In the backdrop of Sri Lanka making its way back from its most devastating economic crisis, the Institute of Chartered Accountants of Sri Lanka held its 3rd Annual Economic and Tax Symposium recently, under the theme ‘Shaping Fiscal Foundations: Tax Policy as a Catalyst for Sustainable Economic Growth’. Attended by a cross section of representatives of various industries, practitioners and students, the Symposium underscored CA Sri Lanka’s commitment to fostering dialogue and development in economics and taxation.
The opening ceremony, held on 1 August 2024, was graced by Mr. Heshana Kuruppu, President, CA Sri Lanka, Mr. Tishan Subasinghe, Vice President CA Sri Lanka, Ms. Lakmali Priyangika, CA Sri Lanka Chief Operating Officer, and Mr. Saman Sri Lal, Council Member and Alternate Chairman, Tax Faculty.
Ms. Sarah Afker, Chairperson, Faculty of Taxation in her welcome speech spoke of the challenges and opportunities in a rapidly changing global economy, emphasizing the relevance of tax policy, economic objectives, and governance.
The Symposium featured esteemed speakers and panelists whose insights stimulated meaningful dialogue. The first session covered the current macroeconomic status, focusing on the IMF program and restructuring of SOEs. The second session explored taxation on ESG, the UNDPs sustainable development goals, and international trade tax policies. Sessions three and four on the 2nd day of the event examined the misalignment between economic objectives and tax policies, and a futuristic view with the digital ID project, potential taxes, and industry concerns.
CA Sri Lanka President, Mr. Heshana Kuruppu in his welcome speech spoke of the focus CA Sri Lanka has on enhancing economic resilience, improving tax compliance, and creating a fair and efficient tax system. He emphasized the importance of progressive taxation to reduce income inequality and support public services, as well as implementing green taxes to drive sustainable practices.
Among the many interesting viewpoints shared were those by Dr. Roshan Perera, Senior Research Fellow, Advocata Institute, who stated that the repeated need for assistance from IMF (which Sri Lanka has engaged with seventeen times up to now stems from common issues identified across these programs. Key themes include a lack of progress in structural reforms, insufficient spending on education and health, fiscal deficits, and foreign exchange crises. These issues have persisted due to both external shocks, like the global financial crisis and the pandemic, and internal shocks, such as the civil conflict.
She underscored the need for a flexible exchange rate, stable inflation, and a robust monetary policy framework and added that the Central Bank Act, which prevents the Central Bank from monetizing the deficit, is a positive step towards achieving these goals.
During the panel discussion, Dr. S. Jegajeevan, Director, Central Bank of Sri Lanka stated that macroeconomic stability has improved, and there are positive signs of recovery, yet the crisis is not fully resolved.
She further stated the outlook for the next two years is uncertain, especially due to upcoming elections and that the continuation of the IMF program and consistent policy implementation are essential. She added that the reserve position has improved, with reserves being built up organically rather than through borrowing, which is a positive sign.
The Chairman of the Ceylon Chamber of Commerce, Mr. Duminda Hulangamuwa showed cautious optimism stating that the future outlook of Sri Lanka's economy is very sensitive and can be interpreted in various ways. He stated that the biggest risk to reforms is political, and that public patience and acceptance are vital, stating that if Sri Lanka keeps on the current path, despite its hardships, the economy can gradually improve but will take potentially 5-6 years.
Director General of the State-Owned Enterprises Restructuring Unit, Mr. Suresh Shah said that SOEs need to be restructured to address issues like subsidies, which have led to significant losses. He stated that the best approach is comprehensive reform, not just divestment. He shared that the SOE policy, approved by the Cabinet, includes principles for governance, disclosure, and ending subsidies parked in SOEs. These principles are being incorporated into the Public Commercial Businesses Act, now in draft form.
Mr. Shah emphasized on the “crowding out effect” that Dr. Roshan Perera highlighted during her presentation where debt to the public sector had overtaken private sector debt over a period and stated that civil society must push for political agreement on fundamental economic principles to transform the nation's economy.
In Session 2, Dr. Lyla Latif, Technical Expert - Tax and SDGs, United Nations Development Programme, emphasized that Environmental, Social and Governance (ESG) is now a benchmark for evaluating the sustainability and ethical impact of investments in companies. Latif highlighted the importance of ESG in understanding the broader impact of companies beyond their financial performance. She provided examples from Kenya and Morocco, illustrating how ESG principles have driven sustainable development and attracted foreign investment.
She further explained that tax policy is a powerful tool for governments to shape corporate behavior and drive social change. Latif cited India’s CSR tax law, which mandates large companies to spend a percentage of their profits on social and environmental projects, as an example of how tax policy can enforce ESG compliance.
Dr. Latif then addressed the relationship between ESG and SDGs, explaining that while ESG focuses on corporate behavior, SDGs provide a broader global framework for sustainable development. She stressed that ESG initiatives can contribute to achieving SDGs, creating a virtuous cycle where progress in one area supports the other. She provided examples from Rwanda and the Philippines to illustrate how tax policies can directly and indirectly support the achievement of SDGs. Rwanda's e-taxation system enhances governmental transparency and accountability, while the Philippines' tax incentives for businesses in less developed regions promote economic equity and concluded by discussing the nexus between ESG, SDGs, international trade, and transfer pricing.
