Tax! Tax!! Tax!!!

 By Harsha Gunasena –

Harsha Gunasena

There are protests against the decision of the government to increase income tax. Although all including the private sector are affected, the main resistance comes from the government employees and the employees of the government affiliated institutions. There are many aspects of this issue and the intention of this  article is to view the problem in different angles.

The protests are coming mainly from the employees who are subject to pay Advance Personal Income Tax (APIT). This was previously named as Pay As You Earn (PAYE) and it was first introduced in 1971 by the then Finance Minister NM Perera who introduced several novel taxes and schemes.

PAYE or APIT are not final taxes. Rather than paying taxes for each quarter after the end of that quarter PAYE scheme provides an opportunity to the employees to pay the taxes at the time they earn the income. For the tax collector it is an easy method of collecting the tax.

The PAYE tax scheme was abolished by the Gotabaya Rajapaksa government along with the slashing of several other taxes with the blessing of the private sector of this country which was the starting point of the present economic disaster. Some argued that tax benefits would have triggered economic expansion but due to Covid, which was a scapegoat for many mishandlings, it has not taken place. On the contrary rating agencies downgraded Sri Lanka, realizing that with the slash of government revenue the ability to repay the loans also will be slashed. Unike in a western developed country, the Sri Lankan private sector is not capable enough to turn the economy with tax cuts expeditiously. 

The reason for the current economic crisis is that the twin deficits, i.e budget deficit and the balance of payment deficit, the successive governments entertained over the years triggered by the foolish decisions taken during the Gotabaya Rajapaksa regime. Therefore, the government now has to increase the revenue and reduce the expenditure and facilitate an export led economy.

In order to increase the revenue the government increased the taxes but the government is not expediting the reduction of expenditure. Government recruitments were stopped and the allocations were restricted but the restructuring/privatization of the government business entities are not taking place. 

It was proposed by the interim budget in August 2022 that to establish an State Owned Enterprise Restructuring Unit with an allocation of Rs. 200 million. In January 2023 the Cabinet decided to establish  a parent company affiliated to the Treasury with 100% equity ownership by the Secretary of the Treasury and to make necessary arrangements to register the State Enterprises identified for restructuring as subsidiaries of the said parent company. However, the actions are getting delayed. 

Government policy was to first deal with the revenue side and the expenditure side could be dealt with later. This is the main reason for the protests against the tax increases. If the president could come forward and said that he would suspend the independence day celebrations in line with the expenditure cuts of the government, it would be appreciated by many including the protesters against the tax increases.

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On the other hand if the government digitized the activities of the government and create a database of information based on the NIC while strengthening the Inland Revenue Department, it would help to get more people to the tax net and taxes could be collected on a justifiable basis.

However the taxes imposed are not so exorbitant as claimed by many. In the Table, the taxes for the income brackets of Rs. 50,000, 100,000, 150,000, 200,000, 300,000 and 400,000 are given. Tax to be paid by a person of income of Rs. 500,000 is Rs 106,500 which is 21% of the salary whereas a person with an income of Rs. 200,00 have to pay Rs. 10,500 which is 5% of the income. These taxes can be compared with the taxes to be paid in the years of assessment 2015/16 and 2018/19 which are given in the Table. Interestingly a person with Rs. 500,000 income had to pay Rs.6,000 more in 2018/19 compared to 2015/16 whereas  persons in all other brackets had to pay less in 2018/19 compared to 2015/16. In the year of assessment 2020/21 we can see the drastic reductions of income taxes promoted by the economic advisors of Gotabaya Rajapaksa.

The other aspect is the exorbitant increase of interest rates. According to the Central Bank the Average Weighted Prime Lending Rate for six months of commercial banks in January 2023 was  27.11% whereas in January 2022 it was 7.34%. Therefore if a loan was taken on flexible interest rates, the increase of the interest rate was 19.77%. If a person has taken a loan the additional burden to the pay packet is unexpected. This also contributed to this unrest. Commercial banks should take steps to restructure these loans wherever possible. The biggest hit persons of this problem are the small and medium entrepreneurs of this country who are an essential element of reviving the economy.

