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| Review
of Lanka’s 2004 budget Any government budget has two components - government expenditures and government revenues. The present government has managed to curb public expenditure and debt, however it has not been able to mobilise the projected revenue through tax and non-tax sources. This is a cause for worry in budgetary planning. Public
Expenditure According to the FM(R)A the budget deficit has to be brought to less than 5% of the GDP by 2006 and maintained thereafter. Besides, in the middle of each year a fiscal position report has to be presented to the parliament by the Finance Minister, which was done for the first time in July 2003. This mid-year report is expected to reveal the fiscal position in terms of the original budget proposals for that particular year. If there are any deviations from the original estimates then the Finance Minister should spell out the reasons for such deviations and remedial actions proposed to be undertaken by the government. Thus, the FM(R)A binds the government by law to restrict budget deficits to less than 5% of the GDP. Further, at the end of 2006 the total public debt should not exceed 85% of the GDP of that year (which stands at approximately 100% in 2003), and at the end of 2013 total public debt (including external debt at current exchange rate) should not exceed 60% of the GDP of that year. According to another clause of the FM(R)A during election times if any political party offers goodies to the electorate it has to estimate the fiscal implications of such goodies and make it public. The Election Commissioner is bound by law to enforce this clause. This is again a very timely clause, because political parties in Sri Lanka have a long tradition of promising various goodies at the time of election campaigns including "rice from the moon". Moreover, every public institution (departments, corporations, authorities) has to submit annual performance reports and accounts to the Ministry of Finance within a stipulated time period. Apparently, according to the Director General of the Department of Fiscal Policy in the Ministry of Finance, about 90% of the public institutions have complied with this condition this year. The Treasury did cut off funding to public institutions that have failed to comply with the deadline. The total public
expenditure earmarked for 2004 is the same as that earmarked for
2003, i.e. Rs 353 billion excluding debt servicing (repayments and
interest on public debt). Thus, there is a cut in public expenditure
for 2004 in real terms. The public debt repayments and interest
payments are expected to consume Rs 314 billion during 2004 or 47%
of the grand total of Rs 667 billion public expenditure. The actual
total public expenditure during 2003 is expected to be lower than
the budgetary allocation as a result of stringent spending cuts
imposed by the Treasury. The government
contends that this is because of repayment of past debt on defence
procurement during 2001 - 2002. It is important to note that the
budgetary allocation for defence does not include pensions of retired
personnel and disability benefits of injured personnel. The allocation
for the Ministry of Finance has been curtailed by 56% between 2002
and 2004 because of drastic spending cuts across the board. Apparently there is no change in public expenditure allocated for Samurdhi poverty alleviation and the Rehabilitation, Resettlement and Refugees Ministries. In other words, the Ministries of Samurdhi and Rehabilitation, Resettlement and Refugees have experienced spending cuts in real terms. Despite repeated assurances by the government to trim expenditures on the Samurdhi poverty alleviation programme, because it is openly acknowledged by the government that at least half the claimants of Samurdhi benefits are non-deserving people, no concrete action has been taken to do so. This may be due to political considerations. A Welfare Benefit Law has been enacted this year; accordingly anyone claiming welfare benefit will be scrutinised about her/his eligibility. However, it is not clear whether existing claimants also would be screened or only the new claimants would undergo the screening process. Besides, anyone providing false information to claim welfare benefit is liable for prosecution under the new law. In spite of this legislation there is no indication of a drop in expenditure on the Samurdhi programme. Public expenditure on rehabilitation, resettlement and refugees appears to be inadequate given the huge number of returning Internally Displaced Persons (IDPs) and their urgent needs. Besides, the public expenditure allocation for the Ministry of Rehabilitation is less that 1% of the earmarked total public expenditure for 2004. Nonetheless, most of the grants to returning IDPs are donor funded and therefore would not be met by the Ministry of Rehabilitation. Further, many other reconstruction activities for the North-East Province are captured by several other line ministries. The North-East Provincial Council is allocated the highest per capita expenditure of Rs 3,682 while the Western Provincial Council is allocated the lowest per capita expenditure of Rs 785. On the other hand, within the North-East, Ampara and Vavuniya District Secretariats are the recipients of highest per capita expenditure around Rs 260 while Batticaloa District Secretariat receives the lowest per capita expenditure of Rs 188. The Jaffna District Secretariat is allocated Rs 231 per capita. However, this would be much lower because the current Jaffna district population is nearly 0.6 million due to return of IDPs (Rs 188 per capita). Therefore, the