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Protests against rising costs of living, increased taxation and political discontent are widespread. Will the Government achieve a lower fiscal deficit by increased revenue collection?

Protests

Last week was marked by a series of protests against the rising costs of living and income taxes introduced by the Government.

There is considerable discontent in the country with the unbearable costs of living. Unemployment, poverty and hunger are increasing. In this context, the Budget for 2023 has heaped severe burdens on the employed middle classes. This has sparked huge protests by professionals.

Professionals

Doctors have protested vehemently citing a vast exodus of medical professions leaving the country owing to reduced real incomes and higher taxation.  University academics have organised demonstrations similar to the Aragalaya. The Federation of University Academics (FUTA) has pledged to continue their struggle to oppose the new taxes.

Reasons

The main objection of professionals to the new taxes is that they are inequitable as they are a severe erosion of their incomes. Specifically, they oppose the lowering of the threshold for personal taxation to Rs 1.2 million a year or Rs 100,000 a month.

They contend this is inequitable as Rs 100,000 a month is hardly adequate for living and the six percent tax deduction is deemed a further hardship to professionals as it aggravates their financial difficulties.

Central Bank officers

The Central Bank’s Executive Officers Union (CBEOU) too has written to the government pointing out the inequitable nature of taxation and the likely inability to obtain taxes from the rich and affluent.

The CBEOU letter expressed their “strong displeasure regarding this extremely burdensome tax policy, which is imposed without a proper analysis.”

Key points

The CBEOU acknowledged that the budget deficit should be properly managed for macro-economic stability, while enhancing Government revenue. Their view was that the increase in taxes should be bearable to a multitude of taxpayers who are already affected by the economic downturn.

Anomalies

Further, the CBEOU pointed out that higher attention should be paid towards suitable medium to long-term policies to rectify the anomalies that have been created in the past.

Key points

The key points in the CBEOU letter were that the tax-free income threshold of Rs. 1.2 million per annum was too low due to salaries of many employees not rising close to or on par with the prevailing high inflation.

Exodus

They point out that young and middle-aged professionals in almost all fields are leaving the country. This will have a severe negative impact on the productivity of the economy.

Taxpayers

In the last few decades, they point out the number of registered taxpayers (individuals and institutions) in the country have not increased with increased incomes. Also, there are allegations that even some registered taxpayers do not pay taxes properly.

Thus, if tax evaders are included in the direct tax system and the Government recovers the lost revenue through proper assessment of income, it can relieve the undue additional tax burden imposed on employees and institutions that are already paying taxes. This is indeed a valid issue that must be addressed.

Expenditure and corruption

They also question the proper use of state funds and the need to reduce corruption through financial transparency, improving public financial management and introducing a strong anti-corruption legal framework. The Central Bank officers are highly critical of the management of public finances of the country including uneconomic or wasteful public expenditure.

Advice

An implication arising from the issues raised in the CBEOU’s submission is whether there was adequate technical and professional advice in drafting the tax proposals. Was the Central Bank as Advisor to the country on economic affairs not consulted?

There is much food for thought in revamping of taxation and public expenditure that should be considered.

Public finances

While there is no doubt that the lowering of the threshold for income taxes is burdensome in the current context of the high costs of living, it can be argued that the country’s parlous public finances require such taxation.

Tax evasion

The contention that the rich and high earning professionals avoid and evade taxes on their earnings is a valid issue that must be addressed in a pragmatic and effective manner.

Higher revenue

The Government must obtain much higher revenue than the current low 8 percent of GDP. Increased revenue must be obtained by taxing the rich and the methods adopted should minimise tax avoidance and tax evasion by the rich.

Ignored advice

The taxation measures discussed by economists and tax experts in the media in the run up to the budget made suggestions for more equitable and effective tax measures. Think tanks and tax experts made many suggestions, all of which underscored the need for progressive and effective taxation.

These suggestions for a progressive and equitable tax reform that would reduce the fiscal deficit fell on the deaf ears of the Government. Several suggestions for a progressive system of taxation and reduction of tax avoidance and tax evasion suggested in these columns have also fallen on deaf ears.

Conclusion

There is no doubt whatsoever that the Government must raise its tax to GDP ratio from eight per cent to at least 12 percent and increase it to around 15 to 20 percent in the next few years. In such an effort the employed must be willing to contribute their share, however difficult.

It is as important to devise a tax system that is equitable by taxing high income earners. This requires a realistic and implementable tax system that effectively taxes high income tax evaders like lawyers, doctors, tuition masters and thriving businesses. A system of expenditure taxation is the way forward.

It is also vital that the strategy to achieve fiscal consolidation must be a two-pronged one of increasing revenue and curtailing expenditure.