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Cushioning the impact of tax hikes on poor

23 Sep 2022

The Government is set to introduce massive tax reforms starting next month, with a focus on increasing direct taxes, which currently constitute around 20% of the overall tax revenue, and looking into alleged large-scale tax evasion. Announcing this, State Minister of Finance Ranjith Siyambalapitiya further revealed that all tax-related laws would be amended to achieve the said objectives. Boosting tax revenue is a necessity, as on the one hand, Sri Lanka’s direct tax revenue is extremely low in comparison to its indirect tax revenue, even though it should ideally be the other way around, while on the other hand, Sri Lanka has to address the issue of its overall tax revenue not constituting a satisfactory percentage of Gross Domestic Product (GDP). At the same time, according to economists, the Government is yet to recover the amount of tax revenue that was lost due to the massive tax rate cuts announced in late 2019, which is another major concern. Although various parties have demanded for years that this situation be changed, thus far, Sri Lanka has not achieved much beyond the planning phase. According to State Minister Siyambalapitiya, the current plan is to increase the tax revenue from the current 8% to 15%, an almost twofold increase. While a tax income increase of this degree should ideally span over years and many stages in order to ensure that this change is gradual, due to the massive budget deficit and the necessity to bring in tax reforms as soon as possible, it is questionable whether the Government would be concerned about the smoothness of this transition process. However, the Government has to be mindful of a number of possible consequences that could arise from sudden tax reforms. When it comes to direct taxes, which the Government anticipates to increase, it is necessary to evaluate the possibility of these tax rate increases being passed onto the general public through various means. When the Government increases direct taxes, business folk paying direct taxes will attempt to cover this increased cost through their businesses. They opt for cost-cutting measures such as layoffs, pay cuts, and decreased welfare programmes, which will have a considerable impact on their workers. When these workers’ income, job security, and job quality decline, it will affect their families’ quality of life, household economies, purchasing power, and the overall society. At the same time, business folk are more likely to increase the prices of goods and services that they provide and decrease the quality of the same, which in turn affects what consumers pay to obtain. Such situations have been confirmed by a number of apparel factory workers that The Morning has spoken to in relation to the increased costs of production, and therefore, this is a reality that the country will most likely have to deal with.  In addition, considering that the wealthy often tend to evade direct taxes in Sri Lanka, more direct taxes will more likely result in various tax-related irregularities. Therefore, the increase in direct taxes should be implemented via a proper system to curtail such attempts. Those who have to pay increased direct taxes will have to cover this additional expense through some method or other, and it is an understandable situation. However, amidst a national crisis, ordinary, working-class people are not in a position to endure further impacts of inflation, decreased income, and increased costs, be it via direct or indirect taxes. Taking this into account, the Government has to go beyond merely amending laws to increase tax rates and pay some thought to the implementation of such.


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