Be consistent in taxation

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2017-08-19

The Ministry of Finance announced several tax cuts and relief programmes on Thursday (17), which would have a direct impact on the ordinary citizens of the country. Accordingly, the telecommunication levy imposed on internet services has been done away with while the duty on motorcycles, single cabs and mini trucks has been reduced.

Although these tax cuts benefit people, a sudden decision to revise taxes is a reflection of inconsistency in government's tax policy.

Although the government announced that the telecommunication levy on internet services would be removed with effect from 1 September, the initial plan of the government was to increase the telecommunication levy on internet services up to 25% from 10%, which was one of the revenue increasing proposals included in Budget 2017. The proposal to increase the tax on internet services was harshly criticized by the public, but it was not revised. All of a sudden the government seems to have woken up from a deep slumber and realized the importance of reducing the taxes on internet services.

While this is likely to be an election gimmick, the decision to introduce tax cuts reflects the bigger issue of the government being inconsistent in policy making, particularly in terms of economic policy making. Thus far, the only consistency displayed by the government has been in making ad hoc decisions, most of which are not related to each other.

One of the fundamental policies of taxation is consistency and it seems that it is the most lacking feature in the taxation policies of Sri Lanka. Despite having a two-thirds majority in Parliament, the government tax policy has been changing from time to time, making life difficult for businessmen, discouraging them from injecting investment into the economy.

During the last two years, tax amendments were implemented in the middle of the year at the will of politicians. Actions of this nature make the business environment in Sri Lanka unpredictable, thereby making it difficult to operate a business. Very often, concerns were raised by the business community regarding the difficulties in business planning due to the ad hoc methods adopted in implementing tax reforms outside the annual budget. In a similar manner, the government contradicts its tax policy by reducing the telecommunication levy this year, whereas it decided in the middle of last year to raise the Value Added Tax (VAT) in spite of the policy statement made by the government claiming that indirect tax burden would be reduced to nearly 60% of the total tax collection, which amounts to nearly 80% of the total tax collection as of now.

On top of that, the government reforms have not been consistent and in line with each other. While the government has been promoting exports through the New Trade Policy, which was approved by the Cabinet recently, the New Inland Revenue Bill consists of certain clauses which affect exporters adversely. Ceylon Chamber of Commerce (CCC) recently raised concerns about the possible adverse impacts that certain Sections in the new Inland Revenue Bill would have on export industry and claimed that they are pushing for a change in how tax liability on agriculture and export firms is defined as per the current version.

The CCC was critical of the way in which the corporate tax structure was simplified. The Inland Revenue Bill proposed a concessionary income tax rate of 14 per cent for exporters and agriculturists, only if they are solely engaged in such activity. Concerns were raised regarding the practicality of the proposal as most of the exporters and those engaged in exports businesses have local sales and in the case of agriculture, they engage in other trades as well.

This is only one major concern. There have been many inconsistencies in the tax policy of the government, which could be attributed to various reasons including fulfilling flowery election promises. Even after two years, the government seems to have failed to learn the importance of having a consistent tax policy, no matter how unpopular it will be, given the significance of taxation in Sri Lanka.

At present, the country is in the process of introducing a new Inland Revenue Act and in that context it is important that the government clearly sets out its policies on taxation and most importantly, stick with such policies without introducing reforms that contradict the tax policy.

It is often said that a politician thinks of the next election while a statesman the next generation. Only a set of statesmen would take a firm decision to ensure the consistency in government tax policy, thinking about the next generation instead of the next election. Time will prove whether the Sri Lankan public are lucky to have statesmen or not politicians.

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