• Liberalization is the way forward
• Tax base is unimaginably low in Sri Lanka 
• Tax base goes up with the rise of per capita income in any country 

State Minister of Finance Eran Wickramaratne in an interview with Daily Mirror, speaks about the economic policy of the government and recent tax reforms. The Excerpts:

   
Q The government faces a lot of criticism over recent tax hikes, particularly on the small and medium scale entrepreneurs. Won’t it affect their investment capacity and expose them to economic vulnerabilities?  

 We have to understand that tax base in Sri Lanka is dangerously at low levels. In every country, taxation goes up along with the increase of per capita income. Then, you create more government services and a more equal society. If you look at advanced countries, they are more equal societies. It is unimaginably unequal in our country. This basic issue needs to be sorted out. Social contract is under threat because of this inequality. Therefore, there can be a bloodbath again in the future at some point.  Sri Lanka has had a history of that. One aim of taxation is creating a more equal society.   

Within that taxation, we have to re-balance the direct and indirect taxation. We have two tax regimes basically. The corporate tax regime is 28%. It is 14% for small and medium enterprises. Any export industry is within that.   

If you take the entrepreneurial aspect, it is so low in Sri Lanka. It is unimaginable to see how low it is. In Sri Lanka, it is only 2.8% of the total population. In Vietnam, it is 19.6%. In Thailand, it is 27. 5%.   

If you take a country like Bangladesh with a big population, it is 11.6%. China has 7.5% of business owners. The point is that we have to increase the number of entrepreneurs. That is why this economy has a structure of an underdeveloped country. We are still driven by large companies only. We want to encourage. We are giving different kinds of loans through the banking system under Enterprise Sri Lanka programme. 

We have two tax regimes basically. The corporate tax regime is 28%. It is 14% for small and medium enterprises. Any export industry is within that   

Q In such a context, if you increase taxation on existing businessman, it will put them in a difficult situation. How do you address that issue?  

 We had tax free status for 40 years. It has not increased investment though. Actually, it is not taxation that blocks Foreign Direct Investment. It is lots of other different issues. Those issues need to be addressed rather than taxation. Business registration has to be quicker. People have to be able to register businesses in a day. We need to address issues in the ‘Doing Business Index’.   

Q Countries in Scandinavian region, people get quality services from their governments in return for high taxes they pay. It is not the case in Sri Lanka. Now you have increased taxes. How are you going to improve facilities for people?  

All these countries went through these development phases. In Scandinavian countries, taxation is between 40-55%. It is 11.5% in Sri Lanka. We have now moved to 14%. At 14%, we are giving more services than other countries. People have free education and free access to health. If you look at the measurements in health and education, what we have achieved with a little money is amazing. Longevity has improved to mid and late seventies from fifties in the past. If somebody says that service level has to be improved, I completely agree with it. The quantitative targets are really good. But, the quality has to be improved. If you go to see a doctor, he has to spend a lot of time with his patient. The level of education differs from national schools to rural schools. More investment needs to be done to improve quality. Dilemma for the country is to balance investment in human resources and other infrastructure. This is the need. Do you need a highway to Kandy? Do you need investment in the improvement of education? These are the policy dilemmas that are there.   

Q What is the government planning to do?  

The government is gradually increasing investment in health and education expenditures. It is a tough one, though. We have to manage the debt profile. While we are managing the debt profile, we are doing all these things.   

We had tax free status for 40 years. It has not increased investment though. Actually, it is not taxation that blocks Foreign Direct Investment. It is lots of other different issues. Those issues need to be addressed rather than taxation

Q Earlier, you said in an interview with me that the government would not make public investment as such. It is a departure from the practice of the previous government. Now, the government has moved to pump in a lot of money for such development projects such as the renovation of irrigation tanks. What is the reason for the shift in policy?   

