Lanka’s fiscal situation unclear and not transparent – Indian expert

A top Indian economic expert said Sri Lanka's growth rate with inflation being so high in the country is an issue while the country’s fiscal situation is 'not too clear and transparent.'

Dr. Govinda Roa, a member of the Economic Advisory Council to the Prime Minister of India, speaking at a seminar at the UNDP Regional Centre in Colombo dthis week, said South Asia is the fastest growing region in the world despite having some of the lowest incomes. With the exception of Sri Lanka and Bhutan, the other South Asian countries have per capita incomes of less than US$1000 with India's per capita income at US$726, Pakistan's at US$711 and Nepal with US$272. Progressive fiscal reforms are needed for the region to improve its growth rate which is accelerating.

He said India's growth rate has averaged nine percent over the past three years. Pakistan has averaged a growth rate of seven percent during the same period and Bangladesh at 5.9 percent. In general, Rao added that inflation in the region is being kept in check.

The challenges which dominate the troubled region are mostly political and security related issues. India is confronting coalition political issues, Pakistan is dealing with a military dictatorship and Sri Lanka is faced with the ongoing ethnic conflict. Rao said that despite it being a troubled region, it is still growing. Due to these problems, governments tend to play a much greater role than in other countries which makes it difficult to raise revenues for the badly needed investments in the physical and social infrastructure. Moreover, money goes towards appeasing the special interest groups which makes the region a 'politically volatile environment.'

According to Rao, globalization adds to the problem because there is a need to provide competitive levels of infrastructure. Countries in the region think they simply provide fiscal incentives as a substitute but Rao said this will never work.

There must be comprehensive tax reforms which generate revenue in the least kind of distortions.

In India, there is a lot of difficulty in decision-making because the political environment is not conducive to austere fiscal policy. Rao said tax policies, in general, have come out of the special interests from various political parties. He said the best way in which the region should approach taxes is to broaden the base, reduce the rate differences and have simple and transparent tax policies. Discriminatory policies do not work and for too long, there has been a pre-occupation with complicating the tax system. Rao also said that countries must focus on horizontal equity, not vertical equity.

The information system is the most important factor in tax policy and if done properly, tax compliance will remarkably improve. This includes increasing the probability of detection as well as increasing the penalty rate. In particular, Rao said that Value Added Tax (VAT) must be kept simple.

In Sri Lanka, Rao said the people working for the Inland Revenue Department in the provinces have absolutely no idea what the tax system is. He said it would be more prudent to have goods and services taxed at the federal level and have the provinces piggy back on it.

India has adopted a Fiscal Responsibility and Budget Management Act in which there is a finance commission which is headed by an eminent person appointed by the President.

There have been 12 commissions so far appointed for a five year term which worked out a fiscal restructuring plan which has seen a massive increase in income tax revenue. Rao said there was a 40 percent increase in income tax revenue last year alone.