By Mandana Ismail Abeywickrema
The government in a bid to finance its expanding
deficit before the presentation of the next budget has imposed taxes to shore up
revenue and in the process further burdened the masses.
Just two months prior to the budget presentation, the
government last week introduced new taxes and amended several existing ones to
bolster revenue in order to achieve the targets set out for the year. The budget
deficit currently stands at 8% which is US$ 1.76 billion.
Enterprise Development and Investment Promotion
Minister, Sarath Amunugama said that the government had no option but to propose
the amendments to the existing tax structure as revenue had to be increased to
keep up with the growing expenditure on fuel and war.
Meanwhile, Minister Lakshman Yapa Abeywardene told the
media last week that the total subsidy bill of the government was 5.4% of the
Amunugama forecast a growth of 6.5-7% for 2007 and also
told parliament the government was forecasting a growth of 8% for 2008.
Amunugama’s 2007 forecast however is below the Central
Bank’s target of 7.5%.
Analysts say that with the country’s economic
fundamentals in a mess the government was facing a serious cash crunch and the
growth forecast seemed unrealistic.
Economist, Dr. Harsha de Silva said that the government
was facing a serious cash crunch and was finding it difficult to raise domestic
funds with Treasury Bond rates already high at 17% plus. "It is in the bad books
of friendly lenders on human rights and other issues," he said, forcing the
government to resort to commercial borrowing.
The cancellation of the Millennium Challenge Account
money amounting to some US$ 580 million and the US$ 500 million bond which is
also in trouble due to the global turmoil (that has almost doubled the risk
premia for ‘junk bonds’ like the one Sri Lanka is about to issue) has left the
government with no option but to strangulate the people already suffering with
the high cost of living.
According to de Silva, the telecom tax is an anti-poor
or regressive tax. "The average telephone bill of the six million users (based
on Dialog data) is only Rs. 344 a month (90% are pre-paid users). So a Rs.50 tax
on them is 15% as opposed to 1% on a rich person’s bill of say, Rs.5000. Already
the average person pays Rs.53 in taxes and with the Rs.50 flat tax and the 5%
increase in the levy the average user will have to pay (even after reducing
his/her use) around Rs.117 to the state as taxes," he explained.
He also noted that at a time the country was expecting
the mobile telecom penetration to reach 64% by 2010, this tax would reduce
penetration to 55%. "Mobiles help increase productivity of people and save
money, so this will reduce the wide economic benefits through mobiles. The
mobile tax will have a huge impact on millions of people," he said.
Interestingly, the Marxist JVP too believes that the
new telecom tax would have an adverse impact on the sector’s growth.
JVP Parliamentarian Anura Kumara Dissanayake said that
the new taxes would definitely discourage people from using mobiles. He also
refuted the government’s argument that the tax would not have a drastic impact
on the low-income earners.
Dissanayake said that the amount in a mobile phone bill
couldn’t determine a person’s income level.
"That is not true. A person with a Rs. 5,000 mobile
bill may not necessarily be a high income earner," he said. Dissanayake
questioned as to why the government did not tax the companies engaged in the
mobile phone business, which has expanded operations in the country, rather than
tax the poor people.
Burdening the people
The JVP also charged that the government in the guise
of serving the people was actually burdening them with additional expenses.
The JVP last week said that government was moving to
reduce the fertiliser subsidy. (A bag of fertiliser would therefore be increased
from Rs. 350 to Rs. 750).
De Silva said that although there was no independent
confirmation of it, the government has promised HSBC, JP Morgan and Barclays at
the July 11 presentation that subsidies will be cut drastically (the
government’s choice of word) in 2007 and 2008. "The figure given is from 5.1% in
2006 to 3.9% in 2007 to 3.8% in 2008. In rupee terms this is a drop from Rs. 144
billion to Rs. 126 billion to Rs. 142 billion," he said.
"However, with the actual situation in a country with
such high inflation (now 17.3%) one must look at the real value of the cut. In
real terms, that is after assuming 15% inflation (benefit of the doubt to the
government) the real cut in 2007 will be Rs. 40 billion and another Rs. 25
billion in 2008," de Silva added.
Govt. to cut subsidies
Be that as it may, while the government has pledged to
cut down on subsidies to obtain the US$ 500 million bond, a sum of US$ 4.7
billion is still idling in the Central Bank coffers, which have been received by
the country for development projects.
UNP Parliamentarian Kabir Hashim said that the
government was in possession of a sum of US$ 4.7 billion in non-utilised foreign
"The funds have not been used as the issue of
transparency comes into play since they have been granted for specified
projects," he said.
Hashim also said that the government move to secure
more foreign loans would drain the country’s foreign reserves. "This would cause
the rupee to depreciate and the government would have to print even more money
pushing inflation over the sky," he added.
The government’s increased expenditure due to the
introduction of the fuel subsidy and increased expenditure on defence has pushed
the budget into a huge deficit.
De Silva pointed out that according to the Finance
Ministry’s 2008 budget call just released, the deficit for 2007 was to be 9.2%
of GDP. But they are now trying to revise it downwards to 7.9%, he said.
Contrary to Mahinda
"This is amazing. Public investment will be cut by an
entire 2%. So that is how they are trying to manage the deficit. The Mahinda
Chinthana called for increases in public investment, not cuts in it," de
As for the likelihood of the government achieving its
revenue targets for the year and the growth targets, de Silva said that the
rupee value revenue targets could be met because it includes inflation,
currently at 17.3%.
