Rethink Tax Policy

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Rising income disparities are more worrying to the UN than 'climate change,' former UN Conference for Trade and Development Secretary General and Thai Premier Dr. Supachai Panitchpakdi speaking at a function organized by the Sri Lanka Retailers' Association in Colombo, yesterday, said.

He said that the effect of this was that those who invest in real estate, bonds and equities, find their income levels rising faster. This is what led to the Arab Spring, Wall Street Protest and the rise in nationalism in France, which previously was able to garner 1-2% of the vote, but which has since increased to 10%.

Panitchpakdi also said, that though Sri Lanka's retail sales to GDP ratio at 13-15% of GDP were higher than Indonesia or Malaysia and slightly less than Thailand's, its household consumption to GDP ratio was however low, a sign that income disparities were increasing.

His message was that rising income disparities lead to political instability with grave consequences.

The fact that income disparities in Sri Lanka were rising was also highlighted by ADB's Chief Economist Tadateru Hayashi at a press conference in Colombo, recently. He said, that with a Gini coefficient of 0.46% it showed that income disparities were increasing. He however, said that this was normal for a low middle income country transforming itself to a high middle income country.

Premier Ranil Wickremesinghe speaking at a World Bank forum in Colombo last year said, that to minimize income disparities, his Government planned to lower indirect taxes from the current 80% to 60%, while increasing direct taxes from 20% to 40%.

But in November his Government hiked the value added tax, another form of indirect tax, from 11% to 15%, while also reactivating this tax to be applicable to the retail sector as well. Originally, the previous Mahinda Rajapaksa regime made VAT applicable to the retail sector. But, in a political move, he subsequently rescinded its application to the retail sector, only to be reactivated by the present government in November.

It was only last June (2016) that the Government signed an agreement with the IMF to increase its tax revenue, equivalent to 12.4% of GDP as per last year's estimates, to 15% of GDP by 2019. On that premise, the Government won a US$ 1.5 billion Extended Fund Facility from the IMF that June.

The increase in VAT and its re-applicability to the retail sector (supermarkets and such like), were steps taken to reach this 15% of GDP mandate.

Last week the Government passed a controversial new Inland Revenue Act where some of its provisions have as a focus on an increase indirect taxes either directly or indirectly.

Two such proposals are increasing company tax levied on the health sector from the present 12% to 28% and increasing the withholding tax (WHT) on interest income derived from instruments such as fixed deposits from the present 2.5% to 5%.

Usually, Sri Lanka's tax laws are effective from 1 April. But in those new developments, it's unsure whether the new taxes as per the new Act will be applicable from April of next year or as early as next month itself.

Nevertheless, more than doubling taxes on health sector company profits, i.e. 12% rate to 28% would naturally mean that the patients' bills would further go up. Companies in the healthcare sector are not going to take such increased costs lying down.

They will pass on such increased costs to the patient.

There is at present a ceiling on doctor's consultation fees with this figure fixed at Rs 2,000. There is also a price ceiling on certain drugs. To get over such roadblocks and mitigate any hits caused to those companies, bottom lines, those may lead to the importation of drugs which just pass the health regulator's minimum quality standards so as to keep the import prices of drugs purchased, in a sea of other increased costs, down.

But is the encouragement of the consumption of drugs which has a lower chance of patient recovery over the more expensive drugs which give the patient a better chance, the right way to formulate Government policy?

Those drugs, made more expensive because of higher taxes may be within the reach of only the rich. Increasing healthcare company taxation may help to uplift direct taxes, but at what cost?

Further, doubling WHT to 5% on fixed deposit interest income does not necessarily hit only the rich. Even the middle classes who live off such incomes suffer, thereby further increasing income inequalities. Government needs to rethink its tax policy.



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