Senior Partner
GAJMA & CO

Senior Partner
GAJMA & CO

Income tax revisions

The people have been taken by utter surprise by multiple catastrophes primarily caused by accumulated imbecile decisions, which have left them reeling under legislated and unlegislated taxes.

Additional levies in the form of the value added tax (VAT), the social security contribution (SSCL) and income tax have mounted almost instantly. Unlegislated taxes arising from the precipitous depreciation of the Sri Lankan Rupee, and unprecedented demand and supply mismatches, have led to skyrocketing prices of goods and services.

For example, if a person earned an income of Rs. 100,000 prior to the crises, and if he or she used it all for consumption (and if he or she wasn’t liable to income tax), after paying VAT of eight percent, the person would have 92,000 rupees for consumption. If he or she was liable to pay income tax at the highest marginal rate of 18 percent, they would have Rs. 74,000 for consumption, based on a rough calculation.

From October this year, the same person with an income of Rs. 100,000 will have about 80,000 rupees for consumption after 15 percent VAT and SSCL of 2.5 percent cascaded to five percent. This Rs. 80,000 will be halved to Rs. 40,000 because of the depreciation of the rupee of around 100 percent against the US Dollar – from Rs. 180 to 360 rupees.

Furthermore, due to the demand and supply mismatches, prices have at least doubled for most goods and services. Therefore, the Rs. 40,000 will be halved further to 20,000 rupees. Consider the predicament of a non-income tax payer who had a real disposable income of Rs. 92,000 for consumption being brought down to 20,000 rupees!

In the case of an income tax payer at the highest marginal rate of 32 percent, which may increase further, he or she will have a depleted disposable income of Rs. 12,000 – compared to 74,000 rupees before the crises.

No wonder every citizen at his or her level of standard of living often finds that the relevant goods or services have become unaffordable; and even if cheaper substandard substitutes are available, that they too are unaffordable.

So it’s not surprising that the masses at the lowest strata of society are skipping meals regularly.

Certainly, Sri Lankans should not be in such a position as this is a resplendent island. Accordingly, the so-called leaders who made decisions about the lives and livelihoods of the people are answerable and accountable, and should be brought to book.

2023 budget expectations

Solving the foreign debt overhang with IMF assistance together with ensuring that the national budget is efficient is unquestionably of the utmost priority. There can be direct and indirect subtle impositions by the IMF, which we will have to oblige to obtain the Extended Fund Facility (EFF).

As a result, further imposition of tax – including capital taxes in the form of a wealth tax – may be in the offing. This is evident from the Value Added Tax (VAT) Bill issued on 27 September, which has brought down the tax-free threshold proposed earlier of Rs. 120 million per annum to 80 million rupees with effect from 1 October.

So there’ll be more to come in the 2023 budget.

Nevertheless, policy makers shouldn’t be blinded by mere reve­nue enhancements; they have a greater responsibility to ensure that tax and fiscal policies don’t drive businesses and investors away.

However, expenditure based incentives and relief should be granted to ensure that businesses and investments are attractive. This will certainly not offend the International Monetary Fund; it may even be encouraged by the UN agency.

Expenditure based relief in the form of double deductions should be continued for investments, and research and development endeavours. In addition, expenditure based on other business value drivers in the form of food security, storage and distribution, training and retraining, brand building, renewable energy and so on should be recognised, and deductions be available for income tax purposes.

Certainly, the 2023 budget should focus on introducing legislation to make corruption and malpractice impossible; and the tax base should be widened by netting in conspicuous evaders who go free with immunity and impunity.

No wonder every citizen at his or her level of standard of living often finds that the relevant goods or services have become unaffordable