Assessing the equity and efficiency of Sri Lanka's tax systems
As a team of local researchers in Sri Lanka were concluding their PEP-supported project - a rigorous analysis of the impact of recent taxation reforms in the country - they decided to convene a group a key policy and other stakeholders to discuss their findings and share views on the best policy options to address the related issues.
In their PEP-supported study, the researchers set out to realize the first empirical assessment of Sri Lanka’s income tax systems in terms of efficiency and equity.
The team used data from the 2006/2007 National Household Income and Expenditure Survey (HIES) to examine how specific tax reforms implemented in 2011 would affect both tax revenues and redistribution of income in the country (comparing the different tax systems between 2007 and 2011). The 2011 tax reforms in Sri Lanka basically aimed to increase tax revenues by expanding the tax base - particularly by removing tax exemptions for public sector employees - while keeping the tax rates “competitive” (i.e. reducing tax rates which also aimed to improve compliance of tax payers).
Results from the analysis show that, not only does the 2011 tax reform result in a decline in tax revenues for the government, but that the new system is even less progressive than that of 2007 (despite a steep increase in the “tax free” threshold). The researchers have thus conducted several simulations to identify the best policy options for the Sri Lankan’s tax system to achieve both efficiency and equity objectives.
You can find out more about these simulation results and the related policy recommendations through this brief summary of their research paper :
PEP Policy Brief 101 : Assessing the Impact of the 2011 Tax Reforms on Tax Revenues and Income Distribution in Sri Lanka
Or read the complete research report:
PEP Working Paper 2012-13: Tax Reforms in Sri Lanka: Will a Tax on Public Servants Improve Progressivity?
National Policy Dialogue on Taxation and Development
On November 23, 2012, over 40 officials, directors and policy advisors from different national and governmental institutions in Sri Lanka, as well as representatives from regional and international development partner organizations and academic institutions, all answered the PEP team's call to join them at IPS, to hear their PEP project's conclusions and ensuing recommendations.
Among the represented institutions are listed:
The researchers' presentations were followed by a Q&A period, which triggered a general discussion around several issues raised by their research work and findings; in particular, the discussion evolved around the decline of tax revenue (as a percentage of GDP) over time and the possible reasons or causes for such a decline, as well as the inability to increase the tax base in Sri Lanka.
After the main session, the attendants were convened to debate a series of specific policy issues among themselves, in smaller groups, during a "group brainstorming session", where they would suggest ideas and solutions regarding three selected questions put forward them.
In the end, all agreed that the event's tremendous success stemmed from bringing together various stakeholders into a face to face meeting, creating an arena for debate, clarification and mutual information. The group presentations following the brainstorming sessions repeatedly stressed the importance of dialogue and experience sharing between individual government organizations, as well as of the need for further research and analysis to produce evidence base for policy decisions, as essential components to ensure the implementation of a good taxation system for the island.
Some of the participants' inputs, ideas and solutions are reported by the organizers as follows:
"The IRD (Inland Revenue Department) was in the views that tax exemptions had released almost all potential tax payers from paying their dues, and highlighted the difficulty to identify potential tax payers as Sri Lanka’s economic activities are heavily based in the informal sector.
Another IRD participant stated that the government policies are using taxation only as a tool to control the economy and stated that its revenue generating motives are limited. This idea was debated by a representative of the Central Bank who stated that taxation as a tool to discipline the economy cannot be void of revenue generating motives and that there is scope for such activities by taking several international examples.
As solutions to the current taxation dilemma, the IRD was in the views that the tax system is too complicated for simple businesses to understand and that the system should be less complicated, less of a hassle and that the system should show in practice how the income received by tax revenues are directed towards capital expenditure in the island (it was revealed at the discussions that only about 20% of tax income generated by the government goes into capital expenditure).
In response, Professor W D Lakshman suggested that alternative ways of revenue generation are not being considered in Sri Lanka, such as government enterprises being exempted from income tax. It was his view that if these government enterprises are not paying taxes the said enterprises should generate their own income without depending upon budgetary allocations."
See also an example of how the event was broadcasted or covered by national media, through this online article from the Financial Times of Colombo's Daily Mirror.