“This budget doesn’t promote or encourage business growth,” stated the Deputy Managing Partner of BDO Partners Ashane Jayasekara, referring to Interim Budget 2022, which was tabled in parliament recently.
He explained that “it encourages the country’s economic recovery and creates the fiscal platform to bolster medium to long-term economic growth.”
Jayasekara noted that the president has acknowledged “that the country needs a national economic policy for at least a period of 25 years,” which Sri Lanka has been lacking and requires stability in its fiscal policies.
He went on to say that “certain targets have been set. Tax revenue to GDP was around 13 percent pre-COVID-19; today, it’s less than eight percent. The government has finally set a target of 15 percent by 2025; and on the public debt to GDP, which is around 110 percent, the government has set a target of 100 percent.”
These targets are undeniably ambitious; however, Jayasekara believes that with political will, proper administrative support and implementation, genuine reforms can be achieved.
With regard to the proposed increase in tax revenue, he was of the opinion that these would be a heavy burden on the people and asserted: “Corporate income tax, which was around 24 percent, will be increased to 30 percent. [The highest bracket of] individual income tax will be increased from 18 to 32 percent and value added tax (VAT) will be 15 percent from October.”
Indirect taxes, such as the social security contribution (SSC) and VAT, will be levied at the same rate, regardless of the taxpayer’s income – this could be considered regressive, whereas the direct taxes are progressive.
Talking about PAYE tax, Jayasekara stated that employment income will be subject to withholding tax. Previously, this was voluntary but if monthly earnings exceed Rs. 150,000, one will be required to pay income tax every month.
“The thinking behind registering all citizens above 18 is correct. As citizens, we need to contribute to tax revenue… and only about 300,000 individuals are registered for income tax, which may be less than two percent of the population. But how well this can be implemented is in question,” he remarked, on this budget measure.
Jayasekara contended that “currently, Sri Lanka is not in a position to offer tax incentives, given the meagre tax revenue to GDP.”
There is a plethora of other issues such as political unpredictability, policy inconsistency, tax policy uncertainty, archaic labour laws, bribery and corruption.
Instead of offering tax breaks and incentives to attract foreign direct investment (FDI), the government needs to focus on fixing these issues.
“An incentive or holiday on taxes is probably the last thing on the mind of foreign investors,” he claimed, adding that tax amnesties are demoralising for law-abiding taxpayers. The collection of income data is critical in addressing taxation. This could be used to combat tax evasion.
Jayasekara insisted that “a robust data collection system is needed at the Inland Revenue Department (IRD) and other state institutions. Technology should be used to capture data on the income of professionals.”
Commenting on the small and medium enterprise (SME) sector, the Deputy Managing Partner of BDO Partners stated: “The problems in the sector stem from the dollar shortage, rampant inflation and the rupee depreciation. The government needs to address these areas and take a more holistic approach, and overhaul the entire system. Other kinds of reforms are required besides tax incentives.”
And Jayasekara shared his thoughts on the forthcoming 2023 budget: “I would like to see a long-term policy statement which is well thought out and rational. We need technically sound people making decisions about the economy without the influence of politicians.” He also hopes that the government would take steps to lessen the impact of VAT, which is a considerable hardship on the people.