High (INHUMAN SINHALA) taxes said to encourage illegal economy...!!!

High taxes said to encourage illegal economy

Sri Lanka's complex tax structure and high rates are working against the government by pushing consumers to move towards the informal economy that doesn't pay taxes, a senior economist said.
"The Central Bank estimates that revenue losses at import entry points due to illegal importation and under valuation of imports are in the region of 300 million rupees a day," Saman Kelegama, executive director at the think tank, Institute of Policy Studies, said.

"The Board of Investment estimated that in the mobile phone market alone illegal imports, spurred by high duty rates, have caused revenue losses in the magnitude of 600 million rupees."

Kelegama's comments came during a speech at the 14th tax oration seminar on anomalies of the tax system in Sri Lanka, organized by the Institute of Chartered Accountants of Sri Lanka, Wednesday.

Sri Lanka has one of the highest import taxes in Asia. Kelegama said a motor vehicle can be taxed as much as 300 percent from its landing cost.

Kelegama said that according to the motor traders association the number of brand new vehicles imported had plunged to 15,460 in 2008 from 25,382 imported in 2006.

"This year it is estimated to be 5,000," Kelegama said.

Unfair Taxes

However, despite the private sector being forced to pay high taxes, the inefficient public sector enjoys tax free salaries and perks such as duty-free car permits, often re-sold in the open market.

Currently there are over one million public servants in Sri Lanka.

Sri Lanka, in 1977, was one the first countries in South Asia to open-up her economy. In 1979 finance minister, Ronnie De Mel exempted public servants from paying taxes, Kelegama said.

This was done to give a temporary relief to fast rising private sector salaries as against static public sector wages, he said. In addition to this public sector official salaries are linked to an inflation index.

Till recent times Sri Lanka's inflation was amongst the highest in Asia.

"Sri Lanka is the only country in the world where public sector servants are exempted from taxes," Kelegama said.

"The principle of excluding state workers from tax may have been valid before, but with recent across-the-board pay revisions in the public sector the pay gap between public and private sector has narrowed."

The government is desperately trying to widen the tax net as only 600,000 Sri Lankans pay income tax.

A large proportion of non-state workers resent the exemption of state sector wages from income taxes.

"This can't be justified by any tax policy," Kelegama said.

Sri Lanka's rural community engaged in agriculture does not pay taxes, despite receiving heavily subsidized fertilizer paid up from tax revenue.

Fertilizer subsidizes and handouts are openly propagated by politicians to win over rural voters.

"It would be morally difficult for the government to promote greater tax payer compliance, while maintaining tax exempt status for its own employees," Kelegama said.

"If a suitable income threshold is set, then there should be no reason to exclude public employees from tax liabilities, but such a dramatic policy shift will have to be managed well owing to its political sensitivity." - LBO

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