Fixing the tax code: Fairness in, distortions out

KAUTILYA, the chief advisor to Chandragupta Maurya in the 3rd century BC, wrote in his treatise The Arthashastra that taxes should be collected "just as a bee collects honey from a flower without disturbing its petals."

- By Murtaza Jafferjee

Over the past four decades, vehicle taxes have been an easy revenue source in the context of generous income tax policy and weak administration

Many centuries later, Jean-Baptiste Colbert, the First Minister of State under King Louis XIV of France in the 17th century, famously observed that "the art of taxation consists in plucking the goose so as to obtain the maximum number of feathers with the least amount of hissing." Both metaphors, though separated by time and culture, capture the essence of good tax policy: revenue must be raised with minimal economic disruption and minimal public resistance.

Tax policy refers to the design and intent of the tax system-its laws, rates, structures, and principles that determine what is taxed, at what rate, and for what purpose. In other words, a well-designed tax policy protects the "petals" and avoids "excessive hissing." The 17th IMF program is centred on revenue-based fiscal consolidation. There is no dispute about the necessity of raising revenue Sri Lanka's tax collection was unsustainably low. The real issue is how revenue is being raised and who is bearing the burden or escaping it.

A sound tax policy must be grounded in the following principles equity (progressivity and coverage), efficiency (minimise distortions and disincentives), simplicity, transparency, revenue sufficiency, stability and predictability, neutrality, administrative feasibility and economic growth compatibility (encourage investment, productivity and innovation).

Below is a list of policy inconsistencies in the current tax system that should be addressed in the upcoming Budget.

Do away with tax incentives offered for firms in the Port City