Tuesday, November 23, 2010

Sri Lanka tax system not delivering, aid too

From Sri Lanka's Sunday Times:
"The tax system is not delivering the potential revenue in Sri Lanka. As income increases in a country, the revenue also increases although the rate of increase will decline after some time. This is not happening in Sri Lanka. Sri Lanka’s per capita income has increased from US$ 720 in 1995 to US$ 2053 in 2009 but our tax revenue has declined from 20.4 % GDP to 14.6 % GDP during this period. Almost 90% of revenue comes from taxes (10% is accounted by non-tax sources).
. . .
The key reason for this is that the tax base has not broadened in line with the increase in income or economic activities. The reason for the weak tax base is the multitude of tax exemptions, tax evasion, many discretionary tax measures in operation, and weak tax administration."
Nothing especially new here: these are regular problems faced by developing nations. And there is worse:
Successive governments have heavily depended on indirect taxes for tax revenue instead of working out a reasonable balance between indirect and direct taxation. Today, approximately 80% of tax revenue comes from indirect taxes and only 20% come from direct taxation. In other words, the bulk of the taxation has fallen on the less well-off people. A better balance would be 60:40.
Again, this kind of thing is quite common. One reason is that secrecy jurisdictions make it hard for governments to apply progressive direct taxation, partly because it gets evaded, offshore, and partly because tax competition forces governments to lower tax rates on wealthy individuals and capital owners - which in turn means they have to compress their domestic tax rates on high income earners, to stop them shifting their affairs into the corporate tax category. For connoisseurs of Sri Lankan taxation, there if a fair bit more in this article.

One statistic not in this article, but well worth noting, comes from the OECD:
"Up to now, support for revenue and customs sectors has attracted a minimal share of aid, of around 0.1% of official development assistance annually. Donors could increase that amount and see aid as a way to kick-start the move towards sustainable tax systems. Such assistance should be seen as an investment in the future of these countries."
We have been highly critical of the OECD in the past. But this one is right on the money.


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