Sri Lanka’s economy needs revamp: Current tax system making the poor poorer, the rich richer

Economists are of the view that Sri Lanka’s current taxation system needs revamping, as it currently makes the poor poorer while making the rich richer, according to Sri Lanka’s news agency Sunday Morning Post. In Sri Lanka, less than two per cent of government revenue comes through direct taxes and only one per cent of the population come under the requirement to pay income taxes. An increase in direct taxes and widening of the tax base are long overdue, reports The Diplomat. Sri Lanka currently has a low tax-to-GDP ratio – just above eight per cent at this time. It was 12 per cent to GDP prior to the a number of taxation cuts offered earlier in a bid to win elections by political parties. Not only is the tax revenue low, but direct taxes amount to a dismal two per cent of GDP. Therefore with the bulk of government revenue coming from indirect taxes, it is the ordinary consumers, as opposed to the biggest earners, who end up paying the most — thus making the poor poorer and the rich richer. When the 2019 Gotabaya Rajapaksa government came to power, it increased the threshold of direct taxable income while cutting most other taxes. After this, to meet expenditure, it started imposing indirect taxes. Indirect taxes are inflationary, as such taxes are imposed on goods and services, said University of Colombo Faculty of Arts Department of Economics senior lecturer Shanuka Senarath, according to Sunday Morning Post. This means that a person who is making Rs 1 million per month and a person making Rs 500 per day would both be paying the same amount of tax when purchasing the same good or service, thereby making the poor pay more of their income in taxes while the rich pay a considerably negligible amount on the same, he explained. The taxation system is both inadequate and regressive, The Diplomat explains, adding that Sri Lanka needs a more progressive and effective taxation system that makes the wealthy pay their due share. To preempt concerns pertaining to capital flight, the government must implement more transparency-centric regulations that ensure the property rights and business interests of the burgeoning upper-middle and middle classes – the bulwark of the Sri Lankan economy’s growth in the future. The International Monetary Fund, who Sri Lanka is hoping will bail the country out of this crisis, had echoed similar sentiments. It said, “Given the low level of revenues, far-reaching tax reforms are urgently needed.” Sri Lanka needed to “reduce corruption vulnerabilities”, contain spiralling inflation and bring an end to costly energy subsidies that had long been a drain on the government budget without hurting more vulnerable citizens, the statement added. With input from agencies Read all the Latest News , Trending News , Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.