Presenting the budget in parliament, Finance Minister Ravi Karunanayake said on Thursday that there was a need to collect due revenue to the government from the high end luxury house owning segment in Sri Lanka.
Earlier Treasury officials had suggested including a similar super-rich tax in the 2014 budget of the previous regime, but it was turned down at the last moment due to severe pressure exerted by a group of multi billionaires who had high political connections at that time.
This was reported in Sunday Times on 20th October 2013 and in another follow-up news item in Business Times on 27th October.
The Sunday Times quoted official sources as saying that the annual income and assets of wealthy Sri Lankans would be taken into account in establishing a new tax category for the so-called ‘super-rich’.
“This tax would be in addition to other normally levied taxes they were now paying. The threshold of income for levying the higher tax rate is being worked out. The tax, once approved, would apply to both those who have acquired wealth through inheritance of family property and cash, and the new-rich, a growing breed of businesspersons who have acquired wealth in recent times,” the Sunday Times reported.
Several ordinary Sri Lankans praised the new Finance minister for taking this bold step without bowing down to the so called super rich class that emerged during the previous regime.
They added that the earlier so-called people’s alliance had failed to tax the rich and help the poor.
However one issue that needs clarity is that the definition of super-rich is not clear. At that time some Treasury officials were of the view that the number of declared wealthy taxpayers is too small to make a substantial difference to the country’s fiscal deficit.
Of Sri Lanka’s 20 million people, 897,000 are tax payers including 530,000 who are subject to Pay As You Earn (PAYE) deductions by their employer. These rates were now low enough to ensure compliance, the official sources said.
An official of the Department of Inland Revenue (IRD), discussing the proposed tax, says the only way to do this is to reactivate the practice of calling for wealth declaration along with annual returns from taxpayers to identify the super-rich.
His view however is that ensuring tax compliance is more important rather than populist taxes.
An eminent economist noted that Sri Lanka has one of the most inequitable tax regimes of Asia where direct tax is only 20 per cent while indirect tax makes up 80 per cent. Direct taxes must be at least twice as much as what it is now and all efforts must be made to get to that ratio.
“Rich people are getting more than their fair share of benefits in this country but it is now quite clear that they, not all, but by-and-large most, are not contributing their fair share. So if the rich are to make sure they continue to enjoy one of the lowest tax regimes in this part of the world they must also meet their obligations,” he added.
Expressing concern on the government’s move, a leading businessmen involved in trading told the Business Times, it is better to tax business enterprises on profit rather than going after the rich.