Current tax system making the poor poorer, the rich richer

Representative image. Reuters.

Economists feel that the current tax system in Sri Lanka needs to be reformed, as it makes the poor poorer while the rich get richer, according to Sri Lankan media. Sunday Morning Post.

In Sri Lanka, less than two percent of the government’s revenue comes from direct taxes and only one percent of the population lives under the tax system. The increase in direct taxes and the expansion of the tax system are already overdue, reports say Diplomat.

Sri Lanka currently has a low tax to GDP ratio – over 8 percent currently. It was 12 percent to GDP before a series of tax cuts that were already given to win elections by political parties. Not only are tax revenues low, but direct taxes are less than two percent of GDP.

So it is more government revenue that comes from indirect taxes, and ordinary consumers, than those with higher incomes, who can pay more – thus making the poor poorer and the rich richer.

When the Gotabaya Rajapaksa government came to power in 2019, it increased the tax revenue and cut many other taxes. After this, in order to meet the expenditure, it began to impose indirect taxes. Indirect taxes are inflationary, because such taxes are paid on goods and services, said the head of the Department of Economics at the University of Colombo, Shanuka Senarath. Sunday Morning Post.

This means that a person making Rs 1 million a month and a person making Rs 500 a day will both be paying the same tax on the same goods or services, resulting in the poor paying more in taxes. The wealthy pay much less for these services, he said.

The tax system is incomplete and inflexible, Diplomat he explains, adding that Sri Lanka needs a progressive and effective taxation system that makes the rich pay their fair share. In order to avoid concerns about aviation, the government needs to put in place laws to ensure that things are in order that guarantee the property rights and trade of the growing middle and middle class people – which will protect Sri Lanka’s economic growth in the future.

The International Monetary Fund, which Sri Lanka hopes will pull the country out of the crisis, echoed the same sentiment. It said, “Due to low incomes, a major tax overhaul is urgently needed.”

Sri Lanka must “reduce the threat of corruption”, contain inflation and end electricity subsidies that have long drained the government budget without harming vulnerable citizens, he said.

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