First, I would not say there is a sudden change of policies. The previous regime was spending as high as seven percent of GDP in public investment. Ours is going to be more like five percent. We are not going to get into the seven percent range. There is no change of policies. There is only change of emphasis. What kind of infrastructure do you build? We are going to focus on the rural sector. That is why we are focusing on the construction and renovation of irrigation tanks, anicuts, rural roads etc.  

We have to face environmental unpredictability. Up to 2014, the world used to have 40 disasters a year. After that, it is averaging at 400. That is the reason for us to make investment in irrigation tanks and all for the benefit of majority of people. The most affected countries in these disasters are in the West Indies. Within the first five or six most affected countries, Sri Lanka is one. This is a huge problem. Many people have not recognized it yet. We have not contributed to global warming. But, we are suffering from consequences of it. There has not been sufficient rain for four cultivation seasons. If we build tanks, we can retain water. Therefore, we invest in the development of 1200 tanks.   

We want to drive our economy through private investment as the other part. We need to keep looking at the ‘doing business environment’ making it better and better. Liberalization is the way forward. The future of this country lies in overseas markets. It lies in our ability to export.   

 

We have to understand that tax base in Sri Lanka is dangerously at low levels. In every country, taxation goes up along with the increase of per capita income. Then, you create more government services and a more equal society

Q What is the extent of liberalization you seek?  

The argument is always between the consumer and the producer. People who come to the doorstep of the Finance Ministry or the Finance Minister are businessmen in general. They say they create employment. So, their industries are needed to be protected. On the other hand, we have 21 million consumers out there. Dilemma is that you can get products cheap from outside. We have to think of the living standard of people. That is the balance we need to strike. Ours is a small internal market. Sri Lanka has to be a trading hub basically. Markets are much wider outside. Markets outside in Asia are growing. Living standards of the Asian markets are growing. We have to attract investment. We do not have technology and investment to produce everything the Asian markets need. The Finance Minister talked about the liberalization of the shipping industry. We are not going to be ship builders. We certainly can provide all the services. We can certainly become the biggest and most efficient port in Asia. Now we are in South Asia. I am talking about Asia. That will come through liberalization only.   

I actually think Colombo will continue to the leading growing port. Hambantota is a buried investment. Certainly, we should grow Hambantota as well. We have converted it to a equity swap.   

Q You started all investments in the council sector ahead of the main elections scheduled. So, some people interpret it as a move for vote catching. What is your response?  

I would not say that. We have been under tremendous pressure to abandon our fiscal discipline. The Finance Ministry has not given into that pressure. We have tight fiscal discipline. We are committed to bring the budget deficit down. We are committed to have an exchange rate that is globally competitive. When you look at the measures we are taking at the macro level, that assessment is completely untrue. We are changing only emphasis. There is no change in policies. We are not for turning or looking back on our economic policy. We want to be consistent. In all the macroeconomic indicators, we are positive. Of course, there are problems. 

Sri Lanka has to be a trading hub basically. Markets are much wider outside. Markets outside Asia are growing. Living standards of the Asian markets are growing

 
Q There is a lot of criticism on the absence of a policy on Free Trade Agreements (FTA). As for the FTA with Singapore, almost all the professional bodies are opposed to it. What is the reason for it?  

I would say that this country has been a protected one. The level of protection has grown from 1990s. It is normal that when you are protected and in a safe comfortable zone, you do not want to move out of it. In 1977, JR Jayewardene took over the government. All the reform programmes were opposed at that time. What a good thing we did! That is what people said after 15 years. We liberalized. That was the period in which my mother waited in the list for ten years to get telephone facility. You can get a telephone instantly. If we are going to be the trading hub, we have to have agreements. We have arrangements with India. We are negotiating with China. Can you imagine having access to Indian and Chinese markets?

If Singaporean investments are relocated here, we will have access to Southeast Asian markets.    

If we are going to be the trading hub, we have to have agreements. We have arrangements with India. We are negotiating with China. Can you imagine having access to Indian and Chinese markets?