Although the Central Bank is criticized heavily for increasing the interest rates it had to be done in order to curtail the exorbitant inflationary trend. Annual inflation based on Colombo Consumers Price Index was 1% in August 2015 and it has peaked in September 2022 to 69.8%. Since then, it started to decline and in January 2023 it was 54.2%. Increase of Interest rates have contributed to this reduction and more importantly there is less demand from the people for goods and therefore price levels are declining. Especially the people in low-income bracket cannot afford to pay even for the essentials. There are no indices to reflect this fact.

The biggest burden to the pay packet is the inflation. According to the Central Bank in the public sector nominal wage rate was 133.1 in November 2022. The corresponding real wage rate was 59.1 which means a slash of 44.4%. This was based on 100 in 2016. In the private sector, based on 100 in 2018, nominal wage rate in November 2022 was 164.8 and the real wage rate was 80.5. As far as the nominal rate is concerned, private sector is more generous than the public sector.

Based on the public sector wage rate, in the Table nominal wages were converted to the real wage to find out the inflationary effect. We can see the biggest issue there. Even with out any taxes the salary of Rs. 100,000 and Rs. 50,000 have reduced to Rs. 44,400 and Rs. 22,200 respectively. It is the duty of the government let alone the moral duty, to look after these people which was emphasized by the IMF as well. The person with the income of Rs. 500,000 who gets an after-tax salary of Rs.393,500 gets a real wage of Rs.174,714. I have not considered other statutory deductions such as provident fund in this exercise.

In respect of the allowances, if there is a fuel allowance it will be taxed but if the fuel which is used for official work is reimbursed it will not be taxed. There is an issue of non-cash benefits. The circulars were  intact for a long time. After the protests there were reductions of the taxable amounts of these non-cash benefits. 

GMOA says that their members are leaving the country due to high taxes. In response I suggest that to allow the private medical universities to come up. 

According to World Bank data tax revenue In Sri Lanka to GDP was 19% in 1990 and it was reduced to 9.7% in 2014. It was increased to 10.9% in 2019 and was reduced to 7.7% in 2020.  Maximum personal tax rates are of Australia 45%; USA 37%; India 42%; China 45%; Japan 55%; and  Singapore 22%. Maximum rate of Sri Lanka is 36% which is applicable for the monthly salary over Rs 322,200.

The President in his “Throne Speech” said that in 2021 in India direct tax was 50%; in Bangladesh 32%; in Nepal 31%; in Indonesia 40%; in Vietnam 31%; in Thailand 37%; and in Malaysia 66%. In Sri Lanka it was 21% and the rest was indirect taxes. We should change our tax system at least of 40% of direct taxes. Leftists in Sri Lanka should advocate this process since it reduces social inequality to a great extent.

Viewing from the National point of view, these tax increases should be supported since we have to protect the State first. The people come next and can forget about the interests of the government. The members of the government including the President should show their solidarity with the process by exemplifying  their intentions of reduction the expenses even at the personal level. That is the missing point. This is not the time to bring popular politics by the opposition parties and claim that “when we will be in power we will reduce the taxes” which has led this country to the present disastrous situation. 

Published in Colombo Telegraph on 12 February 2023

https://www.colombotelegraph.com/index.php/tax-tax-tax/

A Sustainable Model To Curb Corruption

By Harsha Gunasena –

Harsha Gunasena

The International Monetary Fund (IMF), in its press release on September 1st 2022, has identified seven key elements of the programme under the staff level agreement reached with the Sri Lankan Government. Out of these seven key elements five were restructuring related to macroeconomics. Other two elements were a deviation from the traditional IMF approach and those dealt with social safety net and corruption.

The IMF, I think, were able to negate the undue criticisms leveled against its programmes that they were neo-liberal, a term which was used with negative connotations without really understanding the meaning of it.

Following are the two elements referred.

