Govt. likely to face dilemma between raising taxes and maintaining stable tax policy

• Govt. introduced sweeping tax cuts in Dec. 2019 and maintained its tax policy for two years
• But in upcoming budget, govt. is forced to chose between maintaining current tax policy and increasing taxes to bridge an ever widening budget gap

As Sri Lanka is only two months away from its 2022 budget, the government is facing the tough choice between raising the taxes to bridge an expanding budget hole caused by the pandemic-induced disruptions and maintaining a stable tax policy, which the government assured and made good on for two years since coming to power. 

As the virus-related restriction were introduced since April this year, it shattered the government’s original revenue targets set for 2021, while the country was forced to confront its worst foreign liquidity crunch, due to loss of inflows, which resulted in increased prices and food shortages. 

Taxes have been one of the most contentious issues since 2019 December, when the new government of President Gotabaya Rajapaksa afforded sweeping tax cuts for both corporates and individuals, on both direct and indirect taxes, to provide stimulus to a lagging economy under an International Monetary Fund (IMF) programme.  
The lingering effects of the pandemic and the resulting loss of state revenues is now pushing the government to raise taxes again, as the government is accumulating debt in large proportions. 

“The other question is on the tax rate. Will we see some level of change in the budget though we have been told that there will be a continuity in tax policy?” asked Ceylon Chamber of Commerce Chief Economist Shiran Fernando, at a recent forum held online. 

Speaking at the Postgraduate Institute of Management’s monthly montage in September, Fernando proposed bringing back the withholding tax, which he said had yielded results in the past by way of raking in money to the state coffers, before doing away with it since 2020.

As of late, there has been a growing chorus for raising taxes or imposing a new tax at least for an interim period, particularly from big corporates, to overcome the revenue squeeze experienced due to the pandemic-induced economic malaise. 

For instance, billionaire businessman Dhammika Perera appearing on a television programme last week proposed a 2 to 3 percent COVID tax on business revenue for a brief period, while reminding the costly price the previous government and the country alike had to pay by imposing taxes with vengeance such as ‘super gains tax’. 

Expressing similar sentiments, First Capital Holdings PLC Head of Research Dimantha Mathew said raising taxes is no longer a choice for the government, regardless of it chooses to go to the IMF or not. 

“Considering the dire need for tax revenue, there seems be a reasonable chance that tax rates are likely to be raised either at consumer level or corporate or both,” Mathew said. 

First Capital Research forecasted a budget deficit of over 10 percent of gross domestic product for the second year running in 2021, as the government’s revenue is estimated at only half of its expenditure.