Tuesday, January 30, 2018

Does the State deserve to collect more taxation?

It is actually going to cut into growth, not give a helping hand to it.

I was talking with a friend, who has come from overseas to advise the State on increasing the Taxation yield and helped draft the New Inland Revenue Act, that comes into effect on 1st April 2018, and it is hoped that the percentage of direct taxation, most especially personal taxation as a percentage of GDP will rise, assisting the Government to collect a higher percentage and therefore a greater collection from Direct Taxation, in line with comparative countries. So the expected ration of Indirect to Direct will come down in favor of direct.

It is obvious that indirect taxes including VAT and Import Duties on even essential items like Sugar taxed at Rs30/kg our of a total cost of Rs100/kg has been the means by which the state collects Taxes which for all intents and purposes is clearly regressive, as it is the poor who spend all their income on consumer items suffering a taxation bite as they consume. The wealthy on the other hand except for those who pay the duty on imported vehicles, do not pay any significant tax as a proportion of their income and will continue to benefit, increasing their wealth in multiples as there is little of their increased wealth, especially in the rate of rise in property that many indulge in spending their spare cash, that gets taxed.

The capital gains tax proposed is expected to tax at 10% of the gains, which is still attractive, but hardly a disincentive to park their money there. However the 15% VAT now imposed on apartment disposals after April 1st by the developers on the FIRST sale of a new apartment, may suddenly turn into a wholesale property crash, in proportions we have never before experienced, if sentiment suddenly goes sour, and it is only a catalyst such as a VAT hike like this that can trigger such a catastrophe, leaving half built apartments in their wake, and a crisis of confidence of utmost proportions just because some foreign expert whose has NOTHING to lose make a proposal that our idiot followers have blindly accepted as necessary, not realizing how sensitive this sector is to a sudden price manipulation for the state to benefit from this sector.

A property tax gradually imposed on assessed values of new build apartments valued in excess of Rs20M, may have been a better solution.

I gave this background to alert the reader to the manipulations, taking place in order for the state to find means of increasing how much Taxation they collect. But before that, I have a problem with how the state currently spends money, be it taxed or from borrowed sources, and therein lies the real RUB!
There is NO argument that the State is wasting the tax payers money. Remember the tax payers broadly are poor people who are paying the state money so they can be profligate about spending it.

It is not personal money that the State Spends, so they don’t appear to mind if it spent wisely or not. We know it is wasted on unnecessary purchases, as the State Employees are not sufficiently altruistic to be careful with their spending habits, and if the Treasury receives a lot more money, they are simply under political pressure to be even more profligate to keep the public happy by doling out unproductive largesse to fulfill cravings, and not long terms growth.

While it is one argument that the state is not collecting enough , the other side of the same argument is that if the state taxes the people and wastes that money, the economy could be in an even worse state.

One good side effect of wealth, is that people only require so much to live, so wealthy people invest their wealth in ways to increase their wealth further, and the more productive that investment, the greater the return assisting the economy in the process, by creating employment and production.

Instead of that, if that money is taxed and doled out to the poor you are simply helping him have a better life, while not doing anything to improve economic prosperity. So is this money better left in the hands of the wealthy or is it better handed over to the State to spend?

I personally don’t have any confidence in the Sri Lankan state to spend wisely, and so it is another tragedy of epic proportions, where the State will stifle consumption and investment to the extent of the extra taxation yield and waste the money raised on consumption of imported goods like food items for the needy.

I have repeated ad nauseam in this blog about the waste of the Country’s resources by those in power backed by those in Public Service, both of which are highly politicized and peopled with armies of individuals who don’t add one red cent to the economy, except bleed it dry.

Until we clean up the rot at the top, holding politicians and Govt servants accountable for performance, we should resist paying this additional taxation, until the State can demonstrate they know how to spend the people’s money wisely, like they would their own hard earned money.


Anonymous said...

The Sri Lankan entrepreneurial class of which there is just too few have succeeded against all odds including endemic state corruption to get where they have, and full marks to that.

They don't indulge in mass consumption, except in the status symbol of cars, and therefore have used their excess profits from not paying taxation, into building and expanding their businesses. This then provides employment opportunities and grow their businesses.

The new proposals are definitely going to eat into that investment segment, and if the Govt does not invest with a higher rate of return, it is then the lesser of two evils to let the entrepreneur get on with his life with no new taxes.

It is sad that bumptious foreign experts think they have all the answers, but until the core issue of corruption is resolved, nothing else is going to assist in getting the Country out of the mess that they are in.

Please dont kill these golden geese who contribute so much. Just sell all the state assets now and fund the deficit. BOC and Peoples and National Savings Bank can be flogged for US$10B and can wipe out our National debt in one shot. Worth doing only if we can live within our means and not have any inherited debt to repay.

Anonymous said...

Ironically the theory of taxation is to ask citizens with the ability to pay into the State Coffers, so that they will then be able to provide public services, more equitably and cheaply for the common good.

In Sri Lanka it is those entrusted with the State Coffers who regularly misuse this for their own ends believing it to be their entitlement to do so without shame. Public Servants are in fact worse than the elected politicians at this.

The public will have confidence to pay taxes only if 500,000 people in public service who add to the burden not to the relief, are let go. They can compete for the 1 million vacancies in the economy after all, to develop it and pay their share of the taxes.

You immediately solve the budget deficit without having to raise taxes.

Begin with the wasteful tri forces who eat too much into paying wages for people to parade in uniform, and do little else, while the private sector are already slaving away, and are asked to chip in more so that the lazy unproductive state sector can survive unscathed, and even get a retirement pension, which this hard working private sector worker is not even entitled to. What is this madness?

Anonymous said...

When the tax collection departments are the most corrupt letting off businessmen from investigation, because they are paid off, until there is a fair way of taxing people, don't have laws that burden an already burdened populace.

We should first ensure that the top 100,000 income earners pay their fair share of existing taxation first. VAT for example before increasing it for all hardworking people who are honest.

So the new act is a waste of paper and energy and bound to stifle growth, that right!

Anonymous said...

Tax compliance does not improve by a new Act. Only by improving the quality of the officers entrusted with collecting it. Time to get rid of the present carder who are too corrupt and replace them with new professionals, and a new attitude.

You will be surprised how the yield will double. This will prove the Inland Revenue Department is part of the problem and not the solution.

Anonymous said...

When the President categorically says that the Treasury was raided mercilessly within the first few months of the Yahapalanaya Govt. why should we pay taxes for the money to go into some rogues pocket? It goes completely against the principles of justice.

We earn fair and square, but choose to re invest instead of paying taxes to the state because they waste it. So what is morally justifiable?

Simple DON'T pay a dime to the rogues until the whole system is changed

Anonymous said...

Inland Revenue staff are just a shakedown mafia in Sri Lanka, bone lazy and cannot think outside the box. So they go after those with a tax file and hassle them for more payment so they can show collection rise to their bosses and in return for reduced hassle shakedown the tax payer for a kickback on the promise they will not hassle him any further for perhaps two years.

They must concentrate on those not on the net and audaciously flouting their wealth wherever they go, as they know they will not be shaken down, due to cretins in the tax service.

Until professionalism enters the tax service, no laws will be enforceable that benefit the state, only to benefit the staff of the IRD, who have become massively rich second only to the staff in the Customs.

Why don't they have a wealth declaration and check their claims carefully, as they know they wont get caught, they flout their wealth extravagantly.