What is best for Sri Lanka’s environment: Tax or incentives?

Mar 31, 2008 (LBO) – A Bill will be brought to Parliament within days to give broad-ranging discretion to the Minister in charge of the subject of Finance (President Rajapaksa at this time) to impose an environment conservation levy on households (as defined by the Bill),  goods made in Sri Lanka or imported into Sri Lanka and services provided in Sri Lanka.   Do not be fooled by the name.

This is a tax; it has nothing to do with the environment; and it subverts the control of finance by Parliament.

I am not opposed to taxes and levies.  I advocated the extension of the mobile-only levy to all phones in a previous column (if the first-best solution of phasing out industry-specific taxes cannot be implemented).   I am not opposed to levies and tolls.  I have long advocated congestion charges as a solution to traffic congestion and fuel wastage.  But I believe this tax is wrong.

Not for the environment

Let us begin with the name:  environmental conservation.   The tax should contribute to environmental conservation, if that term is not to be devalued like too many others.

The Bill mentions the Minister in charge of the subject of the environment (Minister Champika Ranawaka at this time), but he is only to be consulted on what to impose the levy on, and how much it should be:  consultation, not concurrence.   The Central Environmental Authority is mentioned, but in some vague and ill-fitting role of investigating those who do not pay the levy.

The money is to be collected by telecom operators and by the Customs and remitted to the Consolidated Fund (in the case of the telecom operators, through the Telecom Regulatory Commission).  I am sure Minister Ranawake is dreaming of what he will do with the cash.  But those who have dealt with the Treasury in these cash-strapped times know that getting any kind of money out of Treasury is easier said than done.  So there is little likelihood that the monies raised will be spent on environmental ends.

Most importantly, the levy does not create disincentives for actions harmful to the environment or incentives for beneficial ones.   A congestion charge on a vehicle using the roads at peak times creates a disincentive against that environmentally harmful action.

A volume-based charge on garbage creates incentives for source separation, composting, recycling and compacting of garbage.  In these examples, the charge is connected to behaviour.   You behave in a way harmful to the environment, you pay; you behave otherwise, you don’t.  These charges truly contribute to environmental conservation by deterring bad behaviour and rewarding good behavior.

But this Bill offers nothing of the kind.   The levy is not connected to “bad” behaviour, but to mere use.  The government will impose the levy on goods that are imported or manufactured here, on services, and on households that consume certain services or have certain things.  So it is likely (we have to speculate, because the Bill does not provide any specifics) that levies will be imposed on every TV set that is imported into Sri Lanka and on every telephone bill.

The environmentally undesirable action is not using a TV or telecom service (they are in fact environmentally beneficial, because they reduce the need for travel); it is disposing improperly the TV set or the phone or the computer.  If the objective is environmental conservation and not raising money for the government coffers, the levy must attach to environmentally undesirable actions, not to mere use.

So this is not about the environment; but about raising funds to feed the government coffers.   It is yet another tax that has been given a politically correct name.

Taxing households

The government wants to tax households (buildings or structures used as places of residence) that satisfy three conditions:  an electricity connection AND a telephone connection AND a one member residing in the household being the registered owner of a motor vehicle with more than two wheels.

Table 1:  Percentage of households with electricity, fixed/mobile phones and vans/cars, 2003-04

% households, excl. 3 Northern Districts (2003-04)
Electricity 74.9
Fixed/mobile telephone 24.5
Van/car 5.8

Source:  Central Bank Annual Report 2007, Special Appendix

This proposed definition appears to include three wheelers, which, however, appear to be counted as motor cycles/scooters by the Consumer Finance Survey of the Central Bank.  But the exact breakdown by vehicle types is available with the Registrar of Motor Vehicles, so this will not be a problem.

Leaving that ambiguity aside, it appears that the levy can actually be imposed on only a maximum of around 5.8 per cent of the 4.6 million households (~266,800).   Obviously more households have now got vans/cars than in 2003-04, so the figure should be higher.   But not all households with a vehicle and electricity have phones.   So the figure could be lower, balancing out the increase since 2003-o4.

