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Urgent reforms called for ensuring fiscal sustainability and inclusive prosperity

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Sharmini Coorey, a former International Monetary Fund (IMF) official, delivered a comprehensive critique of Sri Lanka’s economic policies, focusing on tax practices and governance issues. Coorey called for urgent reforms to ensure fiscal sustainability and inclusive prosperity.

Coorey invoked Adam Smith’s principles of tax policy—fairness, certainty, convenience, and efficiency. Despite some improvements from the 20122 tax reforms, Coorey highlighted persistent violations in Sri Lanka’s tax regime.

Coorey criticized Sri Lanka’s excessive dependence on indirect taxes, which disproportionately burden the poor. In 2021, a staggering 77% of taxes were collected through indirect means, surpassing both regional and global averages.

Coorey made these observations while delivering the 73rd Anniversary Oration of the Central Bank of Sri Lanka (CBSL) on November 1, 2023 at the CBSL Head Office in Colombo. Coorey raised concerns about the extensive tax holidays granted to corporations, especially under the Strategic Development Projects Act. She argued that such lengthy exemptions, lasting up to 25 years, disproportionately favor the wealthy. Further she noted the reliance on gazette notifications for major policy changes was highlighted as a governance issue, leading to uncertainty and creating opportunities for corruption.

Coorey has put forth a proposal encompassing six comprehensive tax policy reforms. The first suggestion involves passing a comprehensive tax law that necessitates uniform, non-distortionary tax rates.

The second reform advocates subjecting all corporations, including those in special zones, to the international minimum tax rate of 15%. Another proposed change is to eliminate the ministerial authority to introduce tax alterations without parliamentary approval.

Coorey also recommends establishing a single tax policy department within the Ministry of Finance to centralize tax policy decisions. Furthermore, she suggests implementing a sunset clause for existing tax exemptions, making them expire within 3 to 5 years. The final reform focuses on independent quantification and transparent reporting of all tax expenditures.

Coorey emphasized the necessity for improved tax administration in the fight against evasion, suggesting four specific actions. These include the reinforcement of management and oversight within revenue departments, prioritizing and empowering the large taxpayers unit to address tax evasion effectively, digitizing tax collections to reduce corruption opportunities, and enacting a tax administration act that imposes strict penalties for corruption. (TP)

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