Financial Times

Revenue may fall sharply against estimates
These are excerpts of an article on the budget by P. Guruge, a tax consultant and former tax advisor to the Ministry of Finance.

Capital revenue
This is the camouflaged 'privatization' proceeds. How can there be privatisation proceeds under "Sandanaya?" JVP may not agree to this. The amount expected is Rs. 7500 million. If this is the policy of Sandanaya how can they be different from the previous regime?

Duty on motor vehicles and "luxury goods"
The revenue expected from this during the next year is Rs. 4,650 million. The Minister may be aware that all these taxes will be collectible only if the imports of these items were continued at the same level that prevailed prior to the imposition of this duty. Specially, the motor vehicle duty is almost prohibitive and the imports may fall considerably.

As a result not only is there a likelihood of these estimates of special excise duty not being realized but the spill over effects may be seen in other related taxes as well.

For example when imports fall it will affect customs duty surcharge, cesses, PAL,VAT and all other collections based on the value of imports. The overall reduction in other duties due to the drop in duties in imports may be more than any revenue gain from the above increase in duties if any.

When any measure is not properly evaluated and taken according to the whims and fancies of the policy makers, this type of pitfall cannot be avoided.

Additional revenue from Custom Duty, PAL
Revenue expected is Rs. 6,000 million, When you analyze the tax collection on imports, it is very clear that the major portion comes from motor vehicles. If the volume drops as a result of prohibitive taxes mentioned earlier that will affect the above mentioned revenue estimates as well.

Most of the items classified under 28% duty band along with a number of increases in other taxes, cesses and duties on such imports, may definitely have an impact on the volumes imported. Therefore it may be estimated that only less than half of the above additional revenue may be realised.

Re-formulating VAT
Additional revenue expected is Rs.3,100 million. Although the changes to the rate structure have been proposed to give relief to the poor and other needy sectors of the economy in practice these so called benefits may not be realized due to the nature of the VAT system.

The exemptions will not provide tax-free goods under the VAT. Therefore in certain cases consumer prices may go up instead of coming down. The main problem will be the complicated VAT administration due to these multiple rates. On top of multiple rates a prohibition of VAT input credits has also been proposed.

Even without such prohibition in the VAT law the tax officials now deny many VAT input credits to the taxpayers. All these ad hoc measures aimed at increased VAT revenue may not only make the system more complicated but may result in a turnover tax at very high rate instead of VAT. The VAT in Sri Lanka has been a very controversial issue. Some expected this government to abolish the VAT.

The most important thing is the change in the attitudes of politicians. When the previous regime proposed to amalgamate VAT rates and create an additional revenue of Rs. 2000 million in the 2004 Budget the then opposition (specially JVP) created a lot of trouble which could have been aimed at defeating the budget.

Now this time the expected increase is Rs. 3100 million and the real impact of it may be much more. But now the so-called agitators do not make any noise but they fully support it. What a country and what a political culture.

Taxing individuals
Although this has been described as a 'simplification' of personal income tax system it is really not so. It has increased the tax slabs from 3 to 6. As a result the progressivity has been increased with the associated complications.

Now the individuals pay comparatively less tax on the same income than previously. For ex: Previously any individual having income liable to tax in excess of Rs. 780,000 per year, the excess was liable to tax at 30%. Now the income liable at 30% will be only on anything in excess of Rs. 1.4 million. Isn't it really a pro-people measure, which may give strength to the Minister?

New employment opportunities
Although this has created a severe strain on the Budget since the salary bill has gone up from Rs.97 billion to 127 billion, this measure may be very advantageous politically. In any case the empowerment of the poor has to be done through the creation of adequate employment opportunities. But the problems in this are that all these employments have increased the heavy burden already existing as a result of excessive and unproductive public servants.

With regard to the salary increase the employees in the public sector and semi public sector will be happy. But the overall impact will be felt very soon when the inflationary process get started.

Conclusion
In the final analysis, revenue estimates may not be realised and the shortage may be nearly 1 - 2 percentage point of GDP. It may be more than Rs 50 billion. The overall budget deficit would be more than the estimated amount in the budget.

This is a budget game played by the Treasury for many years especially during the previous PA regime. In 1994 the estimated budget deficit as a percentage of GDP was 6.8 percent against an actual 10.5 percent while in 2001 it was 8.5 percent estimated and 10.8 percent actual.

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