This week, the regulation to increase the Value Added Tax (VAT) from 15% to 18% was approved by Parliament with a majority of 36 votes, sparking much criticism about the Government’s tax management in various spheres. With this decision, the prices of a large number of goods and services will increase, further exacerbating the economic burden on the people.

We always talk about tax-paying citizens, and in the current economic context, the Government has paid more attention to them. In fact, increasing the national tax revenue to fill gaps in the state revenue and to meet international-level tax-related standards is one of the key requirements presented by the International Monetary Fund (IMF) for Sri Lanka to be eligible to receive its support. Many ongoing and planned tax reforms are directly or indirectly connected to Sri Lanka’s obligations to the IMF.

A major issue in Sri Lanka’s tax system is the authorities’ inability or unwillingness to properly tax large-scale businesses. The existing tax system applies to them too. However, there are so many businesses that do not pay taxes either at all or as required by the law. Even though attention was once paid to some of these businesses such as those operating as informal sector operations, the whole discussion on tax policy reforms have brought to light even legally registered businesses that have evaded taxes, causing the Government to lose billions of rupees. Needless to say, as has been revealed, some of these businesses are owned by powerful figures such as politicians. This issue has more to do with the unsatisfactory implementation of tax laws and regulations. While tax laws and regulations can certainly improve, especially in light of the ongoing tax reform programme, if they are not implemented in a scientific, sustainable and an equitable manner, the country will not be able to achieve what it is trying to achieve through tax reforms.

This situation calls for a fundamental change in the Government’s perception of tax collection. The Government asks the people to tighten their belts and pay taxes, and it remains ready to even take legal action against tax evaders. However, we do not see the same enthusiasm when it comes to large-scale tax evaders, especially those who have connections with politicians. They get unbelievably massive tax concessions, grace periods, and in some cases, long-term instalment plans. In addition, some large-scale tax evasion cases get justifications from those in high places. This is in a context where the Government keeps coming up with new forms of taxes to target groups that are not covered through the existing tax system.

There is nothing wrong with paying attention to streamlining the tax system and rectifying the flaws in the same, and that is something Sri Lanka should do regardless of the IMF’s requirements. However, Sri Lanka’s efforts in this regard seem to be largely confined to merely filling the Treasury with tax money, and systematic and equitable qualities of a sustainable tax system seem to be missing. That is why when the Government keeps increasing tax rates and introducing new taxes, the people’s quality of life declines and businesses collapse, which in turn results in various forms of adverse socio-economic impacts.

It appears that the Government, which is almost the same Government that ruled the country when the economic crisis hit Sri Lanka in 2022, has not learnt its lesson, and as the famous saying goes, those who do not learn from the past are doomed to repeat it. If our tax system was wrong and if it was one reason behind the economic crisis, what we should do is not increasing taxes, but taxing what and who needs to be taxed. Giving the Government’s friends a free pass while forcing all income classes including daily wage workers to pay more and more indirect taxes will only make the tax issue bigger, the only difference being this time, it will take longer to witness the consequences.