Favourable tax system vital to boost investment - IMF Resident Head

By Lalin Fernandopulle

Sri Lanka is positioned in one of the most dynamic regions of the world. Fiscal consolidation has been an important contributor to macroeconomic stability and investor confidence, International Monetary Fund Resident Representative for Sri Lanka and the Maldives, Dr. Eteri Kvintradz told the 56th Annual General Meeting of the National Chamber of Commerce of Sri Lanka (NCCSL) last week.

However, she said that the country's tax collection has declined steadily in recent years and added that there needs to be a predictable and stable tax system in the country.

“The global economy is going though uneven recovery with heightened risks. Short-term risks include a worsening of geopolitical tensions and volatility in financial markets. Medium-term risks include stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets. Asia’s outlook is expected to remain solid," Dr. Kvintradz said.

The World Bank and the IMF have slashed global growth forecasts for 2015 and 2016 due to the political turmoil in many regions and the volatile economic scenario in Europe. The drop in oil prices is a shot in the arm for many economies but yet a drawback to oil producers.

“Fiscal consolidation has been an important contributor to macroeconomic stability and investor confidence for Sri Lanka. However, the issue is not whether fiscal targets can be met but rather, whether they can be met in a growth-friendly way," the IMF representative said.

"The IMF has consistently argued for a second round of tax reforms and we continue to see this as essential to putting public finances on a sustainable path over the medium-term," she said.

Dr. Kvintradz said that there is considerable room for raising Sri Lanka’s tax revenue performance. Some regional comparisons bring back the point that Sri Lanka’s performance is one of the weakest in the region. Bangladesh and Pakistan are weaker. As a result of a low revenue base, debt ratios to revenue performance are the highest in Asia, Dr. Kvintradz said.

Sri Lanka's total government debt as a percentage of GDP has declined over the past decade reaching a peak in 2002. The government debt including foreign and domestic debt amounting to US$52 billion was 78.3 percent of the GDP in 2013. The present debt to GDP ratio remains around 78 percent. “Despite past reforms, Sri Lanka’s tax policy framework remains complex. "The number of taxes is still very high. The total stock of tax exemptions and special provisions remain exceptionally high.

These make tax administration difficult and tax efficiency low," the IMF head said.

"For example, efficiency of VAT collection in Sri Lanka is about one half of the same indicator for Asia and Pacific countries,” she said.

Tax experts and economists have been lobbying for tax reforms and simplification of the tax structure. However, policy makers have not paid heed to such appeals.

Dr. Kvintradz said that a favourable tax system is vital to boost investments.

It is not an easy undertaking. The task is easier said than done - reform practitioners would say, but yet it is worth the effort as it is vital and an opportune time for the country.

The Fund's resident chief said that the ongoing tax automation will introduce state-of-art systems which have the potential to uplift tax administration to modern standards.

To take full advantage of the ongoing automation, the tax policy needs to be simplified. However, she said that tax policy reforms could not be implemented in a vacuum.

The government needs to cooperate with the business community to ensure acceptability and applicability of new revenue systems which also means breaking away from the past.

Sri Lanka is at a critical juncture, it has done a significant scale up in infrastructure and it is when the transition to private sector-led growth has to start.

The private sector is expected to seek and use new opportunities presented to them.

However, there seems less vibrancy than anticipated. As other episodes of the scale up in different countries showed, liberalising the business environment is an important catalyst of private sector led growth.

Having it fixed it will make Sri Lanka an attractive destination for long-term investments.

NCCSL's President-elect Thilak Godamanna said that the chamber has done a considerable amount of work to develop the small and medium sector enterprises which make a salient contribution to the economy and added that infrastructure growth, low inflation and interest rates and sustained GDP growth will help take the country to the next level.

‘The lack of skilled workers is a major drawback for economic growth.

Steps should be taken to build technical skills especially in the ICT sector which has enormous potential for growth. There has not been a steady growth in FDIs," Godamanna said.

"We need to do away with red tape and promote consistency in policy. Measures should be taken to build exports through concessions,” he said.