The logic of including three conditions (electricity AND phone AND vehicle) is unclear.  The intelligent thing when dealing with multiple conditions is to pick the smallest category and forget about the rest.  The identification of telecom operators as tax collectors suggests that someone in Treasury thought that this would be the smallest category.

It could well be, because the Consumer Finance Survey does not differentiate between fixed and mobile phones, and between prepaid and postpaid phones.   Since 80 per cent of mobiles are prepaid, the question of monthly bills does not arise.   Even some of the so-called fixed CDMA phones are prepaid.   So if the government wants to collect from phone bills, it will be collecting from postpaid phones only.  This may well be the smallest of the three sets.

Then comes the question of revenue yield.   The Budget Speech stated that it was “estimated to raise Rs.1,000 million from this Environment Conservation Levy that will  be  introduced  from  2008.”  To achieve that yield from Rs 20 per month (0r Rs 240 a year), it would have to be collected from 4,166,666 households or around 90 per cent of the total.   What the above calculations show is that according to the conditions specified in the Bill, only about 25 per cent of households will be subject to the levy.

So this leaves open several possibilities.

The actual amounts charged may be higher than the Rs 20 a month mentioned in the Budget Speech.  In fact, within days of the budget speech, Minister Ranawaka indicated that the levy may be higher than Rs 20 a month.

Then there is the possibility that the household levy charged through the telephone bills will be in the range of Rs 20 a month, but that most of the revenue will be raised by slapping levies on imported items (collected by the Customs) and also items manufactured in Sri Lanka (no indication how this would be done; perhaps this where job creation for Minister Ranawaka’s storm-troopers-in-training comes in).

There is the little matter of double taxation.  The 25 percent of the households that have electricity AND a telephone AND a motor vehicle with more than two wheels are also the ones that will have TVs, and refrigerators and computers, the kinds of things likely to be subject to the levy by this government.   So the end result is likely to be an actual levy rate in excess of Rs 100 a month.

Emasculating Parliament

Violating the Constitution is the national sport; 13th Amendment, the 17th Amendment and Article 148.   When the UNP misguidedly extended unconditional support for the 2006 Budget (support was not the problem; unconditional was), some said there was no point in reading it or of debating it (and many or all did not).   But they should have read it: it contained authority for the Secretary to Treasury to move money among different accounts.

By the time someone went to the Supreme Court in 2007, the game was over.   The Chief Justice had decided that this was an executive power, not one set apart for the legislature.

Article 148 of the Constitution states that “Parliament shall have full control over public finance.  No tax, rate or any other levy shall be imposed by any local authority or any other public authority, except by or under the authority of a law passed by Parliament or of any existing law.”

It would offend common sense to interpret this Article as allowing Parliament to delegate to a Minister the right to impose levies on all households, any manufactured or imported goods, and any service provided in Sri Lanka, without any restrictions on amounts charged or any specification of the households, goods or services.  Delegation this broad and unrestricted is not delegation; it is abdication.

The language of the Bill contains no restrictions on amounts that may be levied or on what the levy may be imposed on: all imported goods and all goods manufactured in Sri Lanka; all services provided in Sri Lanka.  No mention anywhere of the amounts that may be charged from households or on goods and services.

Pretty much any good manufactured in or imported into Sri Lanka, or any service provided in Sri Lanka can be subject to this levy by an Order made by the Minister in charge of the subject of Finance.  No controversy, no fuss, just wait for a moment when we’re all excited about winning a cricket match or the middle of the Avurudu holidays and quietly issue a gazette slapping a levy on whatever the government wants to tax; or raise the levy amount collected through the phone bill.  This is not Parliamentary control of public finance; it is abdication of control.

The only remaining safeguards for the Constitution are Parliament and public opinion.   I hope they will not abdicate their responsibilities in the face of this pernicious Bill.