Economist Arthur Laffer in 1974 argued that cutting tax rates can result in increased total tax revenue. The Laffer tax curve is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue. Today with an ongoing IMF program, the role of taxation cannot be overstated.

For most countries, taxation serves as the primary source of revenue for funding essential public services and infrastructure development. However, the imposition of high income and direct taxes in third-world economies, often under pressure from multilateral agencies invariably causes havoc that overshadows its intended economic benefits to a country. This article argues that getting the right mix of indirect taxes and direct taxes can prove potent in driving domestic economic growth, capital formation, and attracting foreign investment and domestic investment. 

Excessive taxation 

The Government spokesman has said increased tax revenue was essential for improving the country’s financial situation and addressing the debt crisis. Unfortunately excessive direct and indirect taxes can in many instances place a heavy burden on both individuals and businesses. While these taxes are meant to support governments to deliver on its mandate, it can have unintended consequences. Often excessive tax reduces the disposable income for individuals, reducing their ability to spend and invest. For businesses, high taxes can hamper growth, reducing capital for expansions that then create jobs. 

Numerous examples exist where third-world economies have been forced to raise taxes to demonstrate fiscal responsibility to multilateral agencies. However, this approach often leads to a vicious cycle. Increasing taxes can stifle economic growth, resulting in less revenue collection than expected, ultimately undermining the very goal it aims to achieve – economic growth and poverty reduction. 

Capital formation and DDI/FDI

High taxes leave little room for individuals and businesses to save and invest, which is crucial for capital formation. Accumulated capital is the driving force for economic development, enabling countries to invest in infrastructure, education, and innovation. Excessive taxation undermines this process by leaving citizens and businesses with insufficient resources for long-term investments.

Attracting foreign investment is critical for third-world nations looking to bump up growth post-COVID. Excessive taxes deter foreign investors, as they seek stable, predictable tax environments. When tax rates are excessive, most investors opt to allocate their resources to more manageable tax regime thus depriving a country from valuable foreign investment that can inject much-needed capital and technology into a country, facilitating economic growth and job creation.

 Way forward

Sri Lanka needs to objectively study the impact of high taxes. Therefore increasing taxes further on the public will only hurt the final economic recovery. While fiscal responsibility is crucial, it must be balanced with the need to promote economic growth and not hit the poor hard. We need to look at tax reduction strategies, simplification of tax systems, and increased efforts to combat tax evasion (many people don’t pay any taxes, just a few hundred thousand people pay taxes) and increase the pool of taxpayers. For example, start with a mandatory tax file to own a car or a house or to claim to a subsidy. Customs must up their game by improving governance and drive digitalisation. The Government by promoting a favourable tax environment, can prevent economic stagnation, encourage savings and attract new foreign investment. 

We need to improve revenue collection rather than continue to increase tax rates and squeezing the existing taxpayers dry. Otherwise the typical middle-class family that is struggling due to the taxes reducing their overall buying power, will continue to negatively affect businesses and retailers across the country. Given that Sri Lanka has the lowest government revenue among South Asian countries, amounting to only 9.1% of its GDP the much needed Policy consistency in Sri Lanka’s tax regime and structure, including customs duties, excise taxes, Direct and indirect taxes and para tariffs is now an absolute necessity. 

Famous economist Arthur Laffer in his graph visually shows the relationship between tax rates and the amount of tax revenue collected by governments. The curve is often used to illustrate the argument that cutting tax rates can result in increased total tax revenue. 

References: 
https://www.investopedia.com/terms/l/laffercurve.asp#:~:text=The Laffer Curve is based, in increased total tax revenue. 
https://www.presidentsoffice.gov.lk/index.php/2023/02/21/the-current-tax-policy-is-not-a-normal-tax-policy-but-a-rescue-operation-president/?lang=en

Source: DailyFT

By: Staff Writer

Colombo (LNW): The Sri Lankan government is reportedly looking at implementing a new Beira Lake intervention area development plan aimed at restoring the lake and turning it into a scenic asset in Colombo.

Accordingly, the banks of Beria Lake will be developed initially before executing the development activities on the land adjoining the lake whilst improving the quality of environment and beauty of the city.

The Urban Development Ministry official has said that construction of a linear park around the Beira Lake will be completed in the initial stage prior to the launching of this mega development project which will be implemented in five phases.

According to reports, with a highly urbanized catchment of 448 hectares, even today the lake is considered a centre for residential, commercial, tourism and religious activities although the present pollution has affected the picturesque locality.

To overcome the environmental pollution, families living in shanties along the lake will be provided housing units with more facilities in the condominium housing schemes under construction, report state.

Warehouses and garages by the side of lake will be relocated to use the land surrounding the lake for more productive uses, reports added.

The Beira Lake area would be converted to a major entertainment destination, Minister of Tourism and Lands, Harin Fernando disclosed.

He said that this task was handed over to him personally by President Ranil Wickremesinghe who was keen to develop this area as a major entertainment destination similar to Clarke Quay River in Singapore which offers amusement, dining and entertainment.

