Budget 2015 – A revolutionary budget
“Statement by the Minister of Finance on Hundred Day Revolution” read the heading of the supplementary set of budget proposals presented on Thursday at the Parliament.
“A Robin Hood budget” perhaps is another appropriate term to describe it. No prudent analyst would deny that the policy of the ‘Robin from Sherwood’ being engraved in this statement.
An estimated Rs. 5 billion from a one off special levy from casinos and doubling of the betting and gaming levy, Rs. 50 billion from super gain tax from companies with over Rs. 2 billion profits, yet another Rs. 1 billion from the Mansion Tax, Rs. 5 billion from special levy from beer and liquor manufacturers, Rs. 3 billion from Satellite owners and operators, Rs. 1.2 billion from levy on telecom operators and a levy on dedicated sports channels are the significant revenue proposals.
The budget has focused on redistributing such income with the intention of reducing economic inequality by way of reduction of special commodity levy on essential items such as sugar, gram, sprats, canned fish, maldive fish, turmeric, etc, price reductions of kerosene, milk powder, bread and LP Gas, an attempt to reduce prices of motor vehicle (less than 1000 cc) by reducing duty by 15 per cent, increase of salaries of the public sector employees by Rs. 10,000, granting a secured interest rate of 15 per cent (up to Rs. 1 million deposits) for senior citizens, increase of pension by Rs. 1,000 per month, etc.
Almost 60 per cent of the incremental tax revenue of the October budget proposals depends upon the revenue from a scheme for refinancing tax defaulters. Whilst the fate of the said scheme has not been touched in these set of proposals, the ‘super gain tax’ accounts for approximately 60 per cent of the additional revenue proposals presented in Thursday’s budget. Perhaps for large corporates this would be the singularly most significant budget proposal of this “Revolutionary Budget”! The proposal is to impose a tax of 25 per cent on the profits of companies or individuals who have recorded “profits over 2 billion in the Year of Assessment 2013/14.” The tax is a “one off” to gather an estimated revenue of Rs. 50,000 million to the state coffers. The imposing Statute to enact the proposal into law would have to specify whether the reference is to accounting profits, tax profits or any other profit figure computed such as distributable profits computed for purpose of application of VAT on financial services. The enacting Statute would also have to shed light as to whether “tax holiday” companies fall within the ambit of the new tax. Furthermore taking into consideration the fact that the Return of Income for 2013/14 has been lodged by the 30th November 2014 and financial accounts have already been finalized, the prudency requires the Super Gain Tax to be a charge for Year of Assessment 2014/15 to be computed on the profits of Y/A 2013/14 – “the preceding year basis ” in order to avoid encountering technical accounting and tax difficulties (such as restatement of 2013/14 accounts, issues pertaining to declaration of dividend for 2013/14).
Almost all the new taxes and levies imposed, both continuing and “one off ” are in harmony with the first canon of taxation of Adam Smith ” the canon of equity” – taxes must be gathered according to the ability of the person to pay or the broad shoulders to bear a more burden policy. On a constructive note, the Rs. 100 million threshold of the annual Mansion Tax should be revised upwards or the value Rs.100 million to be restricted to include only the value of the house excluding the value of land to provide relief to upper middle class segment of the society. In order to be in harmony with Adams Smiths’s “cannon of convenience” the policy makers may consider installment basis payments for the new taxes and levies.
The reference to the reduction of an array of taxes to 20 is certainly a welcome proposal. The reduction of number of taxes is a must if the country plans to improve its ranking in the ‘ease of doing business index’. Whilst Sri Lanka is ranked overall at 99th place out of 189 countries (2015) one cannot ignore the fact that we occupy 158th rank (2015) in the criteria of ‘ease of paying taxes’. However now there are two new additional taxes; migration tax and mansion tax to be considered, discounting the “one off” taxes and levies such as super gains tax, levy on dedicated sports channels, levy on telecom operators, levy satellite owners and satellite providers engaged in direct – to – home services, etc. It is significant to note that the new taxes that have been introduced are all direct taxes as opposed to indirect taxes. This signifies the policy makers attempt not to adversely affect the 81:19 ratio of direct to indirect tax revenue collection as reported in the annual report issued by the Ministry of Finance and Planning (2012).
The continuing desire of the Sri Lankan legislature to provide tax incentives for lagging regions is manifest in this budget too. In the October budget, businesses expanding outside the Western Province were granted a 50 per cent reduction in rate of tax while in last Thursday’s budget too it was proposed to incentivise investments in lagging regions by offering 50 per cent reduction of the normal income tax rate.
The thrust of the budget is amplified in the concluding statement therein;
“We cannot make the poor, rich within a short time. But we can build a society devoid of poverty within a short span of time.”
The concept is noble! The journey will certainly not be without any pitfalls. It is significant to note that from the October 2014 budget to the 29th January Budget the ‘Tax to GDP’ has fallen from 12.5 per cent to 11.8 per cent. In my view, the critical success factor in this journey would be policymakers being flexible, lending an ear to constructive criticisms in enacting the policies and ensuring the process of inclusive as opposed to arbitrary. A good tax system is not only a set of good policies but a good tax administration as well. Everyone has a role to play, policy makers, tax payers and the tax officers!