Inequality of the Sri Lankan tax system
Taxes are the primary source of income for any government to expend on education, health, defence, maintaining roads (and not to mention the lavish lifestyles of the politicians and their friends and families). All these expenses are met by collecting taxes in different forms from the general public. Other secondary objectives of taxes are import control, local industry protection, etc which are however not the subject matters of this feature.
Depending on the nature of the tax, it is felt differently by the taxpayer. In simple terms, direct taxes are taxes directly paid to the government by the taxpayer and the most common examples include income tax and corporate tax. In contrast, indirect taxes are taxes on goods and services, that is, taxes on what people buy, rather than on what they earn. Examples include goods and services tax, import duty, etc. Payers do not feel the burden much partly because an indirect tax is paid in small amounts and partly because it is paid only when making purchases that include the tax in the price.
Closer look at taxes
According to the Inland Revenue Department, income taxes amounted to 37 per cent of the total tax income of the government, and indirect taxes on goods and services amounted to 44 per cent in 2016. Income tax collection has been reduced by 7 per cent whilst indirect taxes have grown by a colossal 33 per cent since 2015.
The bitter truth is that the poorest 20 per cent pay as much as 13 per cent and the poorest 10 per cent pay as much as 23 per cent of their income in the form of indirect taxes. The richest 10 per cent pay less than 1 per cent as indirect taxes and a pathetic sum in direct taxes. Thus, the poorer you are, the heavier the (indirect) tax burden.
Whether a rich man or poor man buys a commodity, the price in the market is the same for all because the taxes are included in the price. Hence, rich and poor pay the same amount, which is obviously unfair. However, when indirect taxes are imposed on luxury purchases or goods consumed by the rich, they are equitable as these goods are not essential or considered primary goods.
In February, the Finance Ministry slapped a special commodity levy on imported potatoes on the pretext of protecting local farmers, which ultimately resulted in an increase of Rs.29 per kilo. Unless the rich decide to consume more potatoes, it does not take a pundit to realise such a levy is felt more by the poor rather than the rich.
Social issues arise when a poverty-struck nation such as Sri Lanka imposes indirect taxes on staples such as sugar, rice, onions or, for that matter, cement or fuel. Indirect taxes on essentials are not equitable as these taxes are felt more heavily by the poor than by the rich, as mentioned before.
Future direction
The amount of indirect taxes paid by the rich and the poor is invisible in Sri Lanka. For this reason, the public underestimates what the poorest pay in taxes and wrongly believe the richest bear the biggest tax burden as they pay the higher portion of income taxes.
About 46,000 companies and 1.2 million people pay income taxes. Some 1.2 million out of a population of 21 million is a very low percentage, and of that 1.2 million only 1.1 million pay taxes through employment, meaning that only 130,000 people file income taxes directly. The Inland Revenue Department should be ashamed of these statistics and should immediately turn it around.
Many economists have recommended moving towards direct taxes. However, it is safe to conclude that no country can do with only one type of tax. Both types of taxes must be mixed in a good system of taxation. The rich can be taxed best directly, but the pockets of the poor also must be tapped through indirect taxes. The challenge is to achieve the magical balance between these two types of taxes. Until this sensitive issue with the tax system is tackled by a bold regime, despite anticipated hostility from the rich and influential, Sri Lanka will remain as a land of the poor becoming poorer whilst the few rich prosper.