By Mandana Ismail Abeywickrema

The government without passing on the benefit of the declining global prices is now in the process of raking in a windfall of taxes imposed through the budget for 2009.

Analysts point out that although global prices were at a peak during the time the 2009 budget proposals were being formulated, the situation has seen a drastic change since then.

It has also been said that while the current trend in most of the countries is to reduce taxes with the aim of encouraging production and consumption, the Sri Lankan government was going in the opposite direction.

Economist Dr. Harsha de Silva said that while the objective of the country should be to reduce taxes, it was currently in the process of imposing new ones.

He explained that while the government planned the budget for 2009, the taxes were imposed in line with the global economic conditions at the time and the money from the taxes were calculated to be essential for the sustenance of the government.

Local prices not reduced

However, Dr. de Silva said that although global prices have declined, the government did not reduce local prices accordingly and the government still continues to benefit from the declining global prices as a result.

If one looks at the real situation, it would definitely show that local prices do not at all reflect the crashing global commodity prices.

Interestingly even after the global prices started to decline, reducing with it the anticipated cash crunch, the government is still continuing with a plethora of taxes it proposed on various sectors burdening the people.

The government in its budget for 2009 has proposed a large number of taxes as a revenue collection measure.

Presenting the Nation Building Tax Bill in parliament last week, Deputy Finance Minister Ranjith Siyambalapitiya said that the tax is imposed only on importers, manufacturers and service providers.

According to him, importers, manufacturers and service providers whose quarterly turn over is less than Rs. 650,000 will be exempted from the tax.

Welfare of security forces

"The revenue from the new tax is to be used towards the welfare of security forces, and to rebuild communities and infrastructure facilities affected by terrorism," Siyambalapitiya said.

Several opposition legislators who joined in the debate while criticising the new levy said it would affect the small and medium industries in the country.

A JVP legislator charged that all goods, which are produced locally, would go up in price by 1% because of this levy.

Meanwhile, UNP Parliamentarian Kabir Hashim said some sectors including the construction industry will be affected by the tax.

He said manufacturers will also be affected as they will not be able to claim it as their suppliers will not show it in their invoices.

Dr. de Silva said that the Nation Building Tax would definitely result in an increase in the prices of several commodities.

He explained that the imposition of the new levy before the reduction of VAT from 15% to 12%, would definitely result in the increase in price of certain commodities in the local market.

He said that since the Nation Building Tax is applicable to importers, manufacturers and service providers, the most affected would be the services sector.

According to him, the various tax concessions granted to the manufacturing industries might minimise any adverse impact on the manufacturing sector.

However, the service sector would be badly affected by the new levy.

Dr. de Silva reiterated that the government was siphoning out the benefit of the declining global commodity prices and was also collecting additional money through the news taxes.

He said that given the decline in global commodity prices, it seemed as if the government was scooping out huge profits.

Citing an example, Dr. de Silva last week said that the government's decision last month to reduce milk powder prices by Rs. 15 was a move to mislead the people. He explained that milk powder that was priced at US$ 3,000 a metric tonne at the beginning of 2007 saw a drastic increase in the global market by mid 2007 as it reached US$ 4,500 a metric tonne.

During this period the price of a 400 gram pack of milk powder in the local market increased from Rs. 195 to Rs. 285, which was a 150% increase given the 50% increase in global prices.

Price of milk powder

Although various ministers made statements that the era of cheap food was over, the global milk food prices once again declined to US$ 3,000 per metric tonne. However, local prices were not adjusted accordingly.

Dr. de Silva said that when the global milk powder prices declined to US$ 2,000 per metric tonne last month, the government announced a reduction of a mere Rs. 15 in local prices.

It is indeed interesting that a pack of milk powder that was priced at Rs. 195 when a metric tonne of milk powder was US$ 3,000 was increased to Rs. 285 when the prices increased and has now been subjected to a reduction of only Rs. 15 when the global prices have plummeted to US$ 2,000 per metric tonne.

Given this example, the government's decision to impose new taxes in the present global economic conditions is deemed unfair by analysts.

Several opposition legislators have also pointed out last week that billions of funds generated from cutting wastage would be enough to build the nation and a tax is not needed for the purpose.

JVP Parliamentarian Premasiri Manage speaking during the debate on the Nation Building Tax in parliament has said that if the Rs 6 billion allocated for Mihin Air, Rs 1.2 billion generated from the expenses cut from Ministers,' Rs 37 billion collected from VAT are sufficient to pull the nation through.

He had charged that the government was hoodwinking the people by imposing new taxes.

Meanwhile, the so called economic stimulus package presented by the government last week as a new year gift for the people has come under fire from many sectors claiming it to be insufficient to revive the country's flagging economy.

Following a closer look at the relief package economic analysts are now calling it eyewash presented to mislead the public, especially given the downward trend in the world fuel and food prices. Analysts say that the reduction in local fuel and other commodity prices do not in any way reflect the huge decline in global prices.