Taxation, in general, is the most important source of Government revenue in almost every country regardless of whether they are in high, middle, or low-income categories. As of today, developed countries collect a much larger portion of their national output in taxes than the majority of developing countries, such as Sri Lanka. While rich countries tend to rely more on income taxation, middle and lower-income countries lean more heavily on trade taxes and taxes on consumption.
According to the World Bank, tax revenue collection must be 15 percent to 20 percent in lower and middle-income countries and over 30 percent in high-income countries as a share of the Gross Domestic Product (GDP). However, in Sri Lanka, tax collection was only 8 percent as a percentage of the GDP in 2020, far lower than acceptable standards.
This phenomenon indicates that the Government has less funds for public goods such as infrastructure and good governance. This decline was created by the sweeping tax reductions introduced by the previous regime without any justifiable reason. The huge descent in Government revenues (the figure is contradictory, but according to some sources, it was around 600 billion rupees annually) was one of the key reasons for the deep economic crisis that the country is currently in.
According to news reports, none other than the new Finance Minister has revealed to the Parliament that over a million taxpayers were lost due to the inexplicable tax cuts in 2019. Elsewhere, the media reported that the number of active tax files stands at slightly less than 300,000 when it should actually be millions. This is a clear display of the inefficiency of the Government machinery.
In most developing countries, including Sri Lanka, tax collection is a daunting challenge due to informality and misreporting. These challenges generate a vicious cycle as they are unable to mobilise funds for public welfare, creating enormous public annoyance.
In Sri Lanka, the new tax routine introduced by the Government has come under the wrath of the majority of the citizenry. Customarily, by adding fuel to the fire, the Opposition is having a field day in prompting the general public. While some of the politicians and their parties blame the IMF for influencing the Government, others accuse the Government of not producing alternatives to increase state revenue. Nevertheless, the irony is that none of them offers a viable substitution to solve the ongoing gruesome cash crunch.
Authorities
The awareness of the importance of the tax components of the general public in Sri Lanka is minimal. Neither the authorities responsible for making policies nor the collectors who are duty-bound to collect them have made a conscious effort to educate the public about the benefits of the collections.
Quite understandably, the masses are only concerned about the additional amounts they have to pay in direct or indirect taxes. Therefore, a more concerted effort must be made to educate them about the benefits the government is compelled to endure for public welfare, such as free education, free health facilities, numerous social protection programs, and other essential public utilities.
Taxes are also used for social development and welfare programs. For example, the Government allocates a substantial amount of revenue for various social development and welfare programs, including public health and nutrition, education, and rural development programs.
According to Government sources, Sri Lanka’s recurrent expenditure on public sector salaries and pensions accounts for approximately 44 percent of the Government’s revenue. The total public sector cadre currently stands at over 1.5 million across over 1200 entities, according to media sources. Seemingly, the government is left only with a balance of 56 percent of the revenue to provide essential public services and service the country’s over-extended debt pile.
Sri Lanka boasts of a very high literacy rate, on par with many developed countries and the highest in the South Asian region. This is possible because of the free education provided to the public on equal terms. Since 1945, when the free education policy was enacted, the country has produced millions of educated citizens. This was possible because the respective governments collected revenue predominantly from taxes that enabled them to spend on education. Over 10,000 schools throughout the country with approximately 4.2 million student populations are being maintained by the state.
Similarly, the health system in Sri Lanka is placed at a high position in the world charts. The country’s standing is substantially higher than the regional average, with high life expectancy and lower maternal and infant death rates than its neighbours. The government maintains over 550 Government hospitals (excluding those in the Ayurveda system), including primary medical care units, in the country with over 87,000 beds.
Except for a small segment of the affluent society, the vast majority of Sri Lankans receive healthcare from Government hospitals, where patients receive free consultations, medicine, laboratory services, surgeries, and a variety of other services. In order to provide healthcare to the public, the government has to collect money through taxes.
Even those expatriates who avoid remitting foreign exchange through legal methods conveniently ignore that they have obtained free education, healthcare, and numerous other benefits through the state. They also opportunely disregard that their kith and kin who live in Sri Lanka continue to enjoy free services and facilities offered by the state.
The biggest disappointment is that some political parties with ulterior motives that act as so-called saviours of the nation keep discouraging these ex-pats from remitting foreign exchange. They clearly display their unscrupulous political motives even when the citizenry is in dire straits.
From the recent tax reforms, it is evident that the intention of the Government is to increase direct taxes on those who earn high incomes and reduce indirect taxes from which the public will benefit. The taxes imposed on gaming, tobacco, liquor, and several other high-income industries imply that the government’s aim is to bridge the gap mainly through direct taxes.
However, instead of appreciating the decision, the opposition, who made a loud hue and cry on increasing direct taxes, has now started criticising the move for cheap political gains.
The irony is that these critics do not offer alternatives or even clearly state what action they will take if they come into power. Even some of the media institutions, through their presenters on talk shows, unjustifiably criticise the move, simply to gain ratings.
It is abundantly clear that tax reforms at any given time are hard for taxpayers anywhere in the world. Nobody likes to pay more taxes on what they earn. Nevertheless, one should understand what they get in reciprocation. As mentioned earlier, many free services, facilities, and utilities are given to the country through the taxes collected.
Over the years, politicians created situations where the majority of people became accustomed to free disbursements apart from what they received for education, healthcare, and infrastructure. Most often, these were offered to the citizenry as election pledges, regardless of evident negative financial repercussions.
Reforms
Whether the tax reforms were introduced under IMF influence or not, the only option for the government at this point is to increase revenue through direct taxes as an urgent measure. The other alternatives suggested by some pundits take a longer time. Regardless of whose fault it is, the government cannot evade essential tasks at hand.
As always transpires in Sri Lanka, the opposition politicians will neither genuinely support the Government on any of the ongoing issues nor will the general public accept their word, even if they do. Nevertheless, as a minimum, they can stop unreasonably instigating the general public to evade paying taxes for the simple reason that they will also have to eat humble pie if or when they gain power.
However, economists and other scholars who have earned public respect must come forward and explain the gravity of the current situation to the masses and help the country to increase national revenue as early as possible.