Taxing times ahead

Opinion

With fiscal problems further fuelling public discontent, Sri Lanka’s ‘unity’ government, writes Neville de Silva, is more divided than ever.

After Sri Lanka’s parliamentary elections in August last year the United National Party (UNP) and the Sri Lanka Freedom Party (SLFP) cobbled together what they called a Government of National Unity.
Long before the year was out there were already signs that the publicly avowed unity had started to fray at the edges. Today the troubles between Sri Lanka’s two main political parties are more than peripheral; they are gnawing away at the coalition’s epicentre, despite the public image of consensual governance.
It is not only the differences between the two parties that are beginning to worry President Maithripala Sirisena, who took control of the SLFP after the presidential election in January 2015 and appointed UNP leader Ranil Wickremesinghe prime minister ahead of the parliamentary polls. A substantial section of the SLFP and the United People’s Freedom Alliance (UPFA) – a group of parties, including the SLFP, that formed the government of defeated president Mahinda Rajapaksa and still strongly supports him – continues to harry the government from inside and outside parliament.
The current issue that has embroiled the two governing parties, anti-government forces, the Supreme Court, the International Monetary Fund (IMF) and the public goes deeper than the contretemps that caused friction between the UNP and the SLFP in the months leading up to the present crisis, the appointment of the governor of the Central Bank.
A substantial section of the SLFP and the UPFA continues to harry the government from inside and outside parliament.
At the centre of today’s troubles is the increase in VAT and the broadening of the base of Nation Building Tax (NBT). VAT was increased from 11 per cent to 15 per cent and more people have been drawn into the NBT net, all fixed by administrative fiat, effective from May 2. In doing this, the UNP’s Finance Minister, Ravi Karunanayake, and his party, responsible for economic affairs under the power-sharing arrangement, have slipped up badly.
How they failed to recognise the constitutional requirement that most parliamentarians should be aware of puzzles many. Article 148 of the country’s constitution states: ‘Parliament will have full control over public finance. No tax, rate or any other levy shall be imposed by any local authority or any other public authority except by or under the authority of a law passed by Parliament or of any existing law.’
Those knowledgeable in Sri Lanka’s constitution, including alert parliamentarians, know that a constricting hold by the legislature, even over the executive presidency, is parliament’s power over public finance, and a recalcitrant parliament could make life difficult if it wishes to exercise that power. If the government deliberately tried to bypass this constitutional requirement, hoping it would not be spotted or challenged once the new taxes were a fait accompli, it was probably because of an urgent need to meet IMF conditions.
With huge fiscal deficits eating away at the government’s ability to meet its domestic commitments and debt servicing, partly due to the extravagance of the previous administration and partly as a result of the present government’s profligacy, the ‘National Unity’ government approached the IMF for an Extended Fund Facility when almost all other sources of financial assistance appeared to have run dry.
The IMF granted US$ 1.5 billion, spread over three years.
The first tranche – a little over $168 million – has already been drawn, and will be used to help extricate the administration from the fiscal morass into which it keeps wading.
One of the IMF’s key preconditions was that the government collects more revenue to meet its expenditure and debt-servicing requirements. The increase in VAT seemed to be the most convenient way to meet these conditions, and to satisfy the IMF and conclude the negotiations successfully, the government implemented the new taxes from May 2. But last month the National Unity government ran into trouble when the VAT and NBT adjustments were challenged in the Supreme Court.
A three-judge bench, including the chief justice, issued an interim order stopping the new tax adjustments until they are passed by parliament, as constitutionally stipulated. So the tax increases are in abeyance, causing confusion in the markets and friction between the two main parties, with Rajapaksa loyalists sniping away at both, trying to widen the wedge in this ‘consensual’ government.
The Supreme Court order has led to two problems. Since the government had already announced the tax increases would be effective from May 2, the wholesale and retail trade is charging the public the higher rates, sending living costs soaring still higher. The confusion was made worse when, subsequent to the Court order, the government said VAT would remain at the previous rate of 11 per cent until parliament passes the new law. While many traders had already started charging the increased tax and are now called upon to return to the old rate, unscrupulous businesses are insisting on the new 15 per cent VAT, even though it is not operative.