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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » “Robin Hood” or “Saradiel” may be misunderstood

“Robin Hood” or “Saradiel” may be misunderstood

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Subsequent to the downfall of King Mahinda Rajapaksa at the Presidential polls held on 08.01.2015, the new “Maithree” government led by (President) Maithripala Sirisena and (Prime Minister) Ranil Wickremesinghe started work immediately under the promised “100 Day Programme.”

In order to regularise the promised concessions such as cheaper consumer goods and services to the public in general and unprecedented salary increase to the Government employees a “mini budget” was presented to Parliament and it was approved by a 2/3rds majority.

But there were some concerns about the revenue measures proposed by the new Minister of Finance in order to finance this additional expenditure. A lot of discussions have taken place and budget seminars, etc were conducted to discuss these measures but no alternative proposals have emerged. The Minister himself has made certain amendments but the main proposals remain unchanged. The writer does not want to conduct a “post mortem” on this mini-budget proposals but the purpose of this article is to have some constructive criticism in order to enlighten all concerned regarding a few main proposals.

Firstly, we must see whether some of these proposals are suitable for a democratic country having a new “Maithree governance” in this 21st century.

I think this aspect was adequately dealt with when the Minister of Finance was referred to as “Robin Hood” by certain printed media. Some of these proposals may be considered as draconian, ad-hoc and non-scientific, in the current environment. Even when one considered the principles of taxation specially the “ability to pay” (although we still don’t know how to pay these massive amounts ie as a lump sum or in installments) this type of taxes or levies, even though once and for all, cannot be approved! In Sri Lanka, in the past such temporary tax measures which were meant for one or two years had been carried on indefinitely. How can the Minister make the public believe that these once and for all or one off levies will not be repeated? The main concern is that the expenditure will be recurring and unless the Minister of Finance will be able to find out alternative revenue sources in the next year mere rhetoric on corruption and wastage of public funds will not satisfy the public.

On the other hand, Ranil Wickremesinghe’s fiscal policies cannot be “Robin Hood” or “Saradiel” policies. In a situation like this the Minister may have given wrong signals to the investor community specially in relation to the foreign investors. One Deputy Minister has tried some damage control exercise by saying “we are not socialists” but it may not be enough specially in a situation where the Rajapaksa regime has invoked the draconian anti-free market provisions in the Business Acquisition Act discouraging private investment. Secondly, let me discuss the pros and cons of some of these proposals.

Super Gain Tax (SGT)

There were “super taxes” that were imposed during post world war periods in the UK and some other countries. That was to tax the additional super profits made by business entities during those periods. But in the context of Sri Lanka our so-called civil war was terminated in 2009.Certain business people may have earned super profits or gains but many of them did not declare such super profits or gains for tax purposes. Then the Minister’s effort to tax so-called super profits from the persons who have declared profits above certain level (which are not super profits) cannot be justified. The Minister could have implemented a general surcharge on all taxpayers above a certain level of income but it is not reasonable to select persons who have genuinely declared their income and paid the tax on such income and again ask them the pay this so-called SGT as well.

The other problem is the selection of liable entities. It is not clear whether the Minister has considered all entities and individuals who had declared income above Rs. 2000 million in the year 2013/14. This amount may not be a super gain if you consider the capital employed and other aspects of the businesses. There are some partnerships also earning massive income. Even some BOI companies paying income tax at lower tax rate may be having annual income very much above this proposed threshold. Then, how about the casino king of Sri Lanka? Although one cannot depend on the CGIR’s (Tax Commissioner General) statistics, those are the best available statistics to deal with. However, in case of partnerships and individuals, the relevant details are not computerised and therefore obtaining such details may be cumbersome. If the Minister can consider all eligible companies, partnerships and individuals he may be able to give some “human face” to this draconian tax.

