Manifestos are usually confined to the dustbin of history once the objective of victory is achieved. The public too does not give much thought to manifestos and promises of candidates, since most voters know that the promises are hardly delivered. But President Gotabaya Rajapaksa has turned this trend on its head in two ways: He has implemented many decisions that are not even on the manifesto and pledged to fully implement his “Vistas of Prosperity” manifesto within his five-year tenure.
The President never promised to reduce his backup convoy, but he did. He did not promise not to live in the Presidential mansion, but he did. And just one week into office, he has started delivering on the pledges contained in the manifesto.
A manifesto is a combination of responses to the conduct of the Government in power at the time it is formulated and also the candidate’s take on future challenges. The previous UNF Government was characterized by its penchant for taxes to an unbearable degree – only a poll tax and a pet tax were missing from the equation. Having allowed the biggest financial fraud in the country’s history to happen, it scrambled to close the financial gap through taxes and taxes alone.
This strategy would have worked in many other countries, but not in Sri Lanka. The Exchequer here relies heavily on indirect taxes such as Value Added Tax, which everyone across the board has to pay, because the number of direct tax (mainly Income Tax) payers is way too low for the 22 million population. Thus the tax burden overwhelmed the poor and the middle class, who were already struggling to live as a result of the high cost of living. In fact, apart from President Gotabaya Rajapaksa, even the UNF’s own candidate made tax reduction a central plank of his campaign.
True to his word, President Gotabaya Rajapaksa lost no time in announcing a series of tax cuts for individuals as well as for the business sector following the Government’s maiden Cabinet meeting. The latter saw its growth stymied by the surfeit of taxes some of which served little or no purpose. Accordingly, the Nation Building Tax (NBT) on Goods and Services, Economic Services Charge, Debit Tax on Banking on Financial Institutions, Capital Gains Tax on Stock Market transactions, VAT on Condominium Property, Pay As You Earn (PAYE) Income Tax, Withholding Tax on interest income and other forms of Withholding Taxes and Debt Servicing Tax have been abolished with immediate effect.
Most significantly, the 15 percent VAT rate on all goods and services has been reduced to 8 percent with effect from December 1, 2019. This is commendable, as the very high VAT rate had a discernible effect on the prices of goods and services. The company turnover limit for VAT has been raised from Rs 1 million to Rs 25 million with effect from December 1. The income tax on the construction industry has also been reduced from 28 percent to 14 percent, which should be a boon for the industry. Remittances sent by expatriate workers to Sri Lanka have been completely exempted from income tax. The Telecom Levy also saw a substantial reduction.
This is a huge relief package in every sense of the word, that should provide an immediate respite to the masses. The reduction of VAT alone will make many goods and services cheaper and more accessible. An entire gamut of sectors would benefit from the tax cuts and abolitions, including tourism, banking, financial services, insurance, technology, Information and Communications Technology (ICT), spurring an overall economic growth. Economists say these moves will also make the rupee stronger.
Above all, this will simplify and streamline tax collection. The plethora of taxes was a headache not only for businesses, but also for the Inland Revenue Department itself. It now faces the question of bridging the gap left by the reduced or abolished taxes. A few pointers in this direction would be increasing taxes and duties on certain luxury goods which have almost zero taxes (however, taxes on automobiles are already very high and need not be changed), imposing higher duties on food items and other items that are produced or manufactured locally and even revisiting the Tourist VAT Return Scheme (TVRS). No tourist would grudge paying 8 percent VAT on a local souvenir, for example.
But the Government has to address the elephant in the room – the fact that many people who can afford to pay direct income taxes are not doing so. Tax evasion has become a big business. Widening the income tax net should be an immediate priority for the new Government. If at least 100,000 more people pay Income Taxes, the Government will be in a position to further reduce some of the indirect taxes. The Government should invite proposals from economists, academics and the public on widening the tax net.
Taxes are a fact of life – no Government will be able to function without them. But it has to be a delicate balancing act – too many taxes can stifle the people but too few taxes can also make life difficult for Governments. The sweet spot is somewhere in between. Ultimately, paying our taxes on time should become a matter of pride, not a matter of shame.