1. Mitigating the impact of the current crisis on the poor and vulnerable by raising social spending and improving the coverage and targeting of social safety net programs.

2. Reducing corruption vulnerabilities through improving fiscal transparency and public financial management, introducing a stronger anti-corruption legal framework, and conducting an in-depth governance diagnostic, supported by IMF technical assistance.

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The focus of this article is to explore the opportunities to introduce a stronger anti-corruption legal framework which would be supported by international bodies either by IMF or by United Nations (UN).

Corruption, as every citizen knows, contributed immensely to the economic downturn of the country. At the same time, we all experienced the malfunction of the institutions which are responsible for curbing corruption. 

The reason why IMF has included curbing corruption in its essentially economic recommendations was that the IMF understood the immense impact to the economy by a less corrupted society with strong anti-corruption legal framework. 

Sri Lanka is in the 102 place out of 180 countries in corruption perception index in 2021 published by Transparency International. The score of Sri Lanka was 37 where 100 was very clean and zero was highly corrupt. Score of Sri Lanka was 40 in 2012 and it was deteriorated to 36 in 2016. Thereafter it was 38 up to 2020.

Sri Lanka is a signatory to the UN Convention against Corruption. Sri Lanka signed and ratified the Convention in 2004.

The Bribery Act was introduced in 1954. The appointment of Bribery Commissioner and a Department was established in 1958. Commission to Investigate Allegations of Bribery or Corruption (CIABOC) was established by Parliamentary Act in 1994 as an independent commission and according to the 19A to the constitution the commissioners were to be appointed by the President with the recommendations of the Constitutional Council.  

There were interferences to the Commission even with these checks and balances. After the removal of 19A the function of the Commission was disgraceful. Therefore, we need to empower the Commission more or have an authority which cannot be influenced by the Sri Lankan authorities or by its collectivist culture to deal with corruption in the country. 

Therefore, it is suggested that to establish an institution with the assistance of an international body. Hence by bringing more checks and balances the independence and the forward drive of the institution can be ensured. Since IMF has dealt with corruption in one hand it could be IMF or since Sri Lanka has signed the UN Convention against Corruption it could be UN.

With this type of suggestion, the main question arises is whether the sovereignty of the country is compromised by taking such a route.

Sovereignty 

The earliest reference to sovereignty in our history was recorded around 223 BC in the form of a preaching of Arhat Mahinda to King Devanampiyatissa when they first met during a hunting session of the King. Arahat Mahinda said “O great King, the birds of the air and the beasts have as equal a right to live and move about in any part of the land as thou. The land belongs to the people and all living beings; thou art only the guardian of it…” This thinking, the land belongs not only to the people but also to all living beings, goes beyond the sustainable development goals of UN.

In our constitution, Article 3 defined that the sovereignty is with the people, and it is inalienable.  Article 4 defined five ways to exercise this sovereignty of the people and in subparagraphs a,b and c it was specifically mentioned that the legislative power ‘of the people’, executive power ‘of the people’ and judicial power ‘of the people’ shall be exercised by the Parliament, by the President and by the Parliament through Courts respectively.

Therefore, sovereignty exercised by the State is a borrowed one from the people and it is based on the principle of public trust. No State can be harmful towards the people of that State in the guise of safeguarding the sovereignty of that very State. In any case by signing the UN charter States  allowed to dilute their sovereignties in order to strengthen the sovereignties of their people. 

This is what Kofi Annan when he was the UN Secretary General had to say about State sovereignty in September 1999. “State sovereignty, in its most basic sense, is being redefined not least by the forces of globalisation and international co-operation. States are now widely understood to be instruments at the service of their peoples, and not vice versa. At the same time individual sovereignty by which I mean the fundamental freedom of each individual, enshrined in the charter of the UN and subsequent international treaties has been enhanced by a renewed and spreading consciousness of individual rights. When we read the charter today, we are more than ever conscious that its aim is to protect individual human beings, not to protect those who abuse them.”

