profits.
Debt Burden
Enterprises Development Minister Eran Wickramaratne intervened to say that the per capita government debt, which was LKR 63,000 in 2000 , had risen to LKR 4 million in 2015. But government’s revenue, which was 17 percent of GDP in 2005, had come down to 12 percent in 2015.
Though government is in need of revenue and has had to increase VAT from 11 percent to 15 percent, it has had to exempt 25 items of consumption so that the common man is not affected. Also, the VAT net has been narrowed by excluding traders with a small turnover, Wickramaratne said.
IPS Study
According to the latest report of the Colombo-based Institute of Policy Studies, the Sri Lankan economy is in a sorry state. In 2015, the economy grew at a modest 4.8 percent and the fiscal deficit was high, at 7.4 percent of GDP.
A low tax base and a plethora tax exemptions coupled with falling exports had hit revenue.The share of exports in the GDP hit a new low of 14 percent in 2015 .In 2016, export earnings have contracted by 6 percent.
Sri Lanka also failed to attract more Foreign Direct Investment (FDI) which remains at 1.5 percent of GDP in 2016. FDI inflows fell by 30 percent in 2015 and by a further 53 percent in the first six months of 2016.
In 2008, due to pressure from local protectionist entrepreneurs, Sri Lanka abandoned a bid to sign a Comprehensive Economic Partnership Agreement (CEPA) with India, which would have brought in Indian and international investments. These investments could have made use of the already existing India-Sri Lankan Free Trade Agreement (FTA) to increase exports to the huge Indian market.
The present Wickremesinghe government is keen on entering into an Economic and Technical Cooperation Agreement (ETCA) with India by year end, with some safeguards for Sri Lankan professionals. But ETCA is proving to be as controversial as CEPA in the public domain, casting doubts about its coming to fruition anytime soon.