Taxation, fiscal and macroeconomic issues causes for concern

A senior economist said the ad hoc changes to taxation is an impediment to growth and despite some gains in achieving economic stability after the war, fiscal and macroeconomic issues are still causes for concern.

"Ad hoc policies on taxation have accumulated over the years. Sri Lanka has 25 taxes administered by the central government while there are about 20 other taxes that come under provincial councils. In developing countries, the number of taxes amount to about five or eight," Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies, said.

The government’s revenue for the year is being squeezed due to the fallout of the global economic crisis. Industries are experiencing a fall in revenue and this in turn impacts on the taxes that go to the government.

The government’s response has been to increase the Nation Building Tax, a new tax introduced with the last budget, to three percent. However, some sectors have been given exemptions from this tax.

Dr. Kelegama said government revenue accounts for 14 percent of GDP.

"This must be increased to about 20 percent if we are to achieve our economic growth targets," he said addressing the Sri Lanka Economic Summit last Wednesday.

"This will call for a massive mobilisation of domestic funds. Domestic savings which is about 20 percent of GDP must be increased to about 30 percent and these savings must translate into investments," Dr. Kelegama said.

Considering the countries limited resources and the government’s inability to meet revenue targets Dr. Kelegama stressed the importance of making the tax regime more efficient.

He also pointed out that economic activities continued to be governed by outdated legislature which he believes to be a barrier to economic growth.

The government is aware of the complexities in the tax regime and President Mahinda Rajapaksa wants a Taxation Commission to try and streamline tax administration by 2010.

S. R. Attygala, Director General Fiscal Policy, Ministry of Finance and Planning, said that for the past six years the government had not tampered much with the tax base.

"Revenue targets have been declining since 1990 but this time the government is not far off from its target," he said.

He also said that certain taxes were imposed to safeguard some industries.

"Cesses were introduced on request of the private sector who called for certain safeguards," Attygala said.

But in many cases the cess funds established for each sector from which this tax was collected had not gone back to the industry.

A major cause for concern is the continued financing of loss-making state enterprises.

"We need to make them more profitable. One way is through private-public partnerships where a performance contract is offered under the ownership of the state," Dr. Kelegama suggested.

Dr. Harsha De Silva, Lead Economist, LIRNEasia, said that net credit to the private sector had grown by about one percent year-on-year last April. Credit to the garment industry had grown by 80 percent while state owned enterprises saw their credit grow by about 60 percent.

"We can keep saying that money is going waste, but much is still being pumped into these corporations," Dr. De Silva said.

The inaugural session of the summit saw senior politicians claim that the private sector should spearhead economic growth in the country.

Dr. Anura Ekanayake, Vice Chairman of the Ceylon Chamber of Commerce, said that there should be a paradigm shift in the bureaucratic framework of the country.

"If we are to seize the opportunity that is now with us after the end of the war, it is critical that an environment is created making it easy to do business," he said.

Sri Lanka has never fared well in international indicators for the ease of doing business.

"We need to have a bureaucracy and policy framework that understands business. There has to be a change in mindsets. This is also an option with minimal cost to the government. There are no fiscal issues involved, considering the credit squeeze this seems a better option to take because it only involves a change in attitude," Dr. Ekanayake said.

Deputy Finance Minister Dr. Sarath Amunugama was also present and he continued his criticisms on the public sector. Last week he likened state enterprises to the fraudulent finance company that stole large sums of money (Sakvithi).

The minister was asked whether politicians should be held responsible for this, since it was they who appointed top officials to state enterprises.

"I am not blaming anybody. We must look at the bigger picture. It depends on the level of blame," he said.

Dr. Ekanayake suggested that no one should play the blame game but sit down to discuss pertinent issues facing the country’s economy in structural fiscal problems and economic imbalances.

Dr. Kelegama pointed out that interest rates, exchange rates and taxation policy issues, government debt and the position of the reserves were causes for concern.

He suggested that these problems need to be looked into before getting the economy right.

"(Sri Lanka) is a victim of the global financial crisis so asking us to make adjustments makes no sense," Attygala said, stressing that with the war over Sri Lanka could expect to see more growth.

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