“We are also keen to have a few floating restaurants, entertainment options, street food corners and other amusement options. We will facilitate international entertainment and hotel companies to start operations here.”

“We wish to create a special active district here without disturbing the cultural value of the country.”

Minister said that the cleaning and the maintenance of the Beira Lake would be done by the Urban Development Authority to ensure a clean environment to launch this operation.

He also said Extreme, a world-leading, purpose-driven adventure brand whose vision is to drive positive change through extreme and adventure sports, has signed up with Sri Lanka. This partnership will bring in high profile sport activities to Sri Lanka.”

They will help to introduce hot air ballooning, skydiving, Bunchy jumping and many other similar international sports activities to Sri Lanka which will encourage tourists to spend more for these activities.

He said that they aim to generate over USD 2.5 billion revenue with over 1.6 million arrivals for 2023 and hope to increase this to 2.5 million arrivals and USD 4 billion revenue for 2024 elevating Tourism as the second best forex earner for Sri Lanka beating the apparel sector.

By: Staff Writer

Colombo (LNW): Sri Lanka is expected to attract over USD 13 billion foreign receipts this year, governor Central Bank Dr. Nandalal Weerasinghe said.

He noted that the main contributing factor towards this would be foreign remittances by Sri Lankan workers overseas which are expected to touch over USD 10 billion this year. “Sri Lanka is currently getting around USD 500 million a month as foreign remittances.”

The Governor said that with the tourism sector opening up Sri Lanka also expected to attract around USD 2.3 billion foreign receipts from tourism. Export and other earnings too would pass the USD one billion mark.

The Governor also said that they also expect to increase the foreign reserves from the current USD 3.8 billion to around USD 10 billion in the future.

Sri Lanka’s remittances coming through official channels went up to $517.4 million in October 2023, up 46 percent from $355.4 million a year earlier, as more expatriates send their earnings due to improved exchange rate after better monetary policy.

However official remittances are down for the fourth month in a row.Sri Lanka’s external sector started to stabilize in September 2022, when the central bank started to run balance of payments surpluses after ending money printing to sterilize interventions made with Indian Asian Clearing Union money.

Worker remittances coming through official channels fell in 2021 which could not be paid for by the banking system at the official rate as money was printed to sterilize interventions and keep a policy rate down, triggering parallel exchange rates, which were settled outside the formal banking system.

From April 2022 rates were raised by unprecedented levels, slowing credit and the need to print money to keep rates down.

In the first 10 months of this year, Sri Lanka received $4,862.5 million from official channels, up 66 percent from $ 2,929.4 million in the same period in 2022.

By: Staff Writer

Colombo (LNW): As demand for air travel continues to grow, the prospects for the SriLankan Airlines remain positive, SLA Chairman Asoka Pathirage claimed.

Despite the increase of Rs 51.5 billion in interest, the airline recorded satisfaction profitability for the first time in a decade and a half (unaudited USD management accounts).

SLA’s prudent resource optimisation efforts and efficiency improvements, coupled with a more favourable macro economic environment that bolstered tourismand air travel in the latter part of the year, played pivotal roles in achieving this progress.

In the 12 months to March 31, 2023, SriLankan posted a local currency loss of Rs.75.03 billion (USD232 million) on revenues of Rs 365.17 billion (USD1.13 billion), SLA annual report revealed.

However, this loss was due to the Rs currency depreciation and the impact on USD-denominated debt.

While SriLankan Airlines’ revenue for the year ending March 31, 2023 saw group revenue soar to Rs. 369,470 million against Rs. 134,301 million in the earlier year, the year ended with a reduced loss of Rs. 71,306 million compared to Rs.163,583 million in 2021/2222,

The operating profit was Rs.43,371 million vs Rs.1,692 million in the previous year while operating expenditure was Rs.329,856 million vs Rs.133,222 million. Aircraft fuel costs were Rs. 155,559 million against Rs. 42,759 million (2021/2022), an increase of 263.80 per cent.

In positioning the airline on a trajectory toward expansion, SriLankan Airlines will improve operations across multiple fronts, encompassing service enhancements, human resource development, training programs, equipment upgrades, and process refinements, all aimed at sustaining service excellence and customer loyalty.

It will also focus on expanding maintenance revenue by securing contracts with new customers in Sri Lanka and the South Asian region.

Additionally, the airline will remain committed to fleet assurance with the prompt execution of procurement initiatives while building a strong network through effective analysis of the most lucrative revenue-generating prospects.

In his review, airline chairman Asoka Pathirage said that in the latter part of the year, the airline demonstrated a recovery compared to the previous year, benefiting from a better operating environment and with the operational improvements made in response to the challenges faced.

“One of the primary challenges was the persistent rise in global inflation, which had a cascading effect on economic activities.

It led to a cost-of-living crisis and the tightening of financial conditions in various regions. This situation was further exacerbated by geopolitical tensions, particularly the conflict in Ukraine, and the lingering impact of the COVID-19 pandemic.

These macroeconomic challenges directly influenced the aviation industry, creating a distinct set of problems,” he said.