‘Capacity To Pay’, ‘Ability To Pay’ Govt’s New Rates Question Tax Principles
By Paneetha Ameresekere
A standard statement by tax consultant N.R. Gajendran when addressing tax seminars, used to be, that the Government's tax policy should be based upon the principle of the taxpayer's 'ability to pay' and the 'capacity to pay'.
In this context, the Government's move, led by Premier Ranil Wickremesinghe to reduce indirect taxes from the current 80% to 60%, while doubling direct taxes from the present 20% to 40%, is a good move.
The logic behind this move, as one of my bosses put it to me succinctly the other day was, why should a man earning
Rs 25,000 a month pay Rs 50 for a loaf of bread, whereas another earning four times that salary at Rs 100,000, also be paying Rs 50 for that same loaf of bread?
His reasoning was that should not the man earning a higher income be made to pay higher or more taxes and thereby reduce the indirect tax burden such as those levied on a loaf of bread, thereby reducing the price of bread and making it more affordable to the low income earner making only Rs 25,000 a month?
It may be impractical to have a two tier or multiple tier tax regime for consumables such as bread vis-à-vis their retail prices, by making the rich pay more for a loaf of bread and the poor, a lesser price. How is the trader to identify who's a rich or a poor customer to levy the 'appropriate' tax rates?
But what may be done, is to either reduce or take off the tax completely on bread, while at the same time increasing the direct tax on those, in Gajendran's words, who have 'the ability to pay' and the 'capacity to pay.'
It is in this context that one has to look at the increase of two direct taxes in the new Inland Revenue Act that was passed in Parliament recently, which questions the fact that when those new taxes percolate down to the end user, whether the taxpayer (either direct or indirect), has the 'ability to pay' and the 'capacity to pay'.
One of those two controversial taxes is the carte blanche Withholding Tax (WHT) of 5% to be levied on interest earned on fixed income instruments such as fixed deposits (FDs), i.e. a doubling of the current WHT rate of 2.5%, to 5% once the new Inland Revenue Act comes into force in April 2018.
The other, is the increase of the Standard Tax regime for companies in the Healthcare Sector, from 12% to 28%.
Therefore, the proposal to hike the tax in the healthcare sector from the present 12% to 28%, is a 16 percentage point or a 133.33% increase. This new tax too will be effective from April next year. In fact, all of the tax proposals under the new Inland Revenue Act will be effective from April 2018.
On the subject of the increase in WHT on interest earned on instruments such as FDs, there may be a question of fairness in levying such a tax, carte blanche, vis-a-vis a person who lives off from such an income, say, an earning of Rs 25,000 per month of interest income and another person who is earning four times that amount, i.e. Rs 100,000 per month.
Such a scenario may be similar to the aforesaid example of a person earning a salary of Rs 25,000 having to pay Rs 50 for his loaf of bread, while another person earning Rs 100,000, also having to pay 'only' Rs 50 for that same loaf of bread, instead of being taxed more.
It's not that this newspaper is advocating that bread should be taxed on an ascending or sliding scale depending on a person's income, where a person earning 'less' would be charged a lower tax on his loaf of bread, while the person who is earning a 'higher' income should be charged a higher tax on his bread, that way ensuring that Government suffers no revenue loss due to a sliding/ascending tax rate applied to an essential commodity like a loaf of bread. Such a scheme, as explained above, is not viable.
WHT on such interest receipts was first introduced by the cash starved Mahinda Rajapaksa regime, where such a WHT first became effective from 1 April 2011. However, at the time, an individual earning a maximum of Rs 500,000 as interest income didn't come under this particular WHT regime.
Initially, when this taxation scheme was introduced, i.e. effective from the financial year 1 April 2011, the minimum rate applicable was 2.5% for individuals earning an interest income of between Rs 500,000 and Rs 1.5 million annually. Anyone earning a higher interest income was subjected to a WHT of 8% on such earnings.
1 April 2011 was the genesis of the WHT regime vis-à-vis interest earned on deposits by individuals. Four years later, on 8 January 2015, the present regime was elected to power, bringing in political and economic changes to the old order, for better or for worse.
The new Government, similar to the previous regime, has also been strapped for cash. While the former government restricted the application of the WHT on deposit interests of those earning more than Rs 500,000 per annum, the present regime, carte blanche, made it applicable to any value earned vis-à-vis deposit interest, doing away with Rajapaksa's minimum deposit interest income threshold.
If an individual earned a deposit interest income of Rs 1,000 per annum, that income was also subjected to a 2.5% WHT under the new regulations, effective from 1 April 2015. Similarly, if a person who earned a Rs 1,500,000 interest income per annum, that person too was subjected to a 2.5% WHT.
