New revenue bill to test govt.’s backbone

The backbone of this government will be thoroughly scrutinized today. No, it has got nothing to do with quelling the seemingly endless daily protests, or the rhetoric of curbing corruption within the current regime or its predecessors. 

Today will test the government’s independence from crony capitalists, when amendments to the proposed Inland Revenue Bill are presented to parliament.

Finance and Mass Media Minister Mangala Samaraweera last week quite cheerfully said that more than a half day’s worth of amendments will be read out in parliament regarding the bill. Of course, some of these amendments are required for the bill to become constitutional. 

The bill is said to be an exact copy of the Inland Revenue Act of Ghana which the International Monetary Fund (IMF) helped draft, and is attempting to push on Sri Lanka under the US$ 1.5 billion loan linked to economic reforms. While what worked with Ghana’s constitution may not work here, Sri Lanka clearly needs the tax reforms present in the bill to reduce its fiscal deficit.

How many of these amendments, to be read out for half a day, are brought in to fulfil constitutional requirements, and how many are brought in to placate crony capitalists is the crucial question, since most of these crony capitalists do not pay billions, or possibly trillions of rupees in income taxes through various exemptions provided in the current inland revenue legislation. Ascertaining how these tax exemptions came to be, why specific industries were provided these tax breaks, and what incentives politicians were provided to legislate these exemptions, does not require much imagination.
Before the proposed bill was presented in parliament, some politicians had tried to justify keeping this status quo, by saying that the key to increasing tax revenue was to including tax evaders in the tax net, instead of putting more of a burden on existing income tax payers to pay more. These two should not be mutually exclusive, especially in the case of those enjoying income tax subsidies.

The traditionally large exporters, who enjoy massive margins due to subsidies, were the first to cry foul over the proposed Inland Revenue Bill, which provides tax subsidies only to companies that fully export their products. Currently, companies which export 80 percent of their products can enjoy 
lower taxes.

Finance State Minister Eran Wickramaratne had said that the government has no intention for letting export competitiveness slip, and that the concerns of parties who had lobbied against the removal of tax exemptions were being addressed.

There usually should be no excuse for providing tax subsidies, in order to fully account for the externalities and other imbalances—knowingly or unknowingly—created by the private sector, but given Sri Lanka’s bureaucratic red tape which hampers export competitiveness, some level of government support seems justifiable until the bureaucracy is reformed.

The current government may not be able to undertake this exercise anytime soon, given that its political capital has been depleted by internal betrayals, a Treasury bonds scandal, attempting to fend of doctors and university students backed by political forces, and other mishaps, some of which were not of this government’s own making.

Therefore it then should be determined who receives these tax subsidies or for that matter, any other incentive. Certainly not large-scale producers who have been enjoying these benefits for decades, have political influence to smooth out problems in their supply chains and have had plenty of time to manage these challenges.  Subsidies and incentives should ideally be provided, in the short-term, for realized investments—instead of the current practice of providing subsidies for promises to invest—and in the medium term for fledgling industries which have the potential to become key exports for the country.

Providing tax subsidies to large, well established companies results in a diminished capacity the government has to provide support for these potential high growth sectors.

The increased taxes collected from the private sector deprived of subsidies could be used to invest in technologically advanced systems that would eliminate the need for such a bloated and inefficient bureaucracy, and help foster competitiveness.

Two months ago, the World Bank had been quite confident of the new Inland Revenue Bill as one of the answers for Sri Lanka’s macroeconomic woes. This week, the confidence appears to have watered down to cautious optimism, with the World Bank, in a Twitter Q&A saying that it hopes the Inland Revenue Bill will be implemented as it was envisioned, when asked how it views the private sector lobbying for amendments in the bill.

The United National Party—the leading political voice within the coalition government—was well known for promoting crony capitalism the last time it was in power in the early 2000s. Given the massive political-economic blunders under the current administration, today will determine whether the UNP has matured, even by a little bit.