Economy

Strategizing Fiscal Fortitude: The Imperative of a Tax Policy Unit in Sri Lanka’s Economic Blueprint

The necessity of a robust fiscal framework for economic and social advancement cannot be overstated. An effective tax system is at the heart of this framework, playing a pivotal role in generating resources crucial for public services such as healthcare, education, and infrastructure. These services are fundamental to promote growth and societal well-being. However, the success of a tax system transcends revenue collection; its effectiveness and fairness are crucial to achieve  equitable development and efficiency.

In an era where sustainable development and public trust in fiscal policies are paramount, the tax reform process must be thorough, backed by rigorous evaluation, quantitative analysis, and public engagement. This requires access to reliable information, data, and impartial analyses that consider the repercussions of tax reforms on revenue generation, income distribution, and the economy’s overall health. A Tax Policy Unit (TPU) emerges as a crucial element in this context, tasked with steering tax policy discussions through objective data analysis and interdisciplinary approaches. The absence of such units in developing nations, including Sri Lanka, impedes the ability to design and implement effective tax policies, thereby limiting public debate on fiscal reforms and potentially diminishing public legitimacy and tax compliance.

The International Monetary Fund (IMF), in its March 2023 Staff Report, underscores the significance of establishing a TPU in Sri Lanka as a critical component of the country’s reform agenda. This move aims to enhance the efficiency and fairness of the national tax system, drawing on the IMF’s extensive experience in providing technical assistance for tax policy. This initiative seeks to facilitate informed decision-making, ensure policy coherence, and support an equitable tax environment, leveraging the collective expertise of tax policy specialists.

For Sri Lanka, the adaptation and emphasis on the functions of a TPU are pivotal for several reasons:

  • Steering Tax Strategy and Engaging the Public: A TPU in Sri Lanka should lead in developing comprehensive tax strategies that align with the country’s economic goals and facilitate public consultation, fostering broad-based acceptance and compliance.
  • Analyzing Revenue and Economic Impacts: The TPU’s role in conducting in-depth analyses of potential revenue and broader economic impacts of tax proposals is critical, especially considering Sri Lanka’s challenges in revenue mobilization.
  • Guiding Policy Implementation and Legal Drafting: Overseeing the legislative drafting process ensures that tax policies are accurately reflected in laws, mitigating implementation gaps.
  • Supporting International Tax Negotiations: As Sri Lanka seeks to enhance its global trade and investment profile, the TPU’s expertise in economic impact analysis is invaluable in negotiating favourable tax treaties.

In the context of Sri Lanka’s economic recovery and its participation in the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) programme following the 2022 economic crisis, establishing a TPU is crucial. This period represents a critical phase for the country, marked by the urgent need for comprehensive reforms aimed at stabilizing the economy and steering it towards sustainable growth. The creation of a TPU is key to these efforts, providing essential analytical capabilities and policy guidance to navigate the intricate fiscal landscape effectively.

A TPU would lead tax policy reforms in Sri Lanka by conducting in-depth analyses to inform and shape decision-making processes. It is tasked with evaluating tax policy proposals from a range of stakeholders, including parliament, government agencies, the business sector, labour organisations, and the general public. Given the diversity of perspectives and the complex nature of tax reform, the role of a TPU extends to mediating between competing interests, ensuring that tax policies are not only technically sound but also socially equitable and politically viable.

Within the government framework, the Ministry of Finance is responsible for forecasting  public expenditures and revenues, while other ministries may propose tax system adjustments to support specific policy goals. Simultaneously, the Revenue Administration focuses on enforcing tax laws and improving compliance. These entities often have different objectives, leading to policy and administrative challenges. Here, the TPU’s contribution is to provide balanced, evidence-based analysis, helping reconcile these different goals and directing the policy-making process in alignment with the government’s overall tax policy agenda. This approach ensures that fiscal strategies are  beneficial to the public, enhancing taxpayer trust and compliance.

The TPU’s role is particularly important given Sri Lanka’s current engagement with the IMF. It serves as a crucial link, coordinating discussions across various ministries and agencies to ensure tax policy alignment with broader economic policies, including trade policy adjustments, strategies for regional and local government revenue generation, sector-specific initiatives, and policies addressing unemployment and labour market dynamics. Such a holistic approach is vital for Sri Lanka as it seeks to navigate through its economic recovery, aiming to establish a policy environment conducive to economic stability and growth.

The path to establishing a TPU in Sri Lanka involves a detailed and strategic approach that begins with securing broad governmental support. Highlighting the necessity of an effective, equitable system for domestic revenue mobilisation is essential. The Ministry of Finance, playing a central role, should articulate the TPU’s critical function in developing and refining tax policies to match Sri Lanka’s unique economic and fiscal landscape. This foundational step is instrumental in ensuring the TPU’s strategic incorporation into the nation’s fiscal framework and its effectiveness in enhancing the overall tax system. Recognising the TPU as an integral component of Sri Lanka’s economic strategy underscores the commitment to a more transparent, accountable, and efficient approach to fiscal management.

Initiating a TPU in Sri Lanka could commence modestly, reflecting the country’s specific needs and resource constraints. Starting with a small, specialised team that includes experts in direct and indirect taxation, legal experts familiar with Sri Lankan tax law, and economists focused on tax expenditure analysis and revenue forecasting could provide the TPU with a strong foundational base. This scalable approach allows the unit to gradually expand its capabilities and adapt to the evolving policy environment and fiscal requirements of the country. As the TPU develops, its functions can broaden to include more complex analyses and policy recommendations, fostering a deeper understanding of the intricacies of tax policy and its implications for economic growth and equity. This phased approach ensures the TPU’s growth is sustainable and aligned with national development objectives, laying the groundwork for a robust fiscal policy framework in Sri Lanka.

Furthermore, establishing formal agreements for the use of anonymised taxpayer information, publishing research findings, and potentially outsourcing specific projects to academic institutions are steps that can enhance the TPU’s credibility and effectiveness. In conclusion, establishing  a Tax Policy Unit in Sri Lanka is a  a critical step towards enhancing the country’s fiscal management and policy-making capabilities. Following a structured approach, as recommended by the IMF, can ensure that the TPU not only develops efficient tax policies but also promotes transparency, equity, and effectiveness within Sri Lanka’s tax administration. This development is essential for the country’s economic stability, growth, and long-term prosperity, marking a significant advancement in the management and execution of tax policy in line with sustainable fiscal governance.

By Sanjaya Ariyawansa
Economist
The Ceylon Chamber of Commerce

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