‘Rob Peter to pay Paul’ tax policy will make things worse, says company director

A new tax policy is a valid need for Sri Lanka at present but the government should be careful not to throw the baby out with the bath water, Chaminda Wanigaratne, a Director for a leading Sri Lankan industrial group said.
“Raising high levels of revenue from an anti-industrial tax policy may be the easiest way to pay the salaries of government servants, state-sector pensions, meet huge loan and interest payment liabilities payable by the government and to keep the loss-making state-owned enterprises (SOEs) flying their flag above the water. But the government should evaluate the repercussions of this move before it’s too late,” he said. 

“The government of Gotabaya Rajapaksa gave effect to substantial tax cuts without a mandate from the people and we all know the repercussions it brought to the country at large and the current administration’s policy decisions led by President Ranil Wickremesinghe and Central Bank Governor Dr. Nandalal Weerasinghe will give effect to historically high corporate and personal income taxes, of which the repercussions are going to be grave on the industrial sector and thereby on the overall economy,” he added.

Wanigaratne, who is Director Automotive at Ideal Motors (Pvt.) Ltd, further said if the new tax bill is passed in Parliament, it would definitely discourage the export-oriented companies and companies that are engaged in the production of import substitutions. 

He also said it would no doubt discourage the country’s top talent in the fields of manufacturing, technological, finance, marketing, sales, innovation, etc. 

“This scenario will create a pervading effect of dismay and disappointment among the local manufacturers, business owners, shareholders, C-suite personnel and middle level executives, who are collectively the driving force behind the private sector, which is the engine of growth,” he said.

“We are not saying that taxes shouldn’t be levied. In this country, we need to have a minimum of 15 percent tax to GDP ratio because Sri Lanka doesn’t have alternative earnings. But it should be levied in a strategic and meaningful way. 

It should be fair by the people and society. Taxes collected should be well spent to improve education, healthcare, infrastructure, power and energy sector, etc. But we don’t hear anything from the government whether it is going to use the tax funds for such purposes.

It’s clear that the government’s bull’s eye target is raising revenue to meet public expenditure at any cost. They want to have a surplus in the primary account, as in 2018-2019 and show the IMF impressive numbers in the balance of payments and budget deficit. In my view, this is just not feasible in the medium to long term in an environment of high inflation, high interest rates and ultra-low growth. 

Levying corporate taxes of 30-36 percent and personal income taxes from 6-30 percent would be like robbing Peter to pay Paul. 

What the government should do is not transferring money from the well-managed corporate sector to the ailing public sector, possibly allowing both sectors to collapse. 

Instead, they should make public institutions more efficient and productive by making reforms such as retrenchment and reallocating existing human resources appropriately and cutting back expenses,” he added. Meanwhile, Wanigaratne pointed out that placing the whole burden of loss-making SOEs such as CPC, CEB, SriLankan Airlines, CGR, CTB, etc. on the private sector is a short-sighted strategy.  

“One-third of the potential tax collections will be consumed by the public sector salaries, another one-third will be used to pay interest on the loans the government has taken. And the balance one-third will be channelled to fund the reeling SOEs. 

Not a single tax rupee is likely to be allocated for the well-being of the people. So, we will end up paying high taxes like in Scandinavian countries or Europe and live like poor people in North Korea,” he noted.

Wanigaratne said instead of becoming another North Korea, Sri Lanka should take a lesson from what India did in 1990s, when it encountered a similar crisis. India made the right policies at the right time boldly and turned it into an industrial country. It established all kinds of technology manufacturing in India and the country today is a leading manufacturing hub for automobiles and automotive components in the world. 

Further highlighting the possible unintended consequences of the new tax policy, he said the high tax rates could result in the dollar-earning ICT sector companies that operate online obtaining overseas business licences basing their stations in Dubai or Singapore, instead of operating from Sri Lanka.  

“Then their real business jurisdiction will be one of those countries and will pay taxes to those countries, depriving Sri Lanka of any taxes at all. Further, the export-oriented manufacturers will find the trading sector more lucrative and they too will convert into trading because the prevailing operational conditions are biased towards trading companies such as supermarket chains and fast food chains,” Wanigaratne noted. 

“The high personal income taxes will affect our private sector talent pool from middle managers to cluster heads to directors. 

They have a lifestyle, which they have not deliberately embraced but one that circumstances have compelled them to accept.  Because of the nature of their jobs, they have enrolled their children in private schools, bought houses in close proximity to Colombo and maintain a car, as they need their own transportation. 

All these mean many financial commitments at the end of each month and so, they can hardly take this tax hit. These skilled young people will have no other option but migrate to other countries, where personal income taxes are fair and living conditions are much higher. Thus, no-one with professional career prospects would want to stay in Sri Lanka. As a result, Sri Lanka’s external sector performance will record dismal figures. Foreign inflows will dip further and the situation will get worse,” he added.

“So, we should all unite and raise our voices to prevent this tax bill from getting passed in Parliament or otherwise, a second Aragalaya will soon ensue from the widespread frustrations triggered by this unfair tax structure,”  Wanigaratne cautioned.