The next issue is about the calculation of this revenue threshold. It is proposed to consider a group of companies as one entity. This again will go against our income tax system. We have no system of “group taxation”. Normal income tax liabilities are calculated on the basis of individual companies. Therefore, this so-called SGT may also be implemented on the basis of individual companies. If the tax administration can find the relevant information they need not push for this artificial amalgamation of individual companies within a group to make such companies liable to SGT on this artificial basis. Then, if you consider the amount of statutory income declared for income tax purposes it may not reflect economic income since a lot of enhanced reliefs including higher rate of depreciation have been deducted. Whatever the name used or rational expressed the taxes are compulsory levies which affect the disposable wealth of a person. Now, this SGT will be imposed on the basis of declared income for the year 2013/14. The relevant persons may have already paid normal income tax and declared dividends to the shareholders and may have appropriated the balance income for various investments and other purposes. These days, very rarely does a person keep cash or very high bank balances unless he is engaged in illegal activities.

Legitimate businesses will always try to earn maximum profit by using its assets. It may be appropriate to consider easy instalment payments, at least spread over the year 2015, in consideration of cash flow problems. It is not fair to expect such persons to realise their investments to meet this unexpected tax liability.

Mansion Tax (MT)

Even when Sri Lanka was having Wealth Tax, Gifts Tax and Estate Duty, etc such taxes did not produce much revenue. Even the Capital Gains which was considered as a source of income for income taxation was abolished in 2002 by the previous UNF government of Ranil Wickremesinghe. As a result, Sri Lanka was not collecting any worthwhile tax on capital belongs to individuals. The only tax on capital assets was the rates collected by the local authorities and Stamp Duty on property transactions collected by the Provincial Councils. Therefore, there is a need to strengthen the property taxation in general. Many countries, specially developed countries such as the USA, Japan and a few other Asian countries are implementing successful systems of property taxation.

In Sri Lanka, the collection of rates by local authorities is not implemented properly. Many local authorities (including the CMC) have got massive amounts of arrears in rates collections. Further, the procedure adopted for the valuation of newly constructed buildings is not suitable and sometimes it take more than five years to value a new building and to determine the annual value of such buildings on which the rates are calculated.

The Mansion Tax which is not a once and for all tax requires the determination of floor area or the value. If these matters are entrusted to the local authorities the Minister may not be able to collect any tax.

Therefore, it is necessary to consider an alternate system to collect this special tax in a timely manner.

It is good that the Minister has made some amendments to the original proposal to give some human face to this proposal. Now, this tax will be applicable only to houses completed in the year 2000 or thereafter. Other qualifications will be that the floor area should exceed 10,000 square feet and the value of the relevant land will not be considered. I hope the Minister will establish the necessary administrative machinery to obtain necessary details and to collect the tax equitably.

Amalgamation of the Rajapaksa 2015 Budget for 2015 with the new budget It is very important to reconcile original Rajapaksa proposals with new proposals specially with regard to the estimated expenditure. There were newspaper reports to the effect that the proposed 50,000 teacher appointments will not be made. It is a good decision because this proposal was included in the Budget-2015 by Rajapaksa to cheat the public and to get their votes. However, now the Government has increased the allocation for education to the level of 6 per cent of GDP as promised. It may be important to spend these additional resources to improve the level of education in order to increase the quality of teachers in required numbers and to enhance the knowledge of students in required fields.

There was no proper fiscal consolidation in the last number of years under the Rajapaksa-Jayasundara fiscal consolidation strategies. In each year the actual deficit was much higher than the estimated figure. Actual expenditure was always higher than the estimates and actual revenue was always lower than the estimates. As a result our tax to GDP ratio has come down to the lowest level of 11 per cent.

In this context the revenue estimates for 2015 as proposed in the Rajapaksa Budget cannot be relied upon. For example out of total new revenue proposals amounting to Rs. 65,500 million, Rs. 40,000 million was to be collected out of tax-in-arrears by providing re-financing facilities. But even according to the CGIR’s Administration Reports the collectible arrears are much less than this amount, even if all the arrears were collected during 2015. The Minister may consider this aspect as well, if he wants to keep to the original deficit target, inspite, of so-called “Robin Hood” goodies already implemented.

(The writer is a retired, deputy commissioner in the tax department and a one-time tax consultant attached to
the Ministry of Finance)

Teller

Teller
Moderator
Moderator
Really good article


_________________




Teller said is said..

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