Budget 2019: Informal sectors must be included in tax net

The government gets set to unravel its fiscal policy plan for 2019 at a crucial juncture in time, as on the one hand it prepares for the much-anticipated elections at the end of next year and on the other, the Sri Lankan economy is under immense scrutiny and pressure to take bold and decisive steps to strengthen its place and course for the purpose of development.

Whilst a welfare-biased budget would traditionally be the norm at a time of polls, the delicate state of the economy will compel the policymakers to pepper it with some pragmatism for the want of sustainability and more importantly, to prevent giving the wrong message about the country to the international community and donor agencies. 

One area that can receive significant attention in this process is the numerous informal industries and economies that permeate the country and some which have grown to inconceivable heights warranting stringent regulation to ensure the standards and revenue to the state. 

The local beedi industry presents one of the best examples for a sector that warrants such action and simple changes to its existing structure can bring as much as Rs.20 billion in additional revenues to the government and here’s how. 

As revealed during a recent socio-economic survey, over 25,000 families islandwide engage in rolling beedis. With a daily target of 1,000 sticks, they supply a network of producers, who in turn have been subcontracted by the 500-plus licensed manufacturers 
of beedi. 

Some townships in the Colombo, Galle, Kegalle, Matale and Puttalam Districts had as many as 120 households serving a single producer, with each roller earning on average 80 cents per stick. During discussions it was revealed they worked up to six days a week, primarily employing women and children and this was consistent across every province. 

At maximum efficiency during a six-day working week, these hands effectively produce 7.5 billion sticks annually. With a stick of beedi priced at Rs.5, that is a consumer universe and market worth Rs.37.5 billion annually, presenting no form of revenue to the government. Instead, it adds further cost to the depleted state coffers, resulting from the negative health impacts of smoking.

Furthermore, beedi smoking is not a problem reserved to the senior citizens or ageing population of our country. Due to the cost pressures, many regular smokers have turned to beedi as an alternative with cigarettes costing over Rs.55 – more than 10 times the cost. This was confirmed during the survey by both consumers and traders. 

We also encountered a number of instances in the Southern, Northern and Central Provinces where beedi served as the entry point to smoking for youngsters in villages as they are cheap and easily accessible. Therefore, it is imperative that the policymakers take note of its presence and urgent need to regulate this trade. 

There is no real tax on beedi. The only form of revenue to the state is during the import of tendu leaves used to wrap the tobacco. However, there are discrepancies reported between the recorded shipment leaving the Indian ports and what is landed here 
in Colombo. 

Furthermore, with so many persons engaged in the trade islandwide and considering their stated volume, far more tendu leaf must make its way into the country to serve. Thus, the tendu tax is yielding little benefit for the government, in addition to having gone through very little change over the past two decades. 

Accordingly, the most effective manner to levy a tax on beedi would be at the point of sale. Whilst this would prove challenging due to the highly unregulated state of the industry, a considerable degree of results could be achieved by simply expanding the mandate of Public Health Inspects, Police and even Grama Sevaka Officers. 

If the government were to introduce a simple tax of Rs.2.50 at the point of sale on a stick of beedi, these officials engaged at ground level and armed with local knowledge of outlets selling beedi could conduct regular and ascertain if the shopkeepers have registered and paid their dues for sale of beedi. Payments could be directed to state banks or the district post office, which would then be verified by officials and this can also serve to provide the government with visibility on the length and breadth of the trade. 

It would be naive to expect complete honesty from traders and even officials and to register comprehensive data in this respect, as a number of logistical concerns springs to mind. For instance, it would be difficult to ascertain how many bundles of beedi reach an outlet and how this compares to the final number listed as paid for the purpose of tax. Despite such shortfalls, such measures can serve as entry points for the government to regulate the informal sectors such as beedi, gain significant revenue and over time devise effective mechanisms for greater regulation. 

If a levy of Rs.2.50 were to be paid on just three billion sticks, this would still result in over Rs.7.5 billion in additional revenue to the government, plus, potentially serve as a deterrent to smoking at grassroots level. However, given the current price point and rate of consumption, it was estimated that beedis could be priced even at Rs.10 a stick, which would enhance the earnings to the state to Rs.15 billion. Furthermore, at Rs.10, a beedi is still significantly cheaper than a regular cigarette. 

Alongside beedi, the government must expand its regulatory framework to cover many more informal sectors, especially tourism. Whilst the informal sector is essential to service the social and economic aspirations of the underprivileged communities, it is essential for the government to reign in and wrest some control over these operations, as the costs of turning a blind eye pose significant threats to our economic future as well as justice and health. Budget 2019 presents us the opportunity to set off on this journey and lay the necessary groundwork – we look forward to its kind consideration by the finance minister. 

(Jeewa Siriwardena, a retired educational professional attached to state and private service, is the President of Social Development Network, a development organisation focusing on women and children in rural economies)