Though the WHT may be construed as a direct tax, the carte blanche application of the WHT on interest income, regardless of the value of such an income, however, brings to question, whether such a blanket application of the WHT on deposit interest income, may violate the tax principle of the taxpayer's 'ability to pay' and the 'capacity to pay.'
Matters have been made worse where, under the new Inland Revenue Act passed by Parliament this month, this WHT on deposit interest has been doubled to 5%. The seeming saving grace is that seniors, which the Inland Revenue Department defines as those who are above 60 years of age, earning an interest income of a maximum of Rs 1.5 million per annum, are however not subjected to this new 5% WHT regime.
The retiring age in public service is 55 years, with extensions, such a person may work up to 60 years. A public servant therefore is cushioned by the fact that he can be employed till he's 60 years of age, thereby being assured of a monthly salary till he reaches the 'actual' retirement age of 60 years.
Therefore, whatever gratuity he may get as a retired public servant, he may place it in the form of a deposit such as an FD, which would provide him with an annual interest income. If such an annual interest income is below Rs 1.5 million, that individual is not liable to pay a WHT on such interest earned on an FD. In addition, a retired public servant also earns a monthly pension.
But, in the case of the private sector employee, the retirement age is 55 years. Such a retired individual's FD, made after collecting his retirement benefits, whether such interest earned is a 'low' Rs 100,000 per annum or a higher rate of more than Rs 1.5 million, will, under the new tax regime, be subjected to a WHT of 5% until he reaches 60 years of age.
Even though that individual may be considered a senior citizen according to the Monetary Board's (MB's) definition, where, an individual is over 55 years thereby being entitled to a higher deposit rate, all those gains may be negated due to the ascendancy of the higher WHT regime of 5% from 1 April.
28% Healthcare Tax
Likewise, the Healthcare Company Tax, which stood at 12% even during the former regime, will be hiked up to 28% to be on par with the standard company tax regime, with effect from April next year.
Passing tax liabilities to the end user is an economic reality in the marketplace. Whereas company taxation is a form of a direct tax, passing down such taxes is an indirect cost to the consumer, in this instance, the patient.
Therefore, there is a likelihood of patients' bills going up after 1 April due to the higher healthcare company taxes operable from then onwards. Such increases, however, in the case of doctor's channelling charges, have an upper limit of Rs 2,000 by law. Similarly, in the case of certain drugs, there is a price ceiling.
But the market, whether it be the healthcare sector, or any other sector, knows how to circumvent such price caps. They may levy higher charges for other healthcare services offered in order to recoup the extra costs or alternatively, they may not import those drugs whose prices are controlled by the Government, or may import cheaper drugs of inferior quality.
Former UN Conference on Trade and Development (UNCTAD) Secretary General Supachai Panitchpakdi, speaking at a forum organized by the Retailers' Association in Colombo last week, said that rising income disparities were more worrying to the UN than 'climate change.'
He said that the effect of these inequalities was that those who invest in real estate, bonds and equities, find their income levels rising faster than the rest of society.
Panitchpakdi may provide a solution to the Government's low tax revenue, thereby avoiding taxing carte blanche, on those who live off interest income, while at the same time ensuring that patients don't end up with higher hospital bills due to the current regime's higher tax policy for the health sector.