Therefore, what is suggested is a mechanism which will strengthen the sovereignty of the people and dilute the sovereignty of the State. Since the sovereignty is with the people and it is inalienable, we are in the right direction. 

Iraq experience

Iraq entered into an Extended Fund Facility programme with IMF in July 2016 and Iraq agreed to make amendments to the 2011 law of establishing the Commission of Integrity in order to strengthen its governance, accountability and oversight, and independence, and provide it with powers in line with UN Convention Against Corruption. Later Iraq signed an agreement with United Nations Development Programme  where Iraq got EUR 15 Mn to enhance Iraq’s compliance with the UN convention and to provide staff and legislation support in the investigation of  cases of corruption.

Guatemala Experience

Guatemala had a civil war from 1960 to 1996. It was started as a revolt by the left- wing junior military officers against the authoritarian government. After the peace accord  there were several human right defenders were killed including Roman Catholic Bishop Juan Gerardi Conedera. Civil society leaders started a conversation about the need to establish an international commission with the mandate to identify members of paramilitary groups who were responsible for the killings. By 2002 the idea of a United Nations backed international commission has grown and the Government asked UN to suggest ways to make it a reality. However, this was not materialized.  

In 2005, the government decided to establish a negotiation process aimed at creating the necessary political consensus and legal support for fighting impunity in Guatemala and by 2007, a new legislation for Congress consideration was produced. The initiative was called the International Commission for Fighting Impunity in Guatemala (CICIG-Spanish acronym).

The CICIG’s objective is to support and strengthen the Guatemalan State institutions in charge of the investigation and criminal prosecution of crimes committed by illegal groups that have infiltrated state institutions promoting impunity and undermining the democratic gains made in Guatemala since the end of the internal armed conflict in the 1990s.

According to the agreement which was signed in December 2006, which is considered a treaty between UN and the Government of Guatemala, the Commissioner, who is the head of the institution, shall be appointed by the UN Secretary General and the Secretariat shall be headed by an international official. The expenditure of CICIG shall be met by the voluntary contributions of the international community and the Commission shall act within the law of Guatemala.

Although the main aim of establishing CICIG was to bring the assassins under the law, the Commission has done a remarkable work in combatting corruption. For example, in “La Linea” Case (2015), CICIG together with the Attorney General was able to discover a tax fraud in the customs system and public charges were made against the Vice President and the President which forced them to leave their offices.

The CICIG assisted in filing more than 120 cases in the Guatemalan justice system, implicating more than 1,540 people. Joint investigations by the Guatemalan Attorney General’s Office and the CICIG also resulted in more than 400 convictions. The CICIG did not have prosecutorial powers, nor could it independently carry out raids, arrests, or wire taps. The CICIG has played a fundamental role in promoting important reforms to Guatemala’s justice system.

The story of CICIG is no doubt a successful one. It has delivered what it promised regarding greater enforcement of the law, strengthening of the justice system (particularly public prosecution), and weakening of powerful criminal rings that preyed on state institutions. Above all, it has helped Guatemala in its fighting against corruption and impunity.

Conclusion

Experience of Iraq was an IMF monitored programme whereas the experience of Guatemala was UN assisted programme which was more credible and result oriented. If Sri Lanka solicits the support of UN at this critical juncture in order to save our Democracy, certainly we would get it. Model of Guatemala was effective and sustainable. If this model is established in Sri Lanka its support to the Attorney General’s Department and to CIABOC would be immense.

The values behind the concept of democracy are in line with values of the individualistic societies where rule of law and individual liberty is upheld, and majority opinion is carried out while respecting the opinion of the minority. In our type of collectivist countries rule of law and individual liberty is yet to be established and minority views are crushed by the majority opinion. we have an absurd form of democracy, and we all experience it.

Therefore, we have to act to save our Democracy and thereby the sovereignty of the people even by introducing additional checks and balance coming with the support of UN of which we are a member nation and within the laws of Sri Lanka.

Published in Colombo Telegraph on 25 January 2023

https://www.colombotelegraph.com/index.php/a-sustainable-model-to-curb-corruption/