Daily News Editorial

Developing the economy

 27 August 2016

With Budget 2017 looming on the horizon, State revenue has become a hot topic. In the midst of global and local economic challenges, Government revenue has increased by 21.7 percent during the first six months of this year compared to the corresponding period last year. This is a creditable achievement, given the challenges faced by the Government in this regard.

State revenue was Rs. 857,922 million for the first six months of 2016 against Rs.704,055 million in the previous year. As expected, three of the biggest contributors to this record revenue were the Inland Revenue Department, the Excise Department and the Sri Lanka Customs. Another factor that led to the higher income was the introduction of a more efficient tax collection system, despite the problems over the Value Added Tax (VAT).

The performance of the Inland Revenue Department is noteworthy in a situation where only a relatively few business ventures and individuals pay income taxes. The authorities need to widen the tax net to have more direct tax payers. Then it will be possible to reduce the over-reliance on indirect taxes such as VAT which everyone, rich and poor, has to pay equally. On the other hand, more rich people should be paying direct taxes. In most other countries, at least 30-40 per cent of the population pays direct taxes, but in Sri Lanka this is not so. In the meantime, the Government will have to rely on VAT and other indirect taxes to some extent. The present impasse over VAT is costing the economy heavily and the Government will have to evolve a better VAT strategy that balances the concerns of the Treasury and the consumers.

The Excise Department is another vital arm of the State that can perform better. It has to contend with the problem of smuggling of tobacco and alcohol, which deprives the State of millions of rupees in tax revenue, apart from the manufacture of illicit moonshine. All smuggling avenues and loopholes must be closed, but this is easier said than done due to the porous nature of our sea borders. The Navy and the Coastguard cannot be omnipresent and the Customs still lacks advanced detection equipment to track certain contraband items. There is also a proposal to raise tobacco taxes up to 90 per cent which is under consideration.

The Customs too will benefit if certain duties and taxes can be streamlined and some steps have already been taken in this direction. Although the recent changes in taxes on several varieties of vehicles created a huge controversy, the market finally seems to have adjusted to the new scenario. The re-introduction of concessionary duty permits has also given some relief to prospective buyers. The new Customs Act in the offing must take note of the latest trends and pave the way for enhancing Customs revenue.

The biggest obstacle to the economy is the debt servicing component. With the previous Government running a debt burden in excess of US$ 65 billion, most of the Government revenue goes back to debt servicing. The Government is faced with the challenging task of raising local revenue for debt servicing, since foreign aid cannot be used for that purpose. The downside is that this limits locally available funds for development and welfare.

One must not forget the expatriate workers’ contribution to the economy. They remit more than US$ 6 billion back home annually, which is perhaps the bedrock on which our economy runs. It is lamentable that when pampered people’s representatives get a duty free car permit worth US$ 62,500, our expat workers get only a duty free allowance of US$ 1,750 even if they have worked abroad for 10 years. Their efforts to strengthen our economy should be recognized more widely. The Government should strive to find more employment opportunities for our youth abroad. The Diaspora is also keen to invest in Sri Lanka post-war.

Sri Lanka has a huge import bill driven mainly by oil on which around US$ 6 billion is spent. Serious thought must be given to import substitution of certain products. For example, if Sri Lanka can produce at least half of its annual sugar requirement of approximately 600,000 tonnes, the country can save around Rs.10 billion. Exports are the other side of the coin – the Government has set an ambitious target of US$ 50 billion per year from exports in the medium term. Sri Lanka has the potential to achieve this target with export diversification and new markets. The signing of trade pacts with several countries and the Financial City initiative will also reinvigorate the economy.

Loss making Government enterprises have been a drag on the economy, with the Treasury compelled to inject funds to some of them afloat. The Government plans to restructure these entities without resorting to privatization. This is the best way to prevent further losses to the economy. All these measures are likely to drive up State revenue and an even more positive picture could emerge by this time next year.