Comment - Managing lower budget deficit a Herculean task

Budget deficit is one of the main indicators the World Bank, IMF and other donor agencies are highly concerned about and therefore the government always attempts to reduce the deficit by cutting government expenditure in its annual budget.

The rationale behind this argument is that government spending harms the economy by diverting resources from the productive private sector into the less efficient government sector and by calling for high tax rates that reduce incentives to work, save and invest. Therefore the best way to reduce the budget deficit is to reduce excessive spending,

However, cutting public expenditure is not a politically popular exercise and therefore managing a lower budget deficit is a Herculean task.

Every year after 2004 we heard popular pledges and methods about increasing government revenue by various ways and means. However, with available information we have a doubt on the achievement of these targets.

Last year we heard about a massive VAT scam in the Inland Revenue Department (IRD) and the authorities said this is the biggest fraud in the history of this country.

According to the investigation the amount misappropriated from the IRD under the pretext of VAT refunds is over Rs. 357 million. They pledged to bring the responsible officials and other stakeholders of the scam before the law, punish them and recover the money. However, this is now history and some responsible officials are still in the high ranks of the department.

Two weeks ago another massive VAT scam was revealed and the report said that a single businessman had been paid more than Rs 570 million within a month as VAT refunds. The stunning disclosure was made by the Parliament Select Committee on Public Accounts.

Again last Thursday the media reported that the CID has commenced investigations on a VAT scam following a complaint by the IRD based on a report submitted by the Auditor-General in connection with a criminal misappropriation of Rs. 35,772,868, the money accruing from VAT.

This scenario is taking place while the IRD is undergoing costly and radical reforms and the department and treasury officials are boasting about the increasing efficiency in the department. How can we expect any efficiency improvement with this kind of frauds taking place.

The IRD authorities said that it has launched an initiative to change public attitude towards paying taxes. If the tax money is going to individual's pockets instead of government coffers how can they change public opinion?

Whatever the IRD and Treasury officials say, the government's tax revenue has increased marginally to 17% of the GDP from 16.1%. However, current expenditure alone has gone up from 18.7 percent of GDP to 19.5 percent.

Corrupt bureaucrats in tax collecting institutions are the biggest obstacles to increasing government revenue. They have strong trade unions who have blocked reform proposals such as the Revenue Authority. It has now been proved that the reforms within the department are not effective and tax frauds continue. Under this situation efficiency improvement in the IRD will be a pipe dream.

In this country there is a strong black economy and all institutions, individuals and procedures openly facilitate this black economy. Bribing tax officers is cheap and more convenient than paying tax to the government. Bribing the labour officers is cheap and more convenient than paying EPF and ETF for employees. Understating revenue and evading tax payment is openly carried out and this is the business of tax consultants.

Not only the IRD, the Customs and the Excise Department are also equally corrupt and some officials are putting government revenue into their pockets. A few weeks ago Nokia's sales manager - Asia, Rajesh Sokhal revealed another shocking figure. He said that from 11 million mobile phones imported to Sri Lanka a year only one million have been imported through the proper channel while the balance have been smuggled into the country.

He said that the government loses millions of rupees is revenue from this kind of smuggling.

It is no secret that this is the nature of this business. Normally small-scale traders in the mobile phone industry, computer accessories and other small electronic appliances business go to Singapore, Hong Kong or Dubai and bring these goods. They have connections at the airport and by bribing customs officers they can clear the goods without any duty.

The culture here is evading all kinds of taxes and payments to the government and the government is also promoting this in many ways unwittingly. If we consider BOI status and tax relief many industries misuse the privilege.

The authorities should review the industries before they offer BOI status and check the FDI that is brought to the country, job opportunities and other benefits without losing tax revenue to the government. In the BOI industry list there are restaurants, taxi services and medical centres that get BOI facilities. The authorities should consider economic cost and benefits of this kind of businesses.

Politicians get permits to import super luxury vehicles free of duty every few years. The Government has also decided to give permits again for government officers to import vehicles at lower duty. It was also proposed to give permits to good taxpayers to import vehicles duty free.

The Sri Lanka cricket team was also offered duty free vehicle import permits after they won the semifinal at the Cricket World Cup - 2007.

Almost all the citizens in this country can get imported goods without paying duty and this is perhaps the culture here.

If the tax authorities and treasury officials want to correct this scenario, they can learn how a growing economy manages its tax revenue from neighbouring India. India collected 4.7 trillion rupees ($115 billion) in total tax revenue in the fiscal year ended March 31, 2007.

The taxes were more than the revised budget estimate target of 4.65 trillion rupees. India's total indirect taxes, including taxes from services, during the year were at 2.4 trillion rupees, more than the 2.36 trillion rupees of the revised budget estimate target.

The government received 862.9 billion rupees from customs and 1.17 trillion rupees from excise duties during the year. India secured 2.29 trillion rupees from direct taxes, including 1.43 trillion rupees from corporate tax and 856.2 billion rupees from individual income taxes.

The treasury as well as politicians should be frugal with the money we earn, as a mother in a home since it is not the individual's money but money which belongs to every citizen of the country.