Dilrook Kannangara

Government revenue as a percentage of GDP has steadily fallen down over the past three decades to close to 11%. The government has to prove all services it provides and repay loans and interest from this revenue. Debt repayment and interest expenses alone equals total government revenue. For the rest of government expenses, it has to borrow again. The only way to overcome this debt trap is to increase government revenue.

However, taxing income (income tax, PAYE) is counter productive as it takes away people’s money that would otherwise go into consumption (short term economic growth) and savings (long term economic growth). Taxing consumption (VAT, turnover tax, SNL, NBT) shrinks the economy as people cannot afford higher consumption.

There is a way to both increase government revenue and while not burdening those who shoulder the economy. That is to tax space – land and occupied area. It must be done based on average land value of each GN division, land or building extent and a percentage. A building with multiple floors will have the land area multiplied by the number of floors. Colombo City will have a higher value per 1 square meter of land than a rural area. Obviously, people occupying sizable land in Colombo City have the means of paying their due share of tax. This will net all tax frauds and those who evade tax. It will also force them to put their high value assets to economic use. A tax-free threshold must be introduced so that most land and basic living space will not be taxed. Obviously, government land and government department owned land will not be taxed.

It will prune out unprofitable and environmentally destructive industries and replace them with highly productive industries.

Along with the introduction of the land tax, the government can remove income taxes and reduce VAT which will stimulate economic growth. Land tax will tax some foreign and Diaspora land owners who don’t pay their due share of tax in Sri Lanka. Land tax must not be covered under double tax agreements. The tax must be tied to the property and not the owner. Not paying the land tax over a few years should lead to confiscation of the land.

It will increase state revenue to 15% of the GDP and help the government payoff debt without hurting the economy.

At the same time the government must take a tough decision to confiscate all private property currently leased to the government. Rent and lease payments the government pays to private owners is exuberant and it is a rip off. The saving would be substantial. Going forward the government must construct its own buildings for all government departments, ministries, etc. In fact, the government must construct buildings and rent them out to private businesses and houses which will generate an income for the government without having to do anything else.

Paying off the debt will continuously save an enormous amount of state revenue which can go to development. Once that happens, the land tax can be revoked and replaced with the current regime of taxes.