- Death of Jacintha Peiris
- Renovation work on golden canopy begins
- Poverty down to 4.1% But highest in the North
- MR to preside at SLPP rallies
- Prelates decrying new Constitution Govt to blame says Mano
- New office to assist Uma Oya affected
- Importance of Tourism stressed Dengue threat lgnored
- Indian soldier revisits a brutal battlefield
- Large crowd at Berlin Katina Pooja
- PC polls campaigns Nimal, John lead SLFP team
- ‘Savisthri’ report handed over to Sampanthan
- Nimal warns Railway unions Strict action against strikers
- Attack on Rohingya refugee shelter Police trap monk in Nittambuwa
- Call to extend PCoI term VAC wants to unmask 20 UNPers
- K’Nochchi poorest, at Rs 28,483 Household expenses increase to Rs 62,237 pm Rich spend Rs 158,072 pm per household
- Don’t be misled on new Constitution – President
- PM presents economic policy to Parliament Govt targets private sector involvement
- One Final Offer From the EU to the UK
- Anti-Dumping Bill Gazetted Protection for Local Industries
- Tourism Statistics SLTDA disputes CCC
- Smugglers detained at BIA
- SI injured during hooch raid Falls from third floor balcony
- 1070 traffic fatalities in 2017 121 murders during same period - Police
- Rattota Police OIC suspended
- Technical error in Diversity Visa Programme DV-2019 US Embassy says re-register
- Sri Lanka crumble again, 173 All Out
- De Villiers, Hasan Ali move to top of ODI rankings
- Resurgent Zimbabwe face rising West Indies
- ‘Singer Cup’ U-19 Cricket Hasintha gets ton
- SLCA shows concern for players’ safety
- WI keep SL to 69 to take 1-0 lead
- Trinitians roar to regain Lanka Lions Rugby Sevens title Dilshan Kelaniyangoda named Player of the Tournament
- Hafeez reported for suspect bowling action
- MAS win swimming crown for seventh year
- Kiwis out to tame India's newest spin duo
- Root must 'con' players into Ashes mindset - Vaughan
- Improved Wallabies ready for All Blacks tilt - Hooper
- Waidyathilake quits from ITO officiating
- Troubled Chelsea fight to boost flagging morale
- Pogba on comeback trail for injury-hit Man Utd
- Neymar, Mbappe primed for PSG-Marseille rivalry
- Sadeera’s inclusion will strengthen batting Sri Lanka face uphill task
- Anika into semis in Singapore
- ‘Singer Cup’ U-19 Schools Cricket 15-year-old Pawan scores century
- Sheoran takes Sri Lanka Golf title in thriller
- This simple investment strategy could protect you if the US stock market cracks
- Google’s parent company leads $1 billion investment in Lyft
- Nissan halts production in Japan
- These airline stocks have doubled while rivals go bust
- China's answer to Groupon and Yelp is now worth $30B
- Goldman Sachs Chief Lloyd Blankfein hints at Frankfurt move
- Amazon: More than 100 cities bid for new headquarters
- End of Australia auto-making sector as Holden closes doors
- May pleads for Brexit deal she can sell at home
- Black Monday 1987: ‘Our jaws hit the desk’
- Sustainability a priority for Port City Project
- National Chamber hosts Iranian Ambassador
- Fair demand for Ceylon Tea from Japan, China
- China third quarter growth meets expectations at 6.8%
- The rise of consumerism Thorstein Veblen’s conspicuous consumption now a global phenomenon
- HNB announces seasonal discounts
- Janashakthi takes home Gold at Effie Awards
- Standard Chartered running seasonal promo
- Dialog launches first TIER III Certified Data Centre in Sri Lanka
- CSE to add dollar-denominated board
- Concentrated wisdom Learning from others
- lateral thinking Nation’s guardians celebrate 68th Anniversary
- A Time of Gifts Starting to wind down
- The month of ‘Katina Pinkama’
- OVERWHELMING RESPONSE HUMANITY AT ITS BEST
- Fall of Raqqa
- UN urges B’desh to move Rohingya refugees
- Flu shots are the greatest medical fraud in the history of the world
- Sucking it up
- Ahikuntika community of Sri Lanka Diminishing cultural traits
- No Revenge I want to embrace all those who left us – Basil Rajapaksa
- Large Industrial Zone for Thulhiriya
- Even the PM should be in Prison for the frauds
- Would like more Pradeshiya Sabhas for N’Eliya-Radhakrishnan
- Skills mismatch a massive economic cost Education system must be reformed
- UNHRC Resolution 30/1 Implications for Sri Lanka (Part II) (Based on a presentation to the OPA)
- Electoral Reforms are for People’s Benefit
- Managing perception with international community
- Salient points of horoscope Assessment
- KARMIC CONNECTIONS IN THE BIRTH CHARTS 2
- Dream of travelling abroad?
- Mystery behind Osama bin Laden explained
- Three poses to relieve trauma
- Socio-economic developments from critical perspective
- KAZUO ISHIGURO – THE NEW NOBEL LAUREATE
- The Fairway Galle Literary Festival 2018 –Internationally acclaimed authors to take part
- Portrayal of country and nature
- Resonant Field Imaging - a Marvel in Technology
- Shankar’s International Children’s Competition 2018
- Hindustani Violin recital
- Classical rendering of a masterly-crafted musical
- Kite Surfing Lanka Kalpitiya An experience of a lifetime
- Ella and mini Adam’s Peak
- A cave of history -Ravana Cave
- Making plus-sized clothing trendy
- Pyjamas go viral as well - Sharmila Srikumar
- Giving back to Society
- Double treat at Pinnawala
- Mental illness a health issue Replacing stigma with compassion
- Studying to be ahead