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A gambit that spells doom

16 Oct 2022

It appears that the administration has got its priorities mixed up by the looks of the new, arbitrary tax regime that will most probably kill off any remaining hopes of a dollar inflow. The administration seems to have lost sight of the fact that the root cause of the current economic issue is the forex crunch, which in turn has led to an energy crisis, which in turn has fundamentally affected every aspect of the economy. Now, by taxing the export sector a whopping 30%, including the hitherto exempt IT sector, it is veritably killing the goose that lays the golden eggs.  With most wage earners now suddenly becoming liable for income tax on top of inflation eating into salaries, there will be little or no discretionary income left for spending on products and services. Shrinking consumer spending will lead to the entire value chain being affected. On top of it, businesses will now have to pay 30% in corporate tax. This will no doubt provide further impetus for the ongoing brain drain as young professionals will see little hope in spending the best years of their lives toiling away to prop up a system that is corrupt to the core, with little enthusiasm on the part of the leadership to fix it. The result of all this will inevitably be greater social unrest. While there is absolutely no debate on the need for tax reform and to drastically expand the tax base, what is of particular concern in this instance is the timing and quantum of the taxes in question. According to the World Bank’s latest report on Sri Lanka, the country’s economy is expected to shrink to a record -9.2% of GDP this year. Given this bleak economic outlook, how logical or fair is it to tax people and businesses already struggling to survive?  The issue here is the cumulative effect of the combination of corporate/business taxes plus personal income tax, all of which are being hiked by a considerable margin at the same time. The anticipated fallout of the increase in VAT to 15% and the 2.5% Social Security Levy on top of that, coupled with the considerable income tax hike, will lead to an immediate impact on the already soaring cost of living.  The impact on businesses will be more profound given that they are already struggling to cope with factors such as the cost of credit now in the 30% range, inflation in the 70% range, and prohibitive cost escalation of raw materials and energy costs, etc. The small- and medium-scale sector will be hardest hit due to the twin factors of cost escalation and revenue retardation. One clear sign of business suffocation and bankruptcy is that daily cheque returns in the second quarter of this year exceeded Rs. 1 billion – and this figure is growing. With the latest tax regime kicking in, this number can only head in one direction. It is these factors, with little or no mitigatory intervention from the State, that combine to pose hitherto unprecedented challenges that in the long run will either make or break the economy. It is also noteworthy that the new tax regime completes the full circle of policy reversals of the Gotabaya Rajapaksa presidency. Meanwhile, those responsible for the catastrophic destruction of the nation’s economy appear to be still calling the shots through proxy and it is this, if nothing else, that is leaving a bad taste about this whole episode. Those who should be held accountable are still being maintained at taxpayers’ expense while additional burdens are being thrust on the taxpayer without a second thought. The hefty 50 something ministerial contingent, with more reportedly in the wings, costs the taxpayer billions of rupees in maintenance, with little or no inclination for restraint on that front. If that was not bad enough, corruption on a galactic scale continues to make headlines with increasing regularity, with little enthusiasm on the part of law enforcement for investigation. Meanwhile, the Government is pleading with the World Bank to grant access to funding assigned for low income countries. It therefore begs the question as to whether the people, already with empty pockets, must be made to pay for the sins of their political leaders. It is this culture of impunity that has made the people question why they should be the ones footing the bill for wholesale corruption, inefficiency at every level, and crass stupidity of the political leadership whose legacy has been a country where, according to the latest statistics, nearly half the population is already classified as being poverty stricken.  To make matters worse, it has been found that only 10% of the population will fall into the taxable category even with the exemption threshold being set at a monthly income of Rs. 100,000. What must be kept in mind is that today’s Rs. 100,000 is not what it was six months ago with food inflation in the 90% range. The previous threshold of Rs. 300,000 seems more realistic in the current context. To put things in perspective, the monthly fuel allowance of a minister is in excess of Rs. 300,000. Questions are also being asked as to why there has been no attempt to go after the super rich who are known to owe billions collectively to the Department of Inland Revenue. It is also important that the bottomless pit that is the State-Owned Enterprises are reformed prior to taxing the public for their continued upkeep. Just 52 of these bloodsuckers accounted for a cumulative loss of Rs. 286 million last year but this year, in just the first quarter, that number has shot up to a mind boggling Rs. 966 billion, according to an Opposition legislator. With little or no inclination on the part of the administration to turn things around, as seen from the manner in which the parliamentary Committee on Public Enterprises (COPE) has been formulated, including the appointment of its chair, there is little hope of a better tomorrow – with or without more taxes. It is also time that the administration reined in the State sector into the tax net, which at the last count had swelled to around 1.6 million, all of whom are exempted from income tax. Even where PAYE was applicable, such as at the CEB, it was paid by the State on behalf of the employees! Even though a majority of those serving in the public sector will not fall within the applicable threshold, there is a notable number that does and in the interest of fair play, the regime must walk the talk. It is the private sector, also referred to as the engine of growth, that keeps the State afloat and pays for State expenditure and subsidies as well as endemic systemic corruption. By suddenly throttling their necks, the situation could easily go from bad to worse. Just as much as the sudden, overnight float of the rupee at a time when Covid had put the economy on life support led to a seismic shift in the direction of the country’s economy, the ill-timed tax regime at a time when people and business are struggling for breathing space will likely lead to the same outcome. A recent UNICEF statement notes that seven out of 10 Lankan families are cutting down their food intake simply to stay afloat, while Sri Lanka has the second-highest rate of acute malnutrition among children under five in South Asia. Meanwhile, the UN has stated that Sri Lanka is among 54 poor nations in urgent need of debt relief. Does the regime really expect the people to say thank you for this pathetic state of affairs and keep quiet when their lives are falling apart?


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