Opposition to taxes and inability to tax: Expenditure without taxation

The taxation proposals in the budget have been opposed through violent protests, demonstrations and strikes. At the same time, there are demands for additional expenditure in social infrastructure, social welfare and numerous benefits from the government. People want reductions in prices that decrease revenue, while opposing privatisation of loss making state owned enterprises that increase government expenditure. The government is in a fiscal trap: It is expected to increase expenditure and reduce revenue collection.

Taxation

Taxation is the means by which a government obtains revenue to undertake the whole range of activities that are necessary and benefit society. The government needs much higher revenue to meet its committed and current expenditures and finance development. Taxation is the means by which the government obtains revenue to finance its activities including the running of the government, salaries and pensions of government employees, servicing of the public debt financing education, health and social welfare and undertaking development projects that would in the end benefit citizens of the country as a whole. It is also the means by which law and order are maintained and defence expenditure is met. Without adequate revenue the business of government would be ill done.

Funding development

Taxation is important as the government needs revenue to fund development projects, health care, education and public transport. Without tax revenue, the government would not be able to fund essential projects and services that people need. One of the country’s fundamental fiscal flaws has been the inadequacy of government revenue to meet its expenditure.

Falling revenue

In contrast to the experience of other countries, our government revenue as a proportion of GDP has fallen as per capita incomes have risen. The inadequacy of revenue is clearly demonstrated by the fact that in recent years government revenue was not even adequate to meet the debt servicing costs.

In the early 1990s, government revenue was around 20 percent of GDP. This fell to as low as 11 percent in 2013-14 and increased to 13 percent in 2015.

The budget expects revenue to be 15.7 percent of GDP in 2017 and to progressively increase it to around 20 percent of GDP in 2020—a more acceptable proportion at our level of per capita incomes.

Civic ignorance

There appears to be considerable civic ignorance about the country’s public finances. The public believes that the government can spend without a limit and that it need not increase taxation. Successive governments have themselves given credence to this notion by their extravagant promises prior to elections.

The popular view is that the government has unlimited amounts of finances for handouts, decreasing prices, increasing employment in the public services and reducing taxes. There is no understanding that the capacity of the government to grant benefits is dependent on its revenue collection. ‘After all the government can print money!’

Basic economics

Good economic management requires that the government should not spend much more than the revenue it earns. A small fiscal deficit is acceptable, especially if the additional expenditure is on development activities that would enhance future output of goods and services. When it spends more than its income or revenue, the government must borrow and increase debt that is a burden in future years and requires higher taxation.

When the government resorts to borrowing, it not only increases the debt burden, but also leaves less money for private investment by reducing the supply and availability of funds and increasing the costs of borrowing.

Money creation

It is also true that a government can spend more than the revenue it obtains by the creation of new money. This is as much or more injurious to the economy as it leads to inflation. The increase in costs of living leads to hardships for the poorer sections and lower wage earners. It also leads to increasing costs of production and reduces the country’s competitiveness in international markets.

To correct the trade balance and reduce the strain on the balance of payments, it is necessary to depreciate the currency. This leads to a further wave of inflation. Therefore it is not in the interest of an economy to resort to money creation to finance its expenditure. It should attempt to live within its means. Tax revenue must be enhanced to find the fiscal space for its expenditure.

Specific taxes

Opposition to particular taxes could be justified if these heave unconscionable burdens. Admittedly some of the objections are of this nature. Some of the so called “taxes” were inappropriate inclusions in the budget. The increase in fines for traffic violations should not have been announced as a budget proposal. It could have been part of a revision in legal penalties with a minimum and maximum provision that the courts could decide on.

Water rates

The increase in water rates should have been a part of the routine increase in utility costs that are approved by the Public Utilities Commission. By unnecessarily announcing these as budgetary measures the Finance Minister gave ammunition to the joint opposition and the general public.

Concluding observation

The country is in a serious fiscal trap with the current inability to tax adequately. There were objections to VAT, the GMOA is opposed to the budget, bus operators struck work and so did three wheeler drivers in opposition to increased traffic fines proposed in the 2017 budget. However, the opposition to taxes without discussion smacks of a political agenda to destabilise the economy.

The opposition to the budget by the GMOA appears to be either due to their ignorance of economic issues, self interest to avoid taxation of their high income members who evade taxes or part of a political agenda orchestrated by the Joint Opposition.

Such opposition to economic issues is irresponsible and dangerous. Since the GMOA is more into issues of the economy and the disruption of government medical services rather than the improvement of medical services, they should be asked to propose taxation measures that would reduce tax evasion and increase government revenue to meet its expenditure.

