CB expects no major change to current tax policy from budget

„Says absence of major changes would provide policy consistency on taxes for third year in a row „CB says it submitted views on tax policy on Sept. to be considered for budget process

„However, says there are areas where new or higher taxes can be slapped to support State revenue „Presentation of Budget 2022 in Parliament is scheduled for Nov.12

Although the government faces an uphill task in managing public finances amid significant decline in the tax revenues caused by pandemic-induced restrictions, it is unlikely to introduce major changes to its current tax policy, which has remained low and consistent for two years, according to the Central Bank.

As the budget 2022 is just around the corner, people, businesses and other stakeholders are seeking cues as to how the government would tinker the taxes, which were lowered exponentially in December 2019, soon after the new administration came to power to provide economic stimulus and re-build confidence among economic actors.

Although many factions expect the government to raise tax rates and impose new taxes to make up for the revenue loss caused by the pandemic and also to bridge a widening deficit, the Central Bank Governor Ajith Nivard Cabraal thinks otherwise as he is of the belief that the income from taxes would rise in tandem with the pickup in economic activity after virus restrictions are gradually lifted.

“We don’t foresee a major change in the taxation policy towards taxing further because we need to see a revival as well,” Cabraal said responding to a question on the likely changes in the tax policy in the budget 2022, last week.

“But for now, we think we can manage the situation with the current level of taxes,” he added.

Consistent tax policy is one of the hallmarks of this administration, which received praise from the business community as that gives them the muchneeded predictability for future planning.

Dr. P.B. Jayasundara, the Secretary to the President, had also expressed similar sentiments during a recent media interview.

On September 15, the Central Bank submitted its views to the government on the tax policy as a customary exercise prior to the budget.

“It’s a confidential exercise because if such information falls into the hands of others, they could misuse them. So, the proposals have been presented to the government. We will also come to know on November 12 when the budget speech is delivered what has actually been done,” he stressed. During the first seven months, State revenue was recorded at Rs.798.9 billion, slightly up from Rs.763.2 billion in the same period in 2020, yet accounted for only a fraction of the Rs.2,019 billion in total revenue in the budget for the full fiscal year, as the government had lost up to Rs.1,600 billion in tax revenues in the first six months alone after the pandemic sent the economy into hibernation for months, according to the Finance Minister.

At a time when the prices of everything from food staples to energy to durables have risen by exorbitant amounts, predominantly due to rise in global commodities prices and partly due to the weaker rupee against the dollar, rising taxes may not make sense as that would put additional burden on people.

While raising tax rates on big corporates and the wealthy remain a possibility, the government must tread that path cautiously as overdoing that could also hurt the economy due to the collateral damage created by way of less profits leading to less investments and job creation.

“I think the tax policy is already benign towards all tax payers. We have not unduly taxed any segment or any section of the population. And the taxes are fair at these times,” said Cabraal, who is a proponent of low taxes as a means to generate wealth by both individuals and businesses.

However, as of late, even the billionaires and the business community have asked for some level of higher taxes in the near term until the government rides over these difficult times, but warned that such should not be in the style of ‘Super Gains Tax’, imposed in 2015, which killed the business community spirits.

The International Monetary Fund, which is an advocate of revenue-based consolidation of national budgets, has also sounded a bit more lenient lately on running slightly stretched deficits in the short-term considering the heightened spending required for containing the pandemic as well as to provide financial support for the economically vulnerable, who became a casualty of pandemic-induced restrictions, before charting a medium to long-term path for deficit reduction and debt sustainability.

Cabraal however didn’t completely rule out the availability of areas in the economy where new or higher taxes could be imposed for additional revenues.

“But at the same time the areas where there could be some taxes imposed, would be areas the government could look at carefully,” he added.