Joining the panel discussion, Ms. Gayani Hurulle, Senior Research Manager, LIRNEasia observed that many large technology multinationals are not paying their fair share of taxes. Additionally, there's a growing gray area about who is considered a worker in the digital economy. She said there are diverse challenges for ensuring workers' rights, while maintaining sustainable business practices.
Customs Management Expert, Mr. Ravindrakumar meanwhile, spoke of the relationship between customs valuation, related party transactions, and competing interests of Customs and Inland Revenue in matters relating to transfer pricing.
On day 2, Mr. N. M. M. Mifly, former Deputy Commissioner General of the Department of Inland Revenue and Tax Consultant, MIFA Tax Consultation, emphasized the disconnect between economic growth and tax policies. He pointed out that while tax revenue has increased during periods of low economic growth, it is due to the violation of key taxation principles: fairness, consistency, convenience, and efficiency. This has resulted in a perception that the current tax system is "legalized robbery" and may lead to negative long-term impacts such as brain drain and capital flight.
Mr. Suresh Perera, Principal - Tax and Regulatory, KPMG meanwhile highlighted the inconsistency of Sri Lanka's tax policies with its economic objectives, using the example of the imputed rental income tax. This tax, intended to increase revenue, discourages homeownership and does not fit Sri Lanka's tax framework. He stated that the current tax system fails to meet its very purpose - generating revenue, redistributing wealth, repricing to incentivize or disincentivize industries, and representation. He stated that the current tax policy-making process in Sri Lanka, was unscientific and influenced by lobby groups and politicians rather than being led by data and research. He called for the establishment of a Tax Policy Unit (TPU) to ensure a systematic and accountable approach to tax policy making.
Speaking of expenditure minimization, Ms. Nilanthi Sivapragasam of Aitken Spence PLC stated that from a private sector perspective, the removal of the 14% concessionary tax rate for exporters and the proposed removal of exemptions for export of services are discouraging. These measures counteract the goals of the Economic Transformation Bill, which aims for sustainable economic growth, increased GDP, reduced unemployment, and improved export revenue. She pointed out that exporters are already struggling due to global economic downturns and increased competition. The tax policies exacerbate these challenges, making Sri Lanka less competitive and companies may relocate their operations offshore to avoid high taxes, leading to a loss of foreign exchange earning potential and economic opportunities for Sri Lanka.
Furthermore, she also noted how high personal income taxes are driving skilled professionals out of the country. Noting that while tax rates needed to increase, the current structure—with reduced slabs and higher rates—burdens even moderately high earners, which incentivizes professionals to seek better opportunities abroad, contributing to a brain drain and hindering economic growth.
Among the solutions discussed were the need to increase female participation in the labor force, bonding students who receive free education to serve the country for a certain period, registering more taxpayers to reduce the tax burden on existing ones and addressing tax evasion and ensuring all income is taxed.
Professor Sirimal Abeyratne said that it is common for citizens to leave countries in times of crises, and we have seen this happen in Lebanon, Ghana, Pakistan, Venezuela, and Argentina which have faced similar crises, leading to mass migration. He spoke of the permanent income hypothesis which says that expenditure patters are shaped according to long term income and the sudden increase in taxes has reduced the disposable income of Sri Lankan middle class significantly leading them to poverty levels in some instances though not officially classified as such. Mr. N, R. Gajendran, Partner, Gajma & Co, said that growth is essential for debt sustainability, but first people should live. Savings and interest will follow.
Ms.Thanuja Perera, Tax Policy Advisor, Ministry of Finance, explained the importance of revenue mobilization for fiscal consolidation. She said for 2024, the revenue target is 13% of GDP, and 6% has been achieved in the first five months. She spoke of how addressing the loopholes and ensuring that the refund process is efficient in the government’s bid to abolish the SVAT systems is crucial.
During the Symposium, policy recommendations such as improving tax compliance and reducing evasion through practical measures, such as linking digital IDs to tax systems and providing support to the MSMEsector, were recommended.
Mr. Nishan Mendis, Chairman SLASSCOM and Partner, Deloitte said that the IT industry is in fact low hanging fruit and should be encouraged. The industry had its own set of requests which included phased implementation of new taxes and tax deductibles for staff costs. They also requested to be benchmarked against peer countries, to avoid losing business to more tax-friendly nations.
Mr. Moiz Rehmanjee of Hemas Holdings stressed the need for policy consistency and requested the Finance Ministry to reconsider their decision of abolishing SVAT early next year. He said the current system was patchy but not broken and to fix things where required but not withdraw the system in toto.
Ms. Gayani De Alwis, Vice Chairperson, Women’s Chamber of Industry and Commerce, stressed the need to support the MSME which are the backbone of our economy. The economic crisis has exacerbated their issues and banks and the government should focus on them and help them in this period if they are to sustain their businesses.
The overarching message from all discussions was the need for policy consistency and seeing the reforms through. Proposed measures for improving tax compliance included making digital transactions mandatory for transactions above a certain threshold to enhance traceability and compliance, automating and integrating systems such as linking corporate banking systems with the tax authority’s system for real-time tax transaction tracking and establishing efficient refund processes.
CA Sri Lanka will be compiling all recommendations made at the symposium and submitting them to the Ministry of Finance as a budget proposal at the end of August.