This came in the form of a sharp reprimand issued by the UNCAT using less than the normal diplomatic language than is wont in responding to Sri Lanka’s failure to meet state party obligations under the Convention against Torture. The Committee professed itself ‘alarmed by the presence of the Chief of National Intelligence, Sisira Mendis, as part of the Sri Lankan delegation, since he was the Deputy Inspector General of the Criminal Investigations Department (CID) from March 2008 to June 2009.’

This was in the background of allegations of torture being leveled against officers of the CID during that period by detainees kept in the premises. The Committee proclaimed its ‘deep regret that neither Mr. Mendis nor any other member of the delegation provided information in response to the many specific questions raised.’

From any sensible standpoint, this drama was completely unnecessary. It beggars the imagination as to why this provocation occurred at all in the first instance. Was the Government so woefully ignorant and so bereft of representatives that it had to include an official whose very presence was bound to raise red flags? Or was it that it was so arrogant that it thought that no challenge would come in the first instance? In either respect, the conclusion was absurdly wrong. It put the country into an impossible position of having to defend itself against the indefensible.

Long list of concerns

The Committee’s concerns were made against a background of the State’s failure to perform. While acknowledging some advances on the ground after the change of political power last year, the Committee drew up a long list of pending issues. Heading this list was the finding that torture during law enforcement investigations remained routine in Sri Lanka. The focus was on practical issues rather than esoteric matters of law which were unsuccessfully attempted to be used by the Government representatives as proverbial red herrings.

Indeed, two emblematic cases illustrate persistent concerns pointed to by the Committee very well even though these were not specifically raised before the jurists as such. The first of these instances concerns a torture case of a teenager way back in 2003. This was a case of mistaken identity as much as in many other such instances painfully symbolized in the well known case of Gerald Perera an employee of the Colombo dockyard.

Perera was peacefully living his life until the police arrested him mistakenly when searching for a known criminal going by that same name and tortured him to the point of renal failure. He succeeded in the Supreme Court when an outraged Bench awarded him compensation but later, was killed by the very same torturers days before he was due to give evidence in the criminal trial under Sri Lanka’s Convention against Torture (CAT) Act.

Justice denied by laws’ delays

Here too, the tortured teenager living in a remote village had testified to officers of the Saliyawewa Police Station compelling him to sit on an ant hill for the alleged petty crime of stealing a necklace. He was thereafter hung from a beam with his hands tied behind his back. If that was not bad enough, the responsible police officers identified the real culprit the following day and tendered an apology to the teenager and his family. The Attorney General (AG) then filed an indictment under the CAT Act against the officer in charge (OIC) of the police station and a ‘grama arakshaka niladhari.’

This was a notable instance where the AG found it fit to indict the OIC in the wake of earlier refusals to do so in response to which judicial queries had been raised in Gerald Perera’s case. However, the case was concluded in the High Court recently with numerous delays and with six trial judges hearing segments of the testimony with no continuity. In all, the matter had taken virtually thirteen years to conclude with the judge on record finding that torture had been proved but that the identity of the accused as culpable in terms of the law had not been sufficiently established on the evidence.

Activists monitoring the case however contend that the identification of the accused was sufficiently established on the record by prosecution witnesses and have appealed to the Attorney General to go against the acquittal in the appeal court. The larger point here is that, when a torture trial takes so long to hear, what possibility could there be of a positive outcome in the case?

Use of detention to terrorise

The second instance which is relevant in this discussion is last month’s finding of another juristic body of the United Nations, this time the UN Human Rights Committee (UNHRC) which considered the torture and brutal interrogation in Colombo of a visiting Canadian citizen of Tamil ethnicity, Roy Samanatham who had been arrested in 2007 under the emergency law on flimsy charges of acting in a manner prejudicial to national security upon being found to be in possession of 600 mobile phones.

His protests that these were items that he had imported from Singapore for a friend’s business and that he was visiting Sri Lanka to carry out his marriage were to no avail. Unsurprisingly the Committee found a violation of Covenant rights and asked the state party to provide redress by locating and prosecuting those responsible for Samathanam's torture.

It was observed that the reasons for his arrest had not been given, he had not been detained on lawful grounds, he was not given the opportunity to challenge the lawfulness of his detention, that he was brought to a judge after one year of being detained, in or about September 2008 and that during this period he was held in detention without charges.

Common struggle for accountability

In sum, the UNCAT’s recent findings reflect these same striking patterns of impunity, regardless of whether it occurs in what part of the country or whether it targets individuals of a particular ethnicity. That fact may be remembered as driving what must be a common struggle to restore accountability in law enforcement.