Thursday, 05 December 2019 06:02

Tax cuts aim to stimulate economic growth

Markets in Sri Lanka surged after a long spell and people were delighted by the new tax breaks announced by the government but the move worried economic experts owing to a drop in tax revenue and cash inflows.

The government has taken radical measures to spur economic growth lifting business sentiment with a simple tax system with low rates and a wider tax net easing the burden on the present taxpayers, experts explained.’

Eminent economist and former Deputy Governor of the Central Bank (CB) W. A. Wijewardena told the Business Times that these concessions will result in a loss in revenue of about Rs. 650 billion to Rs. 700 billion or about a third of the government revenue while the adjustment should lead to a compensatory cut in government spending.

“But since it cannot be done, the other alternative is to borrow from the market immediately; that would involve allowing interest rates to go up and since it’s not the government’s intention, the most likely source would be to borrow from the Central Bank by issuing Treasury bills after increasing the Treasury bill limit through Parliament,” he pointed out.

“However it would involve compromising future inflation rate and if the CB wants to stick to the present inflation target of 4-6 per cent, it has to sell those Treasury bills at a higher interest rate; hence, an increase in interest rates is inevitable,” he added.

This is an unconventional stimulus package by using tax cuts to increase cash holdings with individuals and businesses; the caveat there is that individuals increase consumption of imported goods and foreign travel putting pressure on the exchange rate to depreciate, he emphasised.

It has to be avoided by resorting to exchange controls or import controls; whether companies reinvest those moneys will depend on their own reading of market prospects, he opined.

In the short to medium term, the government has to recoup the lost revenue by roping in more people into the tax net; it would automatically happen since abolition of PAYE and withholding taxes on interest income.

(LI)

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