"Revenue as a ratio of GDP, which is the more important
one will be off target. Growth targets will also be most definitely off. Even
the government has downgraded it to 7% from the earlier 8% plus. But others put
it even lower. Quarterly growth last quarter is only 6%, the lowest in two
years," he said.
De Silva said that the country’s economy is facing
serious problems with high interest rates hindering real investments.
He said that as a result, SME people have to borrow at
30%. "How can they survive?" he questioned.
He went on to say that inflation was unbelievably high
at 17% plus and the cost of living was soaring, making people cut back on
"Exchange rates saw a dramatic fall just last week. So
the macroeconomic fundamentals are messed up. What should be going up is coming
down (growth) while what should be coming down are all going up — interest,
inflation, exchange rates," de Silva pointed out.
According to him, the government must rethink its
economic management strategy. "It must realise it cannot have the cake and eat
it too. They must go in for meaningful reform even now if we are to avoid
becoming a failed state, even though Lee Kwan Yu just called us one last week,"
Siyambalapitiya justifies new taxes
Revenue and Finance Minister Ranjith Siyambalapitiya said that although the
country’s debts amounted to Rs. 1,200 million, it has seen a decline in
comparison to the GDP.
Siyambalapitiya said that the country’s debt in
comparison to the GDP, which was 105.5% in 2004, has been reduced to 93% in
2006. "We expect it to be 86.5% this year," he said.
Siyambalapitiya told The Sunday Leader that
the government was hopeful of collecting up to Rs. 1 billion from the newly
imposed taxes and amendments made to already existing taxes.
"The government has lost Rs. 10 billion per year
due to the tax concessions given on essential items. It was a measure taken
to reduce the cost of living. Now the government has to recover at least
part of the loss," he said.
According to Siyambalapitiya, the 10% tax on mobile
phones was imposed as the telecommunications sector has performed extremely
well in the past year.
"If a sector is performing well, the government has
the right to take measures to impose taxes to increase revenue, especially
at a time when the government has granted many concessions to the people
that have made the state lose billions of rupees," he said.
He also said that some of the taxes have been
misread by the people, especially the excise duty amendment on vehicles and
semi-luxury items. "Most items are under-invoiced by importers, therefore
the government adds 10% to the price quoted before adding taxes. Now the
government has decided to add 15% on the quoted price. Some have however
misinterpreted it and said the government was taxing 15% on imported items,"
Tax on vehicles
Another amendment was made to the 2.5% tax imposed
on vehicles imported for personal use. "When vehicles for personal use are
imported there was a 2.5% infrastructure development tax added to it. Now
the government has structured a tax system that would vary according to the
engine power of the vehicle," Siyambalapitiya said.
He explained that vehicles with 1600cc engine
capacity would be taxed 2.5%, vehicles between 1600 and 2000cc engine
capacity would be taxed 5% and vehicles above 2000cc engine capacity would
be subject to a 6.5% tax.
Responding to opposition charges that the
government’s decision to impose new taxes two months before the budget was
to present a rosy budget in November to hoodwink the public, Siyambalapitiya
said that the government had to incur unaccounted expenditure this year and
hence had the mandate to achieve its revenue targets through other means.
"The loss of Rs. 10 billion for the year was not
included in the last budget, but it happened. Now we have to find means to
obtain at least a part of it," he said.
Siyambalapitiya said that contrary to statements
made by the JVP, the government has not cut down on subsidies granted to the
poor and that even with additional expenses like subsidies and defence
expenditure, the government was faring well on the economic front.
World Bank, ADB, caution govt.
Lending agencies, the World Bank and the Asian
Development Bank (ADB) have last Thursday said that Sri Lanka needed to cut
government spending to reduce fiscal imbalances, lift real interest rates,
and rein in money supply growth to stabilise the economy.
Representatives from the World Bank and the ADB
addressing a seminar had said that the government also needed to ensure that
public sector workers increased productivity in exchange for a wage rise,
and it had to take long-term steps to cut the high current account deficit.
"Sri Lanka should reduce its fiscal imbalances,
slow down monetary growth, and bring the economy back to the long-term
trend," Senior Country Economist, Claus Pram Astrup said.
"Managing the economy in the short run is not an
option — the wheels of the economy are spinning too fast," he had further
According to him, the labour market was tight, and
strong consumer spending was adding to import demand and a wider current
Country Economist, ADB, Johanna Boestel said at the
seminar that low foreign exchange reserves along with high public debt and
inflation was a risky combination.
Budget 2007 — estimated revnue
During the last budget presentation the government
set out its revenue measures. The government estimated revenue was Rs. 15.95
billion for 2007.
Following are the revenue measures highlighted in
the budget last November:
Changes in Income Tax Rs. 1,500 mn
Changes in VAT Rs. 2,700 mn
Adjustments in cess Rs. 1,200 mn
Adjustments in Customs Duty and removal
of duty waivers Rs. 2,500 mn
Adjustments in Excise (Special) Provision Tax Rs.
Port and Airport Development Levy Rs. 4,000 mn
Regional Infrastructure Development Levy Rs. 1,600
Visa fees and revision of passport fees Rs. 1,200
Total Rs. 15,950 mn
(Rs. 15.95 bn)
The govt. has pledged to cut down on subsidies to
obtain US$ 500 mn. But a sum of US$ 4.7 bn is idling in the Central Bank coffers
received for development projects. The funds have not been used as the issue of
transparency comes into play since the money has been granted for specified