Effective taxation and combating corruption

By Nuzla Rizkiya 
Jean-Baptiste Colbert, who served as the French Minister of Finance under King Louis XIV, once said, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
The essence of this message is that the goal of taxation should be to extract as much revenue as possible without causing excessive discomfort, disruption, or protests from the taxpayers. Therefore, it is worthwhile to note that while some discontent might be inevitable, effective taxation is crucial for facilitating sustainable growth and stability.
Amid Sri Lanka’s ongoing economic recovery efforts, experts and economists have begun to highlight the many benefits and incentives an effective tax system can offer. 
At the National Management Accounting Conference of the Institute of Certified Management Accountants of Sri Lanka (CMA Sri Lanka) held yesterday, the Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe and President of the Board of CPA Australia Prof. Dale Pinto, as keynote speakers, emphasized the importance of economic stability and how effective taxation promotes dynamic growth and stability.
Building on this foundation, the President of the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), Heshana Kuruppu, along with the President of CMA Sri Lanka, Professor Lakshman Watawala, provided critical insights on the role of finance professionals in tackling corruption. They stressed the urgent need for Sri Lanka to adopt international accounting standards among its professionals.

Economic stability as foundation for growth

“Maintaining and leveraging economic stability is the foundation to achieve robust, sustained, and dynamic economic growth,” Dr. Weerasinghe said at the opening of his address.
No country has achieved sustained growth in the absence of macroeconomic stability, which is an indefinite prerequisite to fostering long-term growth. Sri Lanka too not long ago, experienced the devastating implications of macroeconomic instability in the wake of the economic crisis in 2022. High inflation, excessive balance of payments (BOP) pressures with an acute shortage of foreign exchange liquidity, significant fiscal imbalances, and heightened socio-economic and socio-political tensions painted the portrait for the nation’s crisis.
However, with the support of the International Monetary Fund (IMF) for structural reforms and the collaborative implementation of policy measures by the government and the Central Bank, the country managed to break the streak of six consecutive quarters of contraction by the first half of 2023. 
Moreover, leading indicators predict a growth of around 4 percent for 2024, continuing the momentum of a 5.3 percent growth recorded in the first quarter, according to the Governor.
“In addition to fiscal consolidation and structural reforms centered around social safety nets, fiscal institutions, and state-owned enterprises, addressing corruption vulnerabilities and raising potential growth is imperative to building a strong and resilient macroeconomic foundation for the economy” Dr. Weerasinghe asserted.

Effective taxation promotes economic stability

Quoting the often-cited phrase of Oliver Wendell Holmes Jr., a former Associate Justice of the United States Supreme Court, who once described taxes “as the price people pay for civilized society,” President of the Board of CPA Australia Prof. Dale Pinto, in his address, stressed that taxation is a vital tool to enhance economic stability and promote growth.
“Taxation is necessary to fund the services and infrastructure to support a functioning and orderly society. The Organisation for Economic Co-operation and Development (OECD) average for a country is about 34 percent of the GDP. Looking at the recent figures in Sri Lanka (10.8 percent in December 2022), it raises a question. So, you have to find ways to raise that revenue for the community. That’s a decision for the government of the country” Pinto said.
He went on to elaborate on the five principles of a good tax system, which include simplicity, equity, certainty, neutrality, and efficiency needed to meet the revenue needs of the government to support the economic and social goals of the nation. Moreover, he stressed the incentives taxpayers should be made aware of, such as how taxation policies can promote investments and savings, enhance economic stability through progressive taxation, and support innovation and entrepreneurship.
“The real linchpin is in the compliance with tax laws. For this, education is critical. Taxpayers need to know and understand implications that will ensure their voluntary compliance. This, in turn, will ensure fairness and equity,” Pinto stated.

The role of professionals in tackling corruption

Corruption is a major issue in Sri Lanka, affecting various sectors, including government institutions, law enforcement, and businesses, hindering economic development and public trust. 
Pointing out that “corruption is a complex issue influenced by various factors,” President of CA Sri Lanka Heshana Kuruppu highlighted that the issue of corruption can exist in both public and private sectors.
“Corruption in the public sector receives more attention due to the lack of robust oversight, making it easier for corrupt practices to go undetected,” Kuruppu stated.
He went on to highlight the challenges posed by lengthy and complex bureaucratic procedures, stating that they pave the way for opportunities for corruption as individuals may offer bribes to expedite processes or circumvent obstacles. He referenced a report by the International Federation of Accountants on public trust in tax, which revealed that public trust in tax systems is lower when taxpayers perceive high levels of corruption and diversion of public funds.
“This is the same sentiment we hear in Sri Lanka when we speak to professionals and businesses. It’s not that they are unwilling to pay tax; the question is where the usage of that tax lies,” Kuruppu said.
He recommended several measures from international experts, such as enhancing education and professional development, encouraging evidence-based policymaking, and adopting global standards among local finance professionals to combat corruption in the country.

Need to adopt international accounting standards

Pointing out the absence of professionally qualified accountants in the finance sector as a significant drawback for the country, CMA Sri Lanka President Professor Lakshman Watawala raised concerns about the current state of the nation in financial reporting and accounting.
“Today, the most important thing to do in our situation is to control expenditure. To control the cost, we need more professionals in the country. High standards should also be maintained among local accounting professionals. But local bodies do not know about these things,” Watawala lamented.
He pointed out the lack of balance sheets and the lack of clarity in the current state of government accounting, questioning whether it is based on cash accounting or accrual accounting.
“When presenting a budget, the government’s assets and liabilities should be placed before the members of parliament. We do not do these things. Only when we came to a difficult situation and had no money to repay the loans did we look at these aspects,” Watawala remarked.
He insisted that the lack of professionally qualified accountants in the finance sector, who play a strategic role in ensuring integrity and transparency for development, is an issue that should be rectified immediately.