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Tax policy breeding inequality, injustice: DEW

June 9, 2013, 7:47 pm

President Mahinda Rajapaksa has a word with COPE Chairman DEW Gunasekara at the laucn of the
Treasury annual report.

Pic by Jude Denzil Pathiraja

Inequality and injustice is huge in Sri Lanka because of massive tax evasions in the country warned
Senior Minister of Human Resources and Chairman Parliamentary Committee on Public Enterprises
(COPE) D.E.W. Gunasekara. "We can keep borrowing to build infrastructure but we must not forget
that people also have to make end meets," the minister said at the launch of the 2012 annual report
of the Ministry of Finance and Planning in the presence of President Mahind Rajapaksa at the
Treasury’s financial studies academy Miloda in Colombo.

"Economic growth has doubled. The per capita income has doubled. But where is the evidence and
can we see the results? Is it in the Treasury’s report or can we see an improvement in living
standards?" the outspoken senior minister asked.

"The tax-to-GDP ratio is the lowest since independence and non-direct taxes account for the bulk of
the government’s tax receipts. This shows that income disparity is huge. Inequality is rising and this
is a huge injustice to the people of the country," Gunasekara charged. "We need to take a look at our
taxation policy," he urged the President.

"If we fail to reform our three revenue houses, Customs, Excise Department and Inland Revenue
Department, then everything we do becomes pointless. There is massive tax evasion in the country
and it is an injustice to the people of this country that is allowed to continue. We need to increase
investment on education and healthcare but where will the money come from? We can keep
borrowing to build infrastructure but we must not forget that people also have to make ends meet,
they must live!"

revenue declined to 13 percent of GDP from 14. Revenue from VAT declined by 0.3 percent of GDP in 2012 due to rate adjustments not being matched by broadening the tax base in 2012.7 percent of GDP). Saman Kelegama. Executive Director. Institute of Policy Studies told a recent forum. to improve revenue collection.4 percent GDP in 2011 to 2. likewise. There is a popular saying that we must draw nectar without smashing the flower. 2 billion on behalf of public officials. which account for over 80 percent of total tax revenue. ." Dr. mainly due to many exemptions or zero ratings." a UNDP report said (Sri Lanka Human Development Report 2012).1 percent in 2012. "We must come-up with something appropriate. "The Government may wish to revisit the balance between direct and indirect taxation for several reasons: to spread the burden of taxation more evenly. mainly due to tax revenue declining from 12. and to ensure that revenue is in line with growth. "As long as the revenue from direct taxation remains low. President Mahinda Rajapaksa speaking later said there was a problem with the tax system. Empirical evidence suggests that governance mechanisms are likely to be more robust in countries where the government relics heavily upon general taxation for its revenues. Gunasekara urged direct taxes should increase while in-direct taxes should fall. The ratio for direct:in-direct taxation in Sri Lanka is close to 20:80. Income tax declined from 2.4 percent of GDP in 2011 to 11. "Part of the reason for the slippage is the country’s heavy reliance on indirect taxes. He said the ideal was a ratio of 40:60. At the same time. taxation should not distort the business environment and force relocation of enterprises. to achieve better governance and accountability.He also charged that 28 state-owned enterprises paid PAYE taxes amounting to Rs.5 percent to 2.3 percent of GDP in 2011. this ratio will prevail and this in turn means that the bulk of the burden of indirect taxation will be felt by the poor people. The problems that Gunasekara referred have been articulated by top economists in the country and organisations such as the IMF.8 percent of GDP in 2012 compared to 2011 (3." the report said." a smiling President said. In 2012. This shifts the burden of taxation onto the poor. we must extract taxes from the business sector.

7 percent higher than males. "Income disparities have risen in many developing Asian countries. The Opposition has also charged that the 5 percent levy on gambling was absurdly low and aimed at attracting big players without considering the returns to citizens of the country. with the number of female youth out of work 11. .According to a recent ILO report income inequality in Sri Lanka has grown significantly and is only behind China." Huynh said." the ILO said in its April 2012 edition of the Asia Pacific Labour Market Update. The VIP and normal casino tax rate in Malaysia is 25 percent each. In the Philippines it is 17 percent and 27 percent. So the country’s employment growth is not really coming from the formal sector and this is a concern because it leads to a question as to whether the economic growth was creating enough quality jobs. Own-account and contributing family workers accounted for 42 percent of the labour force. the ratio in China and Sri Lanka increased significantly by 10. Among countries with higher income inequality (measured by a Gini coefficient of 40 or higher). despite remarkable economic growth and poverty reduction in recent past decades. we have seen Sri Lanka achieve good employment growth and economic growth.8 points respectively.0 points and 7. the VIP casino tax is 39 percent while the normal casino tax is also 39 percent." said ILO Labour Economist Phu Huynh as quoted in these pages last December. We have seen employment increase faster across the informal sector such as in the daily wage category and those working in households. "On the surface. we are concerned that formal sector employment is showing very little growth while Sri Lanka’s informal sector continues to be large. But this is only on the surface and if we look carefully there are some concerns and a lot of work needs to be done. It also showed that one in five Sri Lankan youth are unemployed. This trend can undermine economic sustainability and threaten social cohesion." UNP Economic Spokesman Dr. In Singapore the VIP rate is 12 percent and the normal rate is 32 percent. "Despite the strong economic growth. Harsha De Silva MP said. "In Macau.