Financing for Development Follow-up 2023 17 – 20 April 2023
SIDE EVENT: “SDGs and Taxation: Lessons learnt and best practices”

Statement by Hon. Shehan Semasinghe, State Minister of Finance
19 April 2023

Thank you for the of the invitation to participate at this side event to focus on the linkage between SDGs and taxation from the Sri Lankan perspective.

As we are all aware, government revenue mobilization through taxation is important to achieving the Sustainable Development Goals by 2030. On the one hand, taxes are required for governments to make the necessary environmental and social investments. On the other hand, through the tax impact of organizations on the SDGs.

The research finds that the corporate tax rate is positively and  significantly associated with the sustainable development goals. The result implies that a higher rate of corporate tax plays a vital role in achieving the sustainable development goals in the emerging economies.

However, it is no easy task in understanding the nuances between taxation and SDGs. It is hoped that this forum will help to better understand the concept among policy makers and tax administrators.

Most of our countries have tax legislation that does not capture contemporary needs and practices and capacity shortages that lead to tax avoidances and evasions thereby losing potential tax revenue.

Sri Lanka has long been committed to the achievement of SDGs. We have made significant investments in key areas of education, health, social protection, enhancing access to key utilities, and conservation of the environment throughout history. Sri Lanka has impressive records on literacy, educational attainment, low maternal and infant mortality due to our free health and education policies. We have also reached impressive levels in enhanced access to electricity and clean portable water. It is not difficult to appreciate that all these welfare state facilities have to be financed and that the principle source of revenue collection is from taxation whether direct or indirect. How then do we share the burden across the canvass of the community in an equitable manner, having regard to the governance structure of a welfare state.

Sri Lanka is currently emerging from an unprecedented economic crisis that stared in early 2022. We are presently addressing this with Thad assistance of the international community INCLUSIVE of official and commercial creditors and other development partners. I am pleased to inform that that the IMF BOARD APPROVED TBE We have an IMF-Extended Fund Facility Programme LAST month. Consequently, we have been able to address tInflation effectively from the historically high figures of last year. We have also been able to address the shortages of essential items.

Mr Chairman, Fiscal imbalances that existed over a considerable period of time contributed greatly to the severe economic conditions currently prevalent in the country. low government revenue and high recurrent expenditure have led to consistent budget deficits over several decades. This has resulted in raising public debt which has reached unsustainable levels. In addition, untimely Tex reductions in late 2019, further contributed to the further loss of revenue

While duly recognizing past mistakes and lessons learned Sri Lanka is now committed ambitious to a structural reform agenda backed by an IMF programme. Revenue-based fiscal consolidation is one of the key features of the reform programme. Accordingly, we have implemented revenue enhancement measures since June 2022 to enhance the fiscal space. This includes making the tax system more progressive by widening tax bases and removing sector-specific exemptions and concessionary rates. Particularly, the Personal Income Tax Structure has been revamped by reducing the tax-free thresholds and by increasing the marginal tax rates. With the implementation of these revenue enhancement measures, it is expected to increase Government Revenue to 15 percent of GDP from 8.3 percent of GDP recorded in 2022.

These revenue based reforms would contribute to reducing the after-tax income inequality, ensuring that high-income earners contribute more to the tax revenue. A progressive taxation system that is fair and equitable is essential to ensure that the burden of financing the SDGs does not fall disproportionately on the poor and vulnerable.
Further, in recognizing the importance of revenue mobilization, Sri Lanka has also focused attention on enhancing an effective tax administration to mobilize necessary resources to achieve the SDGs. This includes the opening of a tax file for every citizen over 18 years of age, introducing a mandatory electronic tax filing system for non-corporate taxpayers, and enhancing tax audits and controls.

Mr Chairman, whilst enhancing government revenue, expenditure containment measures are also implemented to complement the government’s efforts towards fiscal consolidation. These include measures to reduce the operational expenses of the government and to increase accountability of the appropriation of public funds. However, ex rationalization of the appropriation of public funds would compromise the allocation of financial provision for health, education and social protection

In this context Mr Chairman, we have also undertaken significant reforms to strengthen Social Safety Nets (SSN) in order to cushion the poor and vulnerable from the impact of the economic challenges. While extending the outreach-of the SSN programmes with a view to identifying genuine beneficiaries, we have introduced new eligibility criteria for selection based on objective and verifiable factors.

Mr Chairman as I mentioned before my Government has aligned itself with development programmers in line with the SDGs. We have placed emphasis on ensuring food security through sustainable agriculture practices. Further, we are committed to shifting to renewable energy sources.

You will appreciate that by an incremental enhancement of fiscal space, we would also be able to enhance investments in relevant infrastructure development. In addition, we will move to ensure that our public financial management is transparent and accountable supported by a new public financial management law. The law will provide for, stringent fiscal rules that would require a proper evaluation of the appropriation of public resources.
Mr Chairman we can assure you that Sri Lanka will put in place all such measures to enhance revenue, strengthen tax administration and align development policies with SDGs, we remain much hopeful that Sri Lanka will be able to recover from our current challenge and will not be forced to see a reversal of the SDG gains it has achieved so far.

Thank you.