Sri Lanka's import based taxes slow in second half

Neville Goonewardene, who headed Sri Lanka's customs department, told a forum of importers that the agency was given a target of 570 billion rupees in revenue to collect.

He said the agency usually collected about 38 percent of the revenue in the first half of the year and 62 percent in the second.

But imports have begun to slow in the second half especially car imports, putting the agency behind the target.

Goonewardene said imports of cement, ceramics and steel was up.

Sri Lanka jacked up car taxes to discourage imports in February amid warnings from the both analysts and the International Monetary Fund that it would hurt revenue and singling out particular imports made no sense.

Then mostly so-called tax slashed permits given to members state workers were coming in.

Sri Lanka's rupee peg came under pressure from sterilized foreign exchange sales and manipulation of interest rates to finance bank credit driven energy subsidies.

Sri Lanka started having exchange rate trouble after a money printing central bank which is capable of interest manipulation was created in 1951. Under a currency board (where no money printing was possible) the rupee was fixed from 1885 to 1951.

It is not known why authorities target particular types of imports as hurting the exchange rate ignoring all other sections of the balance of payments.

Analysts say the targeting of individual imports is the most myopic of Mercantilist type of external trade imbalance analysis based on focusing on very small sections of the balance of payments and ignoring all other parts.

Those who believe single items cause exchange rate effectively ignore the rest of the trade account (as labeled by humans), the services account, the full current account and the capital account of the balance of payments.

Some who have a slightly expanded Mercantilist myopia, critics say, believe that the full merchandise trade account (the trade deficit) causes exchange rate trouble and ignore the service account (which may be in surplus), the full current account and the capital account.

Some take a broader view and believe that a current account deficit causes exchange rate trouble, but they ignore the capital account that has to be necessarily in surplus for a deficit to develop in the current account.

Analysts say the problem is compounded by conventional balance of payments reporting where central bank reserve account movements are considered 'below the line' and glossed over and is used as a balancing item.

In a credit driven fiat paper monetary system where gold as a domestic asset plays only a limited role, there are no 'balance of payments surpluses' as all monetary reserves are invested abroad.

READER COMMENT(S)

6. Ishan Dec 15

Jack, i just explained the reasoning as the article bought it to question.
I neither endorse the idea or believe it is implemented effectively.

I believe the higher taxes are to promote local alternatives such as fresh fish, fresh milk, local sugar etc. Again - just explaining not endorsing.

5. Jack Point Dec 11

Ishan - are you aware of the items that are subject to the most amount of tax?

The answer is basic food items - canned fish, dhal, potatoes, dry fish, onions, chillies, milk powder, sugar.

These taxes are not small either; total taxes on canned fish, the food of the poor, is almost 50% of the retail price.

Just visit the Customs website and see what was imposed in the last budget:

http://www.treasury.gov.lk/depts/fpd/gazetts/ImportCessGazette20121109.pdf

This is on top of several other tax increases carried out during the year.

4. normal Dec 04

The gap between rich and poor is reduced by taxing Maruti's and importing BMWs with permits. Nice.

The state cannot reduce poverty. If the state allows people to work freely they will move out of poverty on their own accord. If the state does not depreciate the currency by printing money people's lifetime savings will not be destroyed. The value of their salaries will not be destroyed.

Before interfering and intervening in the lives of citizens, determining what is luxury to citizens while enjoying it themselves is obscene.

People on the street should not be allowed to be shamed into being second class citizens.

3. Ranjith Suvarapola Dec 04

I tend to agree with comments made by Riza. Most of the time the decision making by the top bureaucrats tend to get tainted by the wishes of their political masters and not necessarily by what is good for the country. Some of the proposals contained in the current budget are examples.

2. Riza Samsudeen Dec 03

I think the reason for such short sighted policies is the ignorance of the authorities. Despite having doctorates and other top qualifications they are not able to think and look at the big picture.

1. ishan Dec 03

The "idea" of the authorities to target particular imports is to reduce the gap between the rich and the poor.

Any import will put pressure on the exchange rate and weaken the rupee - Making everything more expensive for everybody.

Luxuries are taxed more so that they are more expensive to the importer. The "idea" is that this will reduce the import of luxury/targeted goods relative to the import of essential goods and reduce the pressure on the exchange rate.

All imports hurt the exchange rate - its just that the authorities target those they deem aren't essential.