allocation of public funds to Jaffna district seems very low. However, several line ministries also would be allocating funds to the Provinces and Districts. In addition, several bilateral and multilateral donors are funding development, resettlement, rehabilitation, and reconstruction projects in all the Provinces and Districts. Most of this funding is either through the Provincial Councils or through the District Secretariats that are not included in the budget allocations. The government has proposed a 10% pay rise for public sector employees and pensioners in order to mitigate the rise in cost of living. This is the first pay rise since 2001. At the same time the government has also proposed a Voluntary Retirement Scheme (VRS) in order to trim the public sector. Therefore, the cost of pay rise to the exchequer may be partly neutralised by the savings made by way of the proposed VRS. Public
Revenue The VAT was introduced in 2003, by combining the previous Goods and Services Tax (GST) and the Defence Levy, with a dual rate, i.e. 10% & 20%. The government felt that the dual-rate system experienced problems in implementation. Therefore, in the budget 2004 a single VAT rate at 15% is proposed. This is expected to improve collection thereby increasing the revenue from VAT, though the net effect of the single-rate (i.e. loss incurred by reducing the 20% plus gains by increasing the 10%) is expected to be marginally negative. Although the price of goods currently charged 10% VAT (e.g. sugar, imported lentils, coconut oil, imported potatoes, imported onions, imported chillies, chicken, dry fish, electricity, LP gas) would increase, the price of goods currently charged 20% VAT (e.g. refrigerators, fans, CFL bulbs) should decrease. Besides, petrol, diesel, kerosene, pharmaceuticals, locally produced rice, fruits and vegetables, infant and baby foods, powdered milk, cereals, fertiliser, etc, are exempt from VAT. According to the Finance Minister, at present about 70% of the revenue from VAT accrues from the 20% rate. Therefore, it is argued that the overall effect of the single VAT rate would not result in increase in cost of living. Further, the public servants and pensioners receive a 10% pay rise from January 2004, which is higher than the current inflation rate of 7% (however it should be noted that public sector employees account for only 20% of the total labour force in the country). Moreover, the 20% surcharge on import duty has been reduced to 10% from January 2004, which would result in a drop in prices of imported goods. Furthermore, essential commodities are exempted from VAT. If we take all these factors into consideration the reviewer feels that the single VAT rate will not result in any rise in cost of living. For 2004, the anticipated total revenue of the government is Rs 332 billion. We do not know how far this is attainable. A number of new tax measures are proposed, in addition to the single VAT rate mentioned above, in order to attain this targeted government revenue. The economic service charge and levy on cellular phone subscribers are two new taxes proposed. In addition, some loopholes in the existing tax regimes are plugged. The excise duty on alcohol is increased. The threshold for personal income tax is raised. Profits made by share trading in the stock market are going to be taxed at 15%. However, this is applicable to locals only and foreign traders in the stock market are exempted. Government
revenue as a proportion of the GDP has continued to decline over
the past 14 years. Government revenue as a proportion of the GDP
has declined from 21% in 1990 to 16.3% (estimated) in 2003, which
is expected to be 16.4% in 2004. In order to improve the government revenue collection a single Revenue Authority is expected to be set up by merging the Departments of Inland Revenue, Customs, and Excise. Although the Revenue Authority Act has been gazetted it has not been presented to the Parliament for approval so far. In any case, the proposed Revenue Authority is only expected become operational by 2005. Conclusion However, a lot more needs to be done on the revenue side of the budget. Presently, tax proposals in the budget appear to be temporary and piecemeal measures. Therefore, a long-term and systematic tax regime has to be evolved in order to resolve the continuing decline in revenue collection as a proportion of the GDP. In this respect the following suggestions are mooted. The corporate and personal income tax system is based on self-assessment in Sri Lanka. However, tax compliance is very poor. There are about 32,000 registered companies in Sri Lanka out of which only 19,000 have opened a tax file with the Department of Inland Revenue. Further, less than 9,000 companies filed their income tax returns for the fiscal year 2001-2002, but only 2,850 companies actually paid any income tax at all. Thus, only 9% of the registered companies in Sri Lanka pay income tax. This certainly cannot go on like this. Stringent enforcement of tax laws is the need of the hour. Furthermore,
broad-basing the personal income tax net is a must for improving
tax collection. For example, public sector employees are exempt
from income tax in Sri Lanka. But in neighbouring India public sector
employees do pay income tax. However, current levels of public sector pay are quite low and therefore salaries have to be increased before imposing income tax. The Pay As You Earn (PAYE) income tax is one of the easiest and efficient ways of collection of taxes. It is high time to inculcate the ethos of everyone paying income tax for the use of public goods and services in Sri Lanka. |
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