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Sri Lanka Budgetary Process, Revenues, and Expenditures
The budget is announced annually in the budgetary speech of
the finance minister, which is normally made in November. This
speech reviews the economic situation of the current fiscal year,
which corresponds to the calendar year, previews the government's
expenditure program for the next year, and sets forth any
proposed changes in taxation. Sometimes adverse public reaction,
or pressure from members of parliament within the ruling party,
forces changes in the measures announced in the finance
minister's speech, but once formally introduced in parliament,
the budget proposals are normally passed intact. All money bills
must be introduced by a minister acting on behalf of the
government. Opposition members may propose amendments to reduce
expenditure under a specific head, but the success of such a
motion would be a major defeat for the government and would
probably cause its resignation. No amendments concerning taxes or
to increase expenditure are allowed. Supplementary provisions are
often presented by the government during the year. The
government's finances are monitored by an auditor-general
appointed by the president.
The colonial administration was heavily dependent on indirect
taxes, especially import and export duties. Some changes in the
structure of the revenue system were set in motion by the report
of the Taxation Inquiry Commission, which was published in 1968.
At that time, the tax system proper (exclusive of such items as
fees, charges, and sales) of the central government consisted of
various separate revenue sources: personal income taxes,
corporate income taxes, wealth (luxury) tax, business turnover
tax, import and export duties, resale of automobiles tax, and the
levy on the transfer of property to nonnationals. The system was
characterized by high taxes on major exports, by a miscellaneous
collection of import taxes, and by high rates of income taxation.
The income tax on corporations was 50 percent, and the top
marginal rate on individuals was 80 percent, with rapid rates of
progression. The wealth tax on individuals was also high.
The Taxation Inquiry Commission concluded that, for steady
revenue flow, dependence should be placed on a broad-based set of
consumption taxes, with differential rates to minimize the
regressive tendency inherent in the consumption tax. This was
recommended on a strictly pragmatic basis because both incomes
and exports were already being taxed almost to their limit. There
was thus no alternative to more and higher import duties and
excises to secure the necessary additional revenue. Because the
commission believed that taxable imports would in the future be
replaced by domestically produced substitutes, it argued that
consumption taxes would increasingly have to bear the brunt of
the search for new revenue. The commission also advised the
government to raise the exemptions, lower the top rates, and ease
the progression rate on income, wealth, and gift taxes; to raise
the excise taxes on tobacco, arrack, beer, and domestically
consumed tea; and to increase the coverage and reduce the
exemptions of the turnover tax. Most of these recommendations
were implemented soon after the publication of this report.
In 1975 sales and turnover taxes raised almost 30 percent of
the government's revenue, and income taxes and tariffs each
raised about 15 percent. A little over a decade later, in 1986,
the importance of the sales taxes and tariffs had increased, but
income taxes raised a smaller proportion of the revenue than
earlier (see
table 11, Appendix A). In 1986 the general sales and
turnover tax raised 15.4 percent of revenue, and selective sales
taxes, which were primarily imposed on tobacco and liquor, raised
10.7 percent. Import duties accounted for 24.1 percent and export
duties for only 3.8 percent. Income taxes raised 11.5 percent of
state funds in 1986, over two-thirds of which came from corporate
sources. Studies carried out in the 1970s, both before and after
the liberalization of the economy, indicated that the tax system
as a whole operated in a progressive manner. Almost 25 percent of
the government's revenue in 1986 came from nontax sources, mainly
interest, profits, dividends, and other receipts from
government-owned enterprises.
In 1988 the maximum rate of personal income tax was 40
percent and the ceiling on both income and wealth tax was 50
percent of a person's income. The 1988 budget reflected a cut in
the highest level of import duty from 100 to 60 percent. A large
proportion of revenue from business came from the established
forms of economic activity because new industries, such as
tourism and the free trade zone factories, had preferential tax
treatment.
No postindependence government has attempted to change, as a
matter of policy, the proportion of the nation's GDP that it
takes in revenue. This proportion generally hovered at just over
20 percent between 1950 and 1983. Annual variations derived more
from external factors than from changes in government policy.
Revenue from export duties on tea, rubber, and coconut, for
instance, varies according to the price of these commodities on
the international market. In 1984 when the price of tea rose
temporarily, the government increased the export duty in order to
gain a share of the windfall profits, and total revenue rose to
24.5 percent of GDP. In 1987 government revenue was only slightly
below this level because of tax increases brought about by
increased fiscal pressures, largely the product of higher defense
allocations and the heavy foreign debt.
Government expenditure has consistently exceeded revenue,
often by a considerable margin. From 1960 to 1977, expenditure
was about 28 percent of GDP. After 1977 it increased, mainly as a
result of investment in infrastructure. Between 1978 and 1987,
the government spent around 38 percent of GDP. Of the nearly Rs70
billion spent in 1986, about half was classified as recurrent
expenditure, and half as capital expenditure.
Governments have used expenditure as a tool of social policy.
In comparison with other Third World countries, Sri Lanka has a
long tradition of public spending on health, education, and other
social services. These programs have contributed at least in part
to the nation's very high levels of literacy and life expectancy
relative to its per capita income
(see Sri Lanka - Social Services
, ch. 2).
In the period between 1960 and 1977, about 9.5 percent of GDP, or
one-third of the government's budget, was devoted to such
programs.
After the liberalization of the economy in 1977, there were
reductions in some social programs. In June 1978 the
long-established system of rice rationing, which provided free
and subsidized rice to nearly the entire population, was replaced
by a food stamp program that covered only about 50 percent of the
population. The value of the stamps was not indexed in order to
keep place with inflation, and as a result the program's cost
fell from 14 percent of government expenditure in 1979 to 7
percent in 1981 and 2.6 percent in 1986. Although there was a
drop in the standard of living for the very poor, in early 1988
the food stamp program continued to provide a safety net more
effective than programs existing in other parts of South Asia.
Overall, social services, education, and welfare accounted for
just under 15 percent of government spending in 1986.
Data as of October 1988
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