SL could easily reverse poor tax revenue if there is political commitment
While the Sri Lankan government is grappling with an enormous debt burden and more and more loans are in discussion to be further included to the existing burden, there is considerable room to improve the tax administration of the country.
If the government wants to reverse the poor tax revenue and raise more revenue it could do so easily. Of course it’s not going to be easy to raise taxes in Sri Lanka. But relative to many other things the government might want to do, it would not be difficult to do it willingly and be politically committed. In terms of what taxes you raise, there is a lot of choice and there is no reason to prefer one rather than the other. There is large number of tax exemptions for investors not only foreign, but also domestic. Cutting them back as quickly and expeditiously as possible would be very sensible, says Prof. Mick Moore, Political Economist, Founding CEO and Senior Fellow at International Centre for Tax and Development and Professorial Fellow at Institute of Development Studies.
He made a clear explanation of Sri Lanka’s tax administration since independence, during a webinar organised by Advocata Institute last week on the topic ‘How can we improve Sri Lanka’s Debt Sustainability?’
He said, “Since Sri Lanka’s independence till about 1990 the government raised about 20-22 per cent GDP in tax revenue, very consistently year-on-year. At that point Sri Lanka was a much poorer country and that was a high tax ratio. Since 1990 the economy of Sri Lanka began to grow very steadily with very few interruptions. In normal circumstances we wouldn’t expect the revenue ratio to the GDP to go up, in fact it started going down. It went down steadily almost imperceptibly year-on-year and reached a low point in about 2013 or 2014 to around 12 per cent of GDP. It almost halved over the period of time, but recovered slightly after that. In the meantime Sri Lanka became a much richer country, it’s now an upper middle-income country. If Sri Lanka’s economy was behaving like other countries in the world, you would expect the government to raise about 25 per cent of GDP in tax revenue. I am certainly of the view that this revenue raising performance is too low for several reasons, including the debt issue. The question is, ‘what are the prospects of increasing the revenue?’”
He said the long decline in revenue collection from 1990 was completely unconnected with the internal conflict within the country. The internal conflict barely affected the capacity to raise taxes. The biggest decline in tax revenue was between 2012 and 2014 after the end of the conflict where people described it as a massive tax giveaway by the government to all kinds of people.
Political institutions in Sri Lanka are in various ways being built around low revenue. The Board of Investment of Sri Lanka which was established in 1979 gave an enormous path to give exemptions to foreign investors with very little explanation or justification and it started a very long tradition of giving away tax revenue by giving exemptions to attract FDI’s.
The other aspect of political institutions is that, most of the time since 1989 when the tax revenue started to decline at the very top, the country has been run by the head of government who is typically also the Minister of Finance. The secretary to the minister of finance is not just a secretary, but to a large degree running the country administratively on behalf of the head of government. “There is very strong evidence, that kind of arrangement has been associated with the general decline in revenue whereas the only attempts to significantly raise revenue would have been made if we had an independent minister of finance who is not simultaneously the head of government,” noted Mr. Moore.