COLOMBO: Sri Lanka needs to target higher revenue and simplify its tax system to meet its fiscal consolidation goal instead of squeezing expenditure, the International Monetary Fund (IMF) said late on Monday.
The country's 2015 budget, unveiled by President Mahinda Rajapaksa on Friday, spelt out plans to cut the budget deficit to 4.6 percent of its gross domestic product (GDP) next year from an estimated 5 percent this year.
Rajapaksa, who is also the country's finance minister, announced ambitious targets to cut the deficit to 3 percent of the GDP by 2017, while giving away handouts and concessions mainly to the rural poor amid plans to run for a third six-year term in a poll rescheduled for January.
"Fiscal consolidation needs to be re-focused from expenditure compression to revenue generation," Eteri Kvintradze, the IMF resident representative for Sri Lanka and Maldives told a Reuters post-budget forum late on Monday.
Sri Lanka has targeted tax revenue to rise to 12.5 percent of the country's GDP next year, from this year's estimated 12 percent.
Kvintradze said since revenue generation had fallen behind targets in the past, "heroic efforts of fiscal consolidation" have mainly relied on expenditure compression, "thus reducing the fiscal space for productive investment."
"The issue is not whether fiscal targets can be met, but rather, whether they can be met in a growth-friendly way, where budgets for infrastructure and human capital spending are fully implemented," she said.
DIFFICULT BUDGET
She also said the latest budget's revenue and expenditure proposals will make it "a difficult budget to implement".
The budget raised wages and social safety net spending and reduced value added tax (VAT) by 1 percent. It has proposed that over 61 percent of the revenue would come mainly through recovery of tax arrears.
Under a $2.60-billion loan programme from the global lender, Sri Lanka was able to bring down the rate of inflation and narrow its fiscal deficit. The loan was fully disbursed in 2012.
However, revenue from tax collections has been far below regional peers, with Kvintradze saying Sri Lanka's performance has been one of the weakest in the region, better than only Bangladesh and Pakistan.
"Despite past reforms, Sri Lanka's tax policy framework remains very complex," Kvintradze said.
"Number of taxes is still very high. Sri Lanka administers (a) total (of) 11 taxes at the national level and if levies are added, total number of taxes and levies could be as high as 25. Compare it to Singapore that administers only 5 taxes."
She also said the number of tax exemptions and special provisions remains exceptionally high.
"These make tax administration difficult and tax efficiency low. For example, efficiency of VAT collection in Sri Lanka is about one-half of the same indicator for Asia/Pacific countries."
S.R. Attygala, a deputy treasury secretary, responding to the comment said Sri Lanka had a tax revenue of 20 percent of the GDP in 1990, supplemented by export levies, but the country had pared those in order to encourage exports.
He also said recurring expenditure has been brought down to around 14 percent of the GDP from 24 percent during the 1990s.
Comments
Comments are closed.