Govt.’s taxation policy heavy burden on the poor

While the government continues to streamline the taxation regime by reducing tax rates and granting heavy tax concessions to attract strategic investments into the country, a new UNDP report says the government’s taxation policy is hurting the poor and preventing resources from going into critical areas of the economy which could significantly improve the standard of living in the country.

The UNDP’s ‘Sri Lanka Human Development Report 2012’, for which detailed research was carried out by the Institute of Policy Studies, points out that public investment in education, health, agriculture and science and technology was inadequate.

"There is a need for increased public investments especially in education, health, agriculture, science and technology, and in provinces besides the Western province. Governance mechanisms in turn must be strengthened to monitor the use of resources," the report said.

"Governance is the responsibility of the government, but all stakeholders can and should play a role. The private sector, NGOs, farmers, women, student organisations, ordinary citizens and other groups need to mobilise to demand more adequate and responsive governance. Governance functions best when it is pushed simultaneously from above and below, from the centre and society at large.

"With stagnating international resources at best, the government needs to improve revenue collection nationally and locally. The decline of total tax revenue as a share of GDP is a cause for alarm; it slipped from 19 percent prior to 1995 to 15 percent between 2003 and 2008, and was a mere 12.4 percent in 2011," the report said.

According to estimates by The Island Financial Revenue, tax revenue to GDP fell to 6.53 percent of GDP during the first seven months of this year from 6.69 percent a year earlier.

"Part of the reason for the slippage is the country’s heavy reliance on indirect taxes, which account for over 80 percent of total tax revenue. This shifts the burden of taxation onto the poor," The UNDP report said.

"The Government may wish to revisit the balance between direct and indirect taxation for several reasons: to spread the burden of taxation more evenly, to improve revenue collection, to achieve better governance and accountability, and to ensure that revenue is in line with growth. Empirical evidence suggests that governance mechanisms are likely to be more robust in countries where the government relics heavily upon general taxation for its revenues. At the same time, taxation should not distort the business environment and force relocation of enterprises.

" A study by The Asia Foundation found that economic governance at the local level - essentially the business regulatory environment - varies across provinces, and that the quality of governance affects business performance. Consistently, small- and medium-sized enterprises, which constitute the backbone of the industrial sector across the country, face a range of problems, from poor access to finance, to difficulties in obtaining licences, permits and approvals. A heavy bureaucracy seems to hold back creativity, growth potential and employment prospects.

"Even though some functions of government have been decentralized to the provinces, provincial governments are highly dependent upon the centre for finances and liquidity, thereby limiting their ability to attend to their local business environment. This hinders independent action. Additionally, coordination between the central and provincial governments is weak, and unclear demarcations of functions have created inefficiencies in public service delivery. There is thus a case for reform of the present structure, such as through better definitions of functions and authority. This issue is being addressed, but change needs to accelerate.

"Sri Lanka has made great progress in achieving gender equity in health and education, along most indicators. But it can improve in terms of women’s empowerment. Fr 2004 to 2010, less than 6 percent of the 255 members of Parliament were women; inclusion in governance mechanisms at the sub-national level is even A primary reason for this gap is that political parties nominate considerably more men for positions in political institutions. The introduction and implementation of quotas for women, for parties and for parliament would be a positive move. Since it is still not entirely clear why women are so poorly represented, it could also be necessary to understand underlying causes before solution, proposed," the UNDP report said.

The report highlighted that several critical recommendations made by the Presidential Taxation Commission to reform the taxation regime were yet to be implemented.

With government fiscal operations coming under strain, as indicated by data for the first seven months of this year (already published in these pages) the government has already increased a slew of indirect taxes.

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