Sri Lanka’s premier private sector lobby group, the Ceylon Chamber of Commerce, urged the Government to accelerate reforms and ensure greater accountability of its spending to complement the proposed tax hike.

The Ceylon Chamber’s stand comes hot on the heels of growing opposition to the Government’s move to double corporate income tax to 30 percent amidst other hikes.

In a statement, CCC said it acknowledges the rationale for the recently proposed tax changes but called on the Government to show greater restraint, accountability and transparency on its spending.

“While the tax hike will invariably impact businesses and private sector employees adversely in the current context of high inflation and negative economic growth, it is the widely held perception of the tax revenue not being fully utilized for the benefit of the people, that is likely to drive public opinion on this matter.

“Hence, it is imperative that the Government effectively communicates the actions it is taking to reduce Government expenditure and prioritize spending on areas that are critical to the public,” the Chamber said.

It emphasized that as a part of the fiscal reform agenda, the focus should be in terms of rationalizing and curbing Government expenditure wherever possible.

In 2021, 31 percent of the recurrent expenditure was on public sector salaries of which 30 percent was spent on Provincial Councils while 34 percent was absorbed by defense, policy and public security.

“These must be relooked at in terms of the current priorities of stimulating growth and the need to reallocate expenditure towards spending on more critical areas like public education, health and research and development,” the Chamber said.

In addition, greater accountability, transparency and governance of existing Government expenditure along with visible steps to curb corruption are also essential requirements to motivate tax payers in knowing that their contribution is being well spent.

To drive higher tax collection, the existing tax payer base will need to be widened further so that the burden does not fall on the current base consisting of a small number of corporates and the salaried workforce to a large extent.

This will require significant reform in tax administration and improving the capacity of key revenue collecting agencies to reduce the leakages and ensure greater compliance. Policymakers should make better use of digital solutions to link existing Government agencies and efforts like the introduction of a Digital ID should be prioritized in this regard.

The Ceylon Chamber said the fiscal reform agenda will need to be complemented with genuine efforts to unlock growth and investment opportunities through State-Owned Enterprise (SOE) reform, improvement in the ease of doing business and investment climate and providing a more conducive trade policy environment for exports to flourish.

This will ensure that growth does not stagnate in the next few years and there will be opportunity for the private sector to reinvest and create more economic activity that will stimulate tax collection.

The Outstanding Government debt has surpassed the Rs. 24 trillion mark in May as per provisional data released by the Central Bank last week.As at the end of April, debt stood at Rs. 23.3 trillion and a year ago (May 2021), it amounted to Rs. 17.58 trillion.

The year on year increase is 36.8% or Rs. 6.47 trillion Provisional data for May has been pending for three months after the April figure was first announced in early July.

Of the Rs. 24 trillion debt, total outstanding domestic debt as at May 2022 amounted to Rs. 12.55 trillion while the rupee value of total outstanding foreign debt was Rs. 11.59 trillion.

CBSL said the debt data for May are highly provisional as the outstanding central Government debt excludes several overdue debt service payments after 12 April 2022, the date of which the Interim Policy regarding the servicing of Sri Lanka’s external public debt was announced by the Ministry of Finance, Economic Stabilization and National Policies.

These debt service payments include overdue interest payments of affected debt which are deemed to be capitalized as per the Interim Policy, it added.
In the presentation to creditors in September, central Government debt was stated as $ 70.3 billion or 106.1% of GDP as at end June 2022 and the public debt was $ 80.5 billion or 121.6% of GDP.

Sri Lanka’s debt has been classified as unsustainable by the International Monetary Fund (IMF) which is supporting the Government’s efforts to restructure.

The Government will have to restructure domestic debt as it has increased to Rs 12.5 trillion at the end of May, from Rs 12.4 trillion in April, while the T-bill and T-bonds amounted to Rs 10.8 trillion.

The staff-level agreement with the IMF states that Sri Lanka should achieve a primary surplus of 2.3 percent by 2025 from the primary deficit of 4 percent forecasted for 2022.

Without going for domestic debt restructure , the Government gazetted the amendments to the Inland Revenue Act, where the Advance Personal Income Tax (APIT) threshold was decreased to Rs. 1.2 million from Rs. 3 million per annum, while the rates were increased to a maximum of 36percent , and corporate income tax in the SME, export, and production sectors was adjusted upto a maximum of 30 percent .

However economic analysts said that there should be a balance between indirect and direct taxes, as the Government cannot earn sufficient tax revenue only through indirect taxes.

They noted the current balance between the indirect and direct taxes is appropriate, as decreasing indirect taxes, which are at 17.5percent (with the VAT at 15percent and Social Security Contribution Levy at 2.5percent ), will cause the direct taxes to increase from 36percent to at least 50percent .

“An increase in direct taxes will impact the development of the economy, as the spending power reduces, leading to a decrease in demand, which will reduce production, while no new investments can be made to businesses with tax rates at 40-50 percent they claimed.