Is Tax a Responsibility or a Burden? Part II

A critical policy misstep by the administration of President Gotabaya Rajapaksa was the substantial reduction in tax rates in late 2019, which significantly eroded government revenue. This drastic contraction in the fiscal base severely undermined public finance sustainability and contributed to Sri Lanka’s deepening fiscal and economic crisis in the years that followed.

- By C. A. Saliya

The intended purpose of these series of major tax cuts aimed at boosting the economy, including slashing the VAT rate from 15% to 8% and reducing corporate and personal income taxes. Several other taxes—such as the PAYE tax, Nation Building Tax, Economic Service Charge, and Withholding Tax—were also abolished. While these measures were intended to encourage investment and ease the tax burden, they led to a sharp drop in government revenue, with total tax income falling by nearly 50% in 2020. Experts estimate that the country lost between Rs. 560 billion to Rs. 700 billion due to these cuts, severely weakening the government's ability to fund public services and manage the economy.

Speechless NPP/JVP/AKD

Fortunately, the current government did not follow through on its election promise to remove taxes on essential goods such as food, medicine, and education-related items. Upon assuming office, they appear to have realised—albeit belatedly—that such a policy is neither fiscally practical nor compatible with the country’s economic realities. Moreover, adherence to International Monetary Fund (IMF) commitments and fiscal consolidation targets has likely influenced this course correction, reinforcing the need to maintain at least a minimal tax base on essential commodities.

Even the stalwarts of the National People's Power (NPP), led by the JVP, are often left speechless when questioned by journalists about the feasibility of their campaign promises, particularly those lacking fiscal credibility. Similar to their eventual admission of responsibility for the 1988/89 insurrection and related violence, they now lack the courage to acknowledge their latest failure. After coming to power, they realised that the promises they made were neither practical nor sustainable—but instead of admitting their mistake, they continue to avoid accountability.