Taxes in Sri Lanka: limiting damage or doing good?

Sept 10, 2007 (LBO) – Once Parliament figures out what really happened when the taxation provisions were supposedly debated and passed on the 6th of September, hopefully, we will find out that the regressive LKR 50 tax on mobile subscribers has been removed.

So much for the braggadocio of the Government Whip, Minister Fernandopulle, about getting them passed without any changes.

What have we wrought?

Table 1:  Illustrative impact of VAT and current and proposed levies on mobile users (LKR)

Monthly spend 15% VAT 2.5% current levy 7.5% original levy 10% amended levy 7.5%+LKR 50 Tax burden reduced by amendment
200 30 5 15 20 65 -45
400 60 10 30 40 80 -40
600 90 15 45 60 95 -35
800 120 20 60 80 110 -30
1000 150 25 75 100 125 -25
1200 180 30 90 120 140 -20
1400 210 35 105 140 155 -15
1600 240 40 120 160 170 -10
1800 270 45 135 180 185 -5
2000 300 50 150 200 200 0

Note:  Actual amounts may vary slightly because tax-on-tax has not been calculated.

It is clear that Minister Rauff Hakeem’s amendment removes the vicious, regressive sting of the tax hike.

Everyone paying less than LKR 2,000 a month benefits from the change; the lower the bill, the greater the benefit.

Everyone paying over LKR 2,000 will pay more in taxes because of the amendment.

A majority of mobile customers benefit.   This is illustrated by the ARPUs [average revenues per SIM] of the largest and smallest mobile operators:

Table 2:  2007 H1 ARPUs for Dialog and Hutch (LKR)

Prepaid Postpaid
Dialog 414 1,709
Hutch 311 Not offered

Most, if not all, Dialog and Hutch prepaid customers will benefit (suffer less) from the Hakeem Amendment.

Possibly around half of Dialog’s postpaid customers may also benefit (suffer less), depending on the shape of the distribution.

But the levy is quadrupled from 2.5 to 10 percent.  Around seven million mobile customers are taxed while two million fixed customers are coddled.

Sri Lanka diverges further from the international best practice of recognizing and encouraging fixed-mobile convergence.

A customer at the Bottom of the Pyramid (BOP) who buys a hundred-rupee prepaid card every two weeks, will pay roughly LKR 50/month in taxes under the amendment, as against the LKR 35 she now pays.

Can we who campaigned against the unfair taxes on mobile customers consider this a victory?

Damage limitation

Policy intervention is rarely about first-best solutions.   Most of the time, we are trying to minimize the damage caused by some stupid act.  Sometimes, we are promoting second- or third-best solutions.

The fight against the regressive tax was an exercise in damage limitation.  It succeeded in limiting the damage, not eliminating it.

This was a great victory for the cause of evidence-based policy making.   The UNP took up the fight on its own and reached out for advice.  That is how we knew the Bill was on the Order Paper.  There was no back channel to Minister Hakeem.   He was convinced by the argument in the LBO, not by the writer.

The media coverage was abysmal at the start.  No one picked up on the original proposal made in June 2007 by the Ven Ellawala Medhananda Thero, M.P., of the JHU to impose taxes on the telecom sector that was “making excessive profits.”

The Lankadeepa broke the story on proposals to tax mobile customers on the front page on 12th of August.  But no one followed up until September 2nd, when the Sunday Times headlined the story.  The LIRNEasia blog carried it on August 14th, so inability to read Sinhala cannot be the excuse.  The LBO column ran on September 3rd.

Yet, from that point, the media played a very positive role, picking up the argument and the data and hammering it home.

Doing good

We must take this opportunity to reflect on this country’s broken government monetary and fiscal policies, masterfully analyzed by my fellow columnist Fuss Budget and by Dr Harsha de Silva.

We have to start from the fount of power in a democracy, the people.

The people must understand that government has no money.   All that government does is take our money and give some of it back to some of us.

While the Bill was being “debated” in Parliament, I was in Mahavilachchiya  discussing ICT policy with some very articulate young people.

We had begun by talking about how bad the new taxes were for the people of this village which first received mobile coverage in December 2006.   Then the discussion shifted to e-schools.    Someone said that they would get a minister to pay for proper data links for the e-schools that are currently connected by CDMA dial up.

There was no appreciation of the relation between the taxes and the subsidies.   I pointed out that if the government is asked to pay for expensive and non-sustainable data links to e-schools and the proliferating commercially unviable nenasalas, one must then also be willing to pay the direct and indirect taxes to enable those payments.

There is no free lunch; only money printing and the resultant inflation that gouges the assetless. To prevent inflation, there is no alternative but to feed the beast.

It is better to keep your money and pay for services than to give your money to government and ask them for services that are suboptimal at best.

If we don’t want to pay more taxes, we must put our obese and flatulent government on a diet.  We must demand a hiring freeze in government and voluntary retirement schemes.

Government must be downsized and focused on doing a few things well.

According to Minister Sarath Amunugama, the government currently employs a million people and pays half a million pensioners.  Therefore, it has no money left for anything else.  Million is a low estimate but comes from an authoritative source.  Others say that the government at all levels employ 6 out of 100 Sri Lankans; that is 1.14 million people.

Think about it:   our taxes must support the upkeep of more  than 1.5 million government functionaries, including their salaries, the electricity and phone bills in their offices, the fuel bills of their vehicles, the batta and subsistence,  the distress loans, duty foregone on the vehicles given to some, the salaries paid for days on strike, etc., etc.

The UNP was booted out for its hiring freeze.   The Sandhanaya immediately took in 42,000 new graduates and is planning to offer more jobs that it cannot afford to pay for.   Unless the people say no to this madness, they have no right to ask for lower taxes.

After this foundation is laid, then we can talk about the merits and demerits of income and consumption taxes, of value-added general taxation versus special taxes, of which schemes are regressive and which are not.

But unless the patient loses some weight, all we will be doing is damage limitation, holding our noses.