Experts oppose industry specific taxes

by Lalin Fernandopulle

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 reduced.

“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. Samarajiva said.

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 support itself.

“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 uprisings.

“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,” he said.

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 component.