Sri Lanka’s “hidden poor”
View(s):Let us call him “Chris”, without disclosing his identity. However, today – during this post-crisis times of the country – Chris represents the average “middle-class” professionals in the country whose earnings are limited to a fixed monthly salary. They neither have a political voice nor do they launch street protests.
But I must say that they are angry; they want to change the system, while some others want to leave the country.
A recent protest against high taxes.
Take-home salary
Chris lives with his wife and two grown daughters in a beautiful modern house that he built in the suburbs of Colombo. He also drives a Japanese motor car. While the elder daughter is following highest studies, at a private higher educational institute, the younger one is expecting to sit for
A/Levels examinations soon.
Chris earns almost half a million rupees as his monthly gross salary! It includes his basic salary of Rs. 275,000, and all other allowances such as vehicle, fuel, telephone, insurance and incentives.
He pays Rs. 95,000 as income tax and
Rs. 165,000 as monthly loan instalments for three loans – housing loan, vehicle loan and personal loan. Some of his allowances are spending-based so that he gets them only if he spends them. All expenses are now subject to 18 per cent VAT. When the property tax comes to be effective, perhaps, he may have to pay it too based on “imputed” rental income of his house as well.
His take-home salary, after all deductions, is Rs. 89,000 only. Out of the take home salary, he has unavoidable scheduled payments, including electricity and utility bills and his children’s transport costs, all which amount to over Rs. 60,000 a month. What is left is less than Rs. 30,000 for food, medicine and other basic consumables. His savings are nil, wife’s jewelries are pawned, and credit cards are over-drawn.
Poverty line
The official poverty line of
Sri Lanka, based on the National Consumer Price Index, is Rs. 17,014 in January 2024. It has increased by 144 per cent from its annual average of Rs. 6,966 in the previous survey year 2019. The poverty line denotes the minimum expenditure per month required for an average person of a household to fulfill the basic needs, maintaining his or her calory intake.
The international poverty line, applicable for a “middle-income” country category is US$3.65 a day, which is approximately Rs. 1000. Accordingly, the people who earn less than Rs. 1000 a day are “poor” by the international poverty line.
As per studies based on the national poverty line, the number of poor in Sri Lanka has increased from 3 million to 7 million during 2019-2023. According to the international poverty line, the number of poor earning less than $3.65 a day has increased from 2.5 million in 2019 to 5.7 million in 2022.
The massive increase in the number of poor is a result of the economic crisis as well as of the policy responses to the crisis – particularly, the tax hikes and price adjustments. An increase in poverty means that many people who were above the poverty line, whether national or international poverty line, have fallen below it. At the same time, many others who were far above the poverty line have moved closer to it with increased “vulnerability” to any external shocks.
Middle-class poor
Where is Chris now? Technically speaking, he is not considered to be “poor” by either national or international poverty line. Enumerators who notice his two-storied house and the motor car parked in the garage don’t even include him or his household in the poverty surveys.
And Chris is a middle-class professional who draws a colossal salary. His gross income or after-tax income, divided by the number of household members in his family, is above the poverty line.
However, effectively, the post-crisis living standards of his household is little different from that of “poor” households. He has no choice at all regarding his income tax or loan deductions from the salary. After dividing his take-home salary, which is Rs. 89,000, among the four members of his household, average income per person is Rs. 22,250.
Their average income is below the international poverty line of Rs. 1000 a day or Rs. 30,000 a month. They are just above the national poverty line of Rs. 17,014 so that it is a household in the “vulnerable” category. They adopt the poor’s coping strategies such as cutting down nutrition from meals, reducing essential expenses, short-term borrowings and pawning valuables.
Despite all that, they are not in the official category of poor and, neither does anyone consider them as poor. But they are hidden poor in the middle-class.
The frustration
From a development perspective, a nation’s development is the “expansion of the middle-class” which takes place along with the contraction in the “lower-income” category. Accordingly, middle-class expansion originates from the lower-income strata as people find ways and means of upward social mobility.
But the bitter truth of the crisis and the policy responses to the crisis is that it is the squeezed middle class that carry a large part of the burden. We can argue that it is what an “economic crisis” means, but the frustration of the middle-class is not unreasonable. Their frustration is not only because of shouldering the crisis recovery, but also because of its ‘unfair’ distribution across the society.
With all types of tax reforms affecting both direct and indirect taxes, the government has been able to raise the tax revenue but it is not enough. Although the employees in the organised public and private sectors pay income taxes, a large part of this economy belongs to the “unorganised” sector which is hardly captured in the tax net. On average, informal sector employment accounts for 57 per cent of the total, while the agriculture sector alone represents 88 per cent.
Informality
Various business activities and professional services operating in the country are “informal” so that their incomes are not captured by income taxes or corporate taxes. Anecdotal evidence suggests that the share of “cash-based transactions” have increased in the recent past, while there is no requirement for presenting a tax identification number (unlike PAN in India) for higher expenses.
In the absense of an effective law-enforcement to limit cash-based transactions, it is an open secret that many businesses in the “formal” sector too, maintain two or three different sets of accounting books. Each set is for different purposes, including one of them for disclosing taxable income.
The greater scope for “informality” in financial transactions has opened the door for corruptions including bribery, commissions, and over-invoiced procurements. Becoming rich is a process, but a sudden increase in incomes, wealth, assets, and expenses are not monitored in Sri Lanka. After all, the government too did not have an established information system to measure people’s income, wealth, assets and expenditure.
Free riders
It is the informal nature of the Sri Lankan economy and the lack of a technology-based tax collection system that have resulted in a narrow direct tax base. The cost of this defficiency is passed on to the organised sector employees whose living standards are now pushed down towards the poverty line.
And after all, there are no incentives or priviledges for the genuine tax payers. Non-taxpayers too enjoy the same public sector services as the taxpayers, or perhaps even with greater access to them. Taxpayers are angry, not only because of the lack of an equitable distribution of tax burden across the society but also because there are “free riders” whose priviledges depend on others’ tax payments.
(The writer is Emeritus Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
Hitad.lk has you covered with quality used or brand new cars for sale that are budget friendly yet reliable! Now is the time to sell your old ride for something more attractive to today's modern automotive market demands. Browse through our selection of affordable options now on Hitad.lk before deciding on what will work best for you!