“There is a lot of concern about the lop-sided economic growth and wealth concentration in Sri Lanka whereby the Western Province (WP) accounts for almost half of the national GDP (44.4% in 2011). The tax incidence or the sources of tax revenue is one of the principal factors affecting income inequality among the population and the regional dispersion of economic growth and wealth”, remarked Dr. Muttukrishna Sarvananthan, Principal Researcher at Point Pedro Institute of Development.
When a tax system overwhelmingly depends on consumption taxes, income will be concentrated in the hands of the wealthy individuals, institutions, and regions of the country. After 1977, indirect or consumption tax as a proportion of the total tax revenue has increased at the same time direct or income tax has decreased. This is one of the primary causes of the skewed production and wealth among the people and places in Sri Lanka. Moreover, the consumption tax revenue and savings of people from the provinces are transferred to the centre which promotes regional inequality.
“Therefore giving freedom to the provinces to retain their respective consumption tax revenue and savings of the respective populations and increasing the proportion of the direct or income taxes in the total tax revenue would significantly disperse production, income, and wealth to the regions away from the WP. Therefore, I propose fiscal devolution for inclusive equitable growth among the different provinces as well as a means of conflict resolution in Sri Lanka”, Sarvananthan remarked while pointing out the tendency in the past 22 years of the operation of the provincial councils (1988-2010) has been the monopolization of taxation by the national government.
Adding further how disparities can be ironed out he said, “By providing fiscal autonomy to the provincial and local governments, the national government could promote competition among provinces and local authorities to attract businesses and investments (both domestic and foreign). The fiscal space envisaged for the provinces and local authorities by this method would create an environment for productive competition among provincial and local governments”.
The national government should do away with the nanny state it currently operates, vis-à-vis the provinces and local authorities, by way of providing annual grants to the provinces and local authorities based on various criteria, he says.
He further added that present financial transfers from the centre to the provinces were barely adequate to pay for salaries, pensions, and recurrent expenditures of the provinces. On the contrary he says that provinces should be encouraged to earn and spend their own money based on their priorities and decisions.(DK)