Debate on Financial Bills:

Policy framework based on Mahinda Chintana

Text of the speech by Senior Minister of Human Resources DEW Gunasekara at the Debate on Finance Bills in Parliament on March 24, 2011

The Government through the budget for 2011 announced several changes with regard to finance, tax and investment. The legislation related to these changes is today placed before the House for approval. This is in line with Government’s medium term policy framework based on Mahinda Chintana. Of those bills presented within at my disposal, I propose to restrict my comments to the amendments, relating to taxation.

In this connection, I would like to draw the attention of the Honourable member to some facts relating to political economy so that they could easily comprehend the political thinking behind the proposed legislations and the historical context in which that political thinking was conceived.

Since 1977, Sri Lanka gradually transformed into what is now conceptually termed as neo-liberalism under President Premadasa from 1989-1993, neo-liberalism reached its peak. Bad governance, violation of human right trends of chauvinism both in the South and the North, anti-Indian phobia - all commenced at the peak point of neo-liberalism during this period.

Economic philosophy

It is our firm conviction that people of this country shall not allow a return of Premadasa era. This does not make us believe that Premadasa was solely responsible for those trends of thought. It was an international factor brought about by Reagen-Thatcher based on Milton Friedman’s economic philosophy that influenced the political thinking of the UNP since 1977 which was put in effect vigorously under President Premadasa.

That is why we do not believe in renaming Premadasa Stadium. We do not forget his share of contribution to the Sri Lankan society.

Even with the change in government in 1994, we were not able to reverse that trend due to two main factors (i) Domestically the balance of forces within the Government and in the country. (ii) Internationally the acceleration of neo-liberalism with the collapse of socialism in Europe and unipolarity reaching its ascendancy.

World power

With the dawn of the 21st Century, the international factor started changing with the rise of China as a world power, awakening of Latin America, Democratization process in the African Continent, giant economic strides in the continent of Asia and re-emergence of Russia, as a political and economic factor.

It is in this historical context that the decisive shift from neo-liberalism in the development policy framework took place in 2005 with the manifesto of Mahinda Chintana. A further shift from neo-liberalism took place in 2010 with the manifesto of Mahinda Chintana - Vision for the future.

The result was that the State Sector role in the market economy was enhanced. The ideology of neo-liberalism otherwise known as ‘small government’ took the back seat.

We must understand that even after 2005, the market-orientation continued and will continue but subject to necessary regulations and policy-based taxes or subsidies. The State has now been made to acquire a greater leadership role in the economy, a leading role in infrastructure development investments. Public employment programs have been implemented. Privatization of State-owned enterprises was abandoned as a policy. The Government intervention was considered necessary and desirable.

Government revenue

We were not prepared to accept IMF prescriptions like Structural Adjustment Facilities etc.

In this context, we are required to effect changes in tax policy, tax laws and tax administration.

Under neo-liberalism Sri Lanka’s tax capacity started declining. The government revenue as 25 percent of the GDP in 1977 was reduced to 13 percent by 2004. Despite our war on terrorism, despite global crises in food, energy and also financial and economic crises, we were able to raise the Government revenue to 15 percent by now.

We have reversed the downward trend in Government revenues in general and in tax revenue in particular. That is an achievement, reversing the trend which started operating since 1978. So, with reforms in tax policy, tax laws and tax administration, we hope to raise the Government revenue to a higher level. If the revenue can be raised, we will be able to accelerate significantly the socio-economic development.

Tax policy

We must remember, at low levels of development, the tax structure is bound to have a bias towards concentration in indirect taxes. This needs change because burdens of indirect taxes generally fall on the working people. Emphasis on direct taxes is necessary and desirable.

Under the new economic policy of UPFA, the new tax policy has several socio-economic objectives - (i) Revenue collection, redistribution of income, macro-economic control, protection of industry, economic growth, restraining of undesirable elements of consumption, and so on.

Our principles of taxation are equity, progressivity, simplicity, efficiency and so on.

In order to realize the objectives of the Government, it is necessary to reorient and streamline the tax policy, tax laws and tax administration.

To give effect to these changes, a greater share of responsibility has to be borne by the Inland Revenue Department.

Inland Revenue Department

The Head of the then Taxation Commission Prof Nicholas Kaldoor once remarked that a tax officer should be professionally an economist, a lawyer and an accountant.

The Inland Revenue Department at that time was the most prestigious Department of highest integrity, calibre, professionalism, tax payer friendly.

I am as a former tax officer, proud to have been a product of that Department which moulded my outlook.

I wonder whether the Department still enjoys that privileged and prestigious position. I cannot shift the blame on to the tax officers in general. Society has failed to turn out such products for the Department.

Time is ripe for a change. I hope that the recommendations of the new Taxation Commission will pave way for this change.