Sajith defends progressive taxation, highlights inequality

ECONOMYNEXT –Days after he lambasted the government for its tax policy, Sri Lanka opposition leader Sajith Premadasa defended progressive taxation noting a serious income inequality in the crisis-hit South Asian nation.In a meeting held in Kandy with the city’s business community, Premadasa said the main opposition Samagi Jana Balawegaya (SJB) has a team of politicians who are experts on economic policy formulation.

“There is serious imbalance (inequality) in our country. Eighty percent of our tax revenue is from indirect taxes. The remaining 20 percent is through progressive taxation where the tax paid increases as income rises,” said Premadasa.

Progressive taxation is fair and equitable, he said.

“What we first need to do is correct this imbalance. We have practical economists with us. There needs to be politicians who understand monetary policy, tax policy and all national policies. The politician cannot be subservient to the advice of officials alone.

“Our political team is one that possesses great knowledge of economic policy,” he added.Speaking at an election rally in Thambuttegama on February 12, the SJB leader criticised the government for its income tax hike.

“The ali pohottu kaputu government is burdening the people with taxes. We hear they’re planning to impose a tax on people who earn 45,000 rupees a month too. Just great,” said Premadasa addressing a large crowd of SJB supporters.

Premadasa was likely referring to reports that the International Monetary Fund (IMF) had asked the government to impose taxes on anyone who earns above 41,667 rupees a month as a condition for a 2.9 billion US dollar extended fund facility. However, the tax threshold remains at 100,000 rupees a month and there is no indication yet that it will be lowered.At an economic summit organised by the SJB in Colombo on February 14, SJB legislator Harsha de Silva presented the party’s proposals for tax reform under an SJB government.

The MP said the party supports progressive tax and that the highest earners should even pay as 39 percent if not more. He also took a swipe at rival opposition group the National People’s Power (NPP) which recently proposed that the tax threshold be increased to 200,000 rupees a month and the highest tax rate be capped at 24 percent.

The SJB’s Economic Blueprint acknowledges that the government has conducted tax reforms, but in its implementation has imposed too high a burden on Sri Lanka’s middle class, disincentiviseing exporters.

The document noted: Both personal and corporate income taxes have been revised. Personal income tax threshold and slabs were reduced, and marginal tax rates revised upwards. The VAT rate was increased, and the threshold was revised downwards, helping expand the tax net.

However, the revised personal and corporate income tax rates are much higher than in the 2017 Inland Revenue Act. The significant increase in personal income tax via PAYE during high inflation has imposed significant burdens on most professional groups. Tax slabs should be broadened in such a way that professionals (perhaps earning up to LKR 500,000 per month) are subjected to a top marginal tax rate of around 25% with the highest marginal rate going up to around 40% for the very high income earners with a temporary surcharge).

It must be noted that the government’s estimate of LKR 100 bn in PAYE tax collection for 2023 is highly questionable given the recent statements in Parliament by the State Minister of Finance that only 120,965 persons were liable to PAYE tax from over 1.1 mn registrations at the end of 2019. An urgent study must be conducted on this discrepancy and steps must be taken immediately to ensure those who are liable to pay taxes, pay.

Beyond PAY, it is essential that citizens of all walks of life who by various means avoid paying taxes are brought into the tax net. The only way to meet the objective of a genuine and stable increase in taxes is by expanding the base, not by squeezing to the bone the few who pay.