Experts oppose industry specific taxes
Economists and tax experts while acknowledging the need to boost tax
revenue for Government coffers, opposed industry specific taxes and
measures to tax consumer goods which is regressive.
LIRNEasia, Executive Director Prof. Rohan Samarajiva said telecom
services should be treated no different from other goods and services.
“I do not object to making telecom services subject to VAT. The problem
is the approximately 25 percent mobile levy which should be removed or
“During the previous regime, multiple taxes were levied on telecom
services, especially mobiles but not limited to VAT. The overall burden
on the consumer was around 32 percent.
“Subsequently, the Treasury rationalised the complex web of taxes on
taxes, and imposed a 20 percent levy that gradually increased to around
25 percent. The VAT was removed at this point and the consumer
benefited, though the burden was higher on the operators.
“What has now been done is to go back to the early Rajapaksa times,
but with an even higher burden on the consumer.
With the complex tax-on-tax system used in Sri Lanka, the actual tax
burden will rise from 25 percent to around 43 percent.
“This will be the highest tax ever imposed on telecom users in the
country. It is likely to reduce telecom use, especially of data. It is
contrary to government policy seeking to encourage internet use,” Prof.
The government should forthwith remove the industry-specific tax of
approximately 25 percent that was imposed when VAT was removed. It is
unreasonable to impose such a high industry-specific tax on services
that are considered merit goods by the government’s ICT promotion
policies. Such high industry specific taxes are normally imposed only on
demerit goods such as alcohol and tobacco.
LIRNEasia’s comprehensive systematic review of thousands of research
articles has clearly established that telecom networks yield a positive
impact on livelihoods. It is unfortunate that this industry is being
singled out for excessive taxation which is likely to depress investment
and set back the transition to a knowledge economy.
Partner, Tax Services, Ernst & Young, Duminda Hulangamuwa said with
the increase of VAT from 11% to 15%, the consumer will have to pay four
percent more on all goods and services liable to VAT. In addition,
services such as healthcare and telecommunications which were hitherto
exempt from VAT will now be liable to VAT which means the cost of these
services would increase at least by 15 percent.
For instance, the telecommunication services which are currently
subject to a telecommunication levy of 25 percent will now have a VAT of
15 percent and NBT of two percent totaling up to 17 percent in addition
to the telecommunications levy.
In total, the telecommunication services will be subject to an
effective tax of 45 percent. This means a reload that costs Rs. 100 will
have a call value of only Rs. 55. Thus, an increase in taxes will
adversely affect consumers at large and the business community.
When the rate of indirect or consumption taxes increase, goods and
services will be costly, reducing purchasing power. When purchasing
power drops, the demand will drop as well and result in lesser profits
for businesses. An increase in tax will have a ripple effect.
“However, one also needs to look at it from the point of view of the
government which needs money to finance recurrent expenditure such as
public sector salaries, pensions, debt servicing and routine maintenance
and on public infrastructure such as roads and water. Unless the
government musters sufficient revenue, by way of taxes to meet these
ever increasing costs, it will have to resort to borrowing from local
and foreign sources to bridge the deficit,” Hulangamuwa said.
He said high borrowings will result in an increase in interest rates
and cause inflation and this would result in the increase of the cost of
goods and services. Therefore, the government needs to balance revenue
collection and borrowings to meet its expenditure.
What is important is to ensure that the revenue collected is invested
wisely to bring in returns in the future and benefit the public. The
government needs to rely less on additional taxes and borrowings to
“However, one area that I did not agree, the overall tax policy
change of the government, is the logic in reducing corporate income tax
from 28% to 17.5% for the manufacturing and service sector while
increasing VAT from 11% to 15%.
“When VAT is increased by 4% and bringing sectors such as healthcare
liable to VAT, the common man will have to bear the cost of the tax
burden and at the same time giving a tax break to big business is a
contradictory situation,” Hulangamuwa said.
Senior tax consultant and partner, Gajma and Company Chartered
Accountants, N.R. Gajendran said it is vital that the tax to GDP ratio
should be increased from the current 10.7 percent to boost revenue to
the government, but this should not be done by taxing essential food
items that would add a bigger burden on consumers. Increasing the VAT
from 11 to 15 percent is regressive and this could result in mass
“Multi-lateral agencies want minimum exceptions on VAT which is not
practical in a country such as Sri Lanka with a low per capita income,”
Private hospitals will have to decide whether to pass the VAT
increase on patients. Higher room charges will result in higher medicine
prices. Middle income earners who prefer private healthcare to the State
will be the most affected.
Gajendran said telephones are no longer a luxury. Around 70 percent
of the calls are unproductive. The VAT increase applicable to the
telecommunication sector will help minimise unproductive calls and SMSes.
“Revenue collection and relief measures cannot be effected
simultaneously. However, balancing it, is a huge challenge. There has to
be a right mix and right fiscal management. Steps should also be taken
to minimise corruption, malpractices and mismanagement in State
entities,” he said.
President, Colombo Stockbrokers’ Association, Ravi Abeysuriya said
the current structure on the VAT threshold being brought down from Rs.
100 million to Rs. 12 million per annum is a regressive approach. The
impact on the small and medium business sectors will also have a bearing
as a result.
The current approach will also result in a greater portion of the
goods and services being incorporated with a VAT element making an
impact on price levels and subsequently causing inflationary pressure.
Healthcare and telecommunication sectors which were exempted have
been included in the tax base to widen the base. This too will cause
direct inflationary pressure. Additionally, the cost to the consumer
particularly as it applied to healthcare will create a big burden
considering that it is not an incremental increase but an introduction
of an entirely new tax component. Although consumers in the private
healthcare sector are using such services given their level of wealth
and the probability of a major impact on the sector can be relatively
lower considering the elasticity of demand.
The FMCG sector may have a relatively higher impact considering that
it is discretionary and there is spending. With regard to the
telecommunication sector, the volume will be affected due to the
inability to use a higher level of service as result of the new taxation