“The challenge before us now is to come out of this debt trap. The majority opinion is that this challenge could be won by the national government. The opinion of the international community is also that. We like to state that many are looking at the way we are proceeding.”
Prime Minister Ranil Wickremasinghe, in Parliament, 8 March 2016
Call it by terms varying from ‘the collapse of the economy’ to a mere ‘downturn’, but there is no escaping from facts. We currently encounter a serious economic challenge – arguably the worst since 2001. Momentous, can be its impact. So momentous that November budget allocations will not do. The Prime Minister does not offer much comfort when he uses terms like ‘debt trap’. The government needs money. Badly.
So the government increases taxes. Value-added tax (VAT) goes up from 11% to 15%. A flat statutory income tax rate of 17.5% will be introduced. Tax concessions granted on telecom, private education and health services would be removed. Only essential commodities and electricity will be left alone. Suspension of the increase in Nation Building Tax (NBT) from 2% to 4% seems to be the only consolation. Under normal circumstances, not all proposed will see the light of the day. This time, of course, will be different. The government is as serious as it can ever be. So let us assume that all of them will go ahead.
My objective is not to dig past dirt. A blame game will not take us anywhere. Who did what wrong is not important anymore. The damage has already been done. This is the time to search for solutions. The government has presented its own. How effective is that? What could be its impact on industries and the public? More importantly, is that the only solution? Couldn’t there be other solutions that bring the same outcome in a more productive manner? Taxation, any economist will tell you, is almost never a simple transfer of wealth from households or businesses to the government.
It is a complex process with too many externalities. Taxes are imposed on business, we are told. Still, who ultimately pays the tax (the tax “burden”) is determined only by the marketplace because taxes always become a part of the production cost. In other words, a tax does not necessarily fall at the point where it is legally levied. A tax on employment will have an impact on the employee, in the long run.
So when the government says that it taxes only private educational institutes, it does not mean the students and their parents will not share that burden. The extra burden will obviously be fully passed to students. In effect, parents will be paying 15% over the school or university fees of their children.
Privately owned schools and higher educational institutes face a different problem. With the demand curve staying the same and the supply curve shifting upwards, there will be a new equilibrium point with less quantity. One may argue the higher price will compensate the loss in sales volume. In reality, there is no higher price. Same price per course – only less students. This is not a sign too good for the business of private education that has been doing well for some time now.
This also raises a serious question of justice. The key reason to do away with the VAT component from school or university fees was their socially beneficial nature. We live in a society that believes in ‘free education’ from primary to degree level. The education of millions of students is state funded – up to the level of uniforms and textbooks. Students of private schools receive no such benefits. Given that their parents too are citizens of this country, how fair is it to impose a tax on education? Now, student A receives education absolutely free, while his neighbor student B pays both fees and tax, as if the government does not like him being educated. Isn’t that sheer discrimination?
Then to perhaps the worst victim of all – the telecom sector. Currently, a tele-user pays a 25% telecom levy for voice (10% for data) and 2% cess over it, effectively making the tax component 27.5% (tax over tax is unfair, but it happens. It should be discussed separately). At the moment of penning this, I am not sure about the tax structure to come, but if 15% applies without any change, total telecom taxes will be 47% (assuming cascading). This will not only be the highest tax component ever applied on tele-use, but the highest telecom tax in the world as well. As a region, the tax on tele-use is currently the highest in Central and Eastern Europe (22%), followed by the European Union (20.5%). In the Asia Pacific region, it is only 13%.
[pullquote]All that is needed is stern action. It is the government that needs to demonstrate to us that good governance saves public money[/pullquote]
This is nothing but killing the goose that lay golden eggs. The telecom industry is penalized for its efficacy. One may argue that these changes do not directly harm neither the industry nor the public. They do. Any tax on usage is a direct tax on consumers. Usage will drop. So will the revenue.
King Parakramabahu did the same thing about 900 years back. He taxed paddy production at three distinct points, says Prof. K. M. de Silva in ‘A History of Sri Lanka’. Land tax from those who cultivated royal lands was a major source of state revenue. Then came ‘diyadada’ – a tax on water.
Finally, a share from any bumpy harvest automatically went to the treasury. Peasants had no additional storage facilities. How could one triple-tax a single product? Either the business had to be too lucrative or the tax had to be too burdensome. In this case, probably, it was both. (King Nissankamalla, his successor, removed some of these taxes.) What paddy was in the eleventh century, telecom is now.
The question: Should we return to thousand-year-old business strategies to come out of the present situation? Isn’t there a better solution?
For instance, instead of passing the entire burden to the private sector, why can’t the government try tightening its own belts for a change? Why not try reducing some of its unnecessary costs? The Government of Sri Lanka, the single largest employer in the island, now employs nearly 1.35 million people. That is 16% of the total workforce of 8.24 million and one out of every 16 people in the population. The government keeps growing. Thousands of ‘man-power’ employees are being absorbed. Not to mention the political supporters now filling non-existing vacancies at government institutions. Isn’t it time to show some discipline?
One can go on pointing where the government could cut corners. Not much use, as it is common knowledge. All that is needed is stern action. It is the government that needs to demonstrate to us that good governance saves public money. After all, that was what we have been told pre-election.
I think it is fair that both the public and private sectors shoulder the burden. Penalizing the private sector for the failure of the government (current or previous) is not only wrong, but ineffective too. We need a different thinking; increasing numbers just looks a solution too simple for a complex problem.