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We’re acting on behalf of 99% of the people An Interview with Ravi Karunanayake

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11111111111front new 2"If a tax was imposed on cars the next day a meeting is called with the traders, money is paid under the table and things settled. These same traders now come and try to do the same thing with us."

Finance minister Ravi Karunanayake has the toughest job in the present government. The populist platform the new regime was elected to power on included two mutually contradictory processes – foregoing government revenue by slashing taxes on fuel and certain foodstuffs while at the same time increasing government expenditure with hefty increases in salaries, pensions, guaranteed purchase prices for agricultural produce etcetera. In this interview the new finance minister speaks to C.A.Chandraprema about the manner in which he hopes to balance such conflicting demands.


Q.When the UNP came into power back in 2001, many people complained that they did not look after the youth who had rallied around the party in unprecedented numbers for that election. The lack of a populist bent in that government was deemed to be the cause of its defeat barely 30 months later. So it would be the height of hypocrisy for anybody to say now that the UNP should not adopt populist measures to consolidate themselves politically after they have managed to get back into power following nearly one and a half decades in the wilderness. But don’t you get the feeling that this time, the UNP has tilted to the other extreme and gone completely overboard in trying to please the masses?


A. No, our mini-budget had nothing to do with the history of the 2001-2004 UNP government. We are a heterogeneous alliance and there was a need to rectify certain matters. The responsibility for that was cast upon the UNP. During the short span that we held power back in 2001-2004 we restored the economy but there was no immediately visible result for the people at the ground level. This time, the people voted for a change. What we did in this budget was that we took away ostentatious projects which meant nothing to the people and directed resources to the people who were most in need of it. We taxed nobody else except one percent of the population. We imposed a tax on certain companies that we thought had used the previous regime’s loopholes and made undue gains. This is a one off thing which will not continue. After all we are people who know the business world and we want to encourage the business community.


Q.The enterprises that fall within the ambit of the super gains tax that you have imposed on companies that have made profits of over Rs. two billion in the 2013/2014 financial year, would be the main conglomerates like Hayleys, Aitken Spence, John Keels and also the banks, insurance companies, telecom companies and the biggest apparel companies. They are not going to be happy when they hear the new government saying that they were making ‘ill gotten gains’.


A. If there were telecommunication companies that were not paying for spectrum charges and blue chip companies that sponsor political forums like ‘Momentum’ what do you call that? People who didn’t pay taxes contributed tens of millions to the effort to get the Commonwealth Games to Hambantota. Taxes that should be paid had been waived. Anyway this super gains tax is just a one off levy. We are very conscious of investor stability and of the market. We inherited a government which was corrupt and inept. The debt burden was supposed to be 6.5 trillion but the actual debt with all the contingent liabilities amounts to over 9 trillion. There was disguised unemployment in the economy.


Q. How confident are you of being able to raise fifty billion rupees from the super gains tax? It’s retroactive and most companies would have already spent the income that is supposed to be taxed.


A. We’ll get more than that. We are taxing the people who took shortcuts and not those who worked hard. Retroactive is not a new word in Sri Lanka. The Rajapaksa government brought an act and acquired 20 companies but nobody said anything. You look at the stock market. There are some players who are trying to destabilise the market. We are a government that is acting on behalf of 99% of the people. Two percent of the players in the stock market cannot try to dictate to the 98% who own just 3 to 4 percent of the shares.


Q.You say the super gains tax is a one off thing. How will that help finance the concessions that have been given on a long term basis? You have taken big cuts in the taxes on certain goods and services with inelastic demand like fuel and certain foodstuffs which most governments target for revenue generation because consumption of such items will not go down significantly even if the price increases. This provides a cash flow for the government. When you reduce such taxes, you will need something to permanently fill that vacuum.


A. The increase in salaries, pensions and all that will have a permanent impact. There are other concessions that will have only a temporary impact and some that have only a one off impact. The ones that have a permanent impact must be met with a permanent revenue source. There is a lot of tax avoidance. We are going to have fewer taxes and better compliance. Just to give you an example, within the three weeks that we have been in power, custom duties collection has gone up by 2.5 to 3 billion. Three billion in one month is an addition of 30 billion annually. This is money that should have been collected which was siphoned off due to the corrupt government that was in office. If a tax was imposed on cars the next day a meeting is called with the traders, money is paid under the table and things settled. These same traders now come and try to do the same thing with us.


Q.When taxes were removed from certain commodities that left the local producers exposed. Even though import substitution earned a bad name during the SLFP government of the 1970s, the UNP also used this policy strategically in the 1980s. Since there was no other way to provide a livelihood for the people of Moneragala except through the cultivation of sugarcane, the UNP government set up the Pelwatte sugar factory and imposed a tax on sugar imports so as to make locally produced sugar viable on the market. So that kind of targeted import substitution is a time honoured economic practice. If we look at your mini budget, the removal of the tax on imports of canned fish will have a direct impact on the local canning industry. Most fisheries ministers wanted to open canning industries in Sri Lanka but only Rajitha Senaratne was able to make a reality of it and for the first time people were beginning to buy fish canned in Sri Lanka. Now such industries are in jeopardy.


A. You are talking of the ill-advised policies of a naive government. The fish that is canned here is imported from China and there is no point in giving protection to such industries. The variety of fish that is canned is not available in the right quantities in our seas. So as a result you are paying Rs. 60 or 70 more just to get somebody to get fish imported from China canned in Sri Lanka. As for sugar, only ten percent of the sugar consumed is produced in this country. There is no point in taxing all consumers to give protection for the production of 10% of the quantity consumed. When sugar production increases to 50% of the quantity consumed we’ll look at it. Take tiles for example. There is a tax of 180% on tiles just to protect one company. We will protect any company if they create employment, help in import substitution or increase exports. We didn’t reduce the price of rice because we produce most of our needs. We brought the price of fuel and the cost of living down so that labour will be cheaper and the country will be more competitive. There will be no privatisation in future. But we will make government service more private sector oriented than the private sector itself.


Q.Don’t you feel that with the emphasis on the consumer, there is a regression in policy to the pre 1970s era where the sole aim of the politicians was provide subsidised foodstuffs and to keep the consumer happy at the cost of everything else?


A. If the so called "api wawamu rata hadamu" grow more food campaign was a success, then we would have grown more and imported less. But we are importing more and growing less. So all these are empty slogans. There is the classic example of potatoes. The cost of producing potatoes in this country is about Rs. 70 to 80. But you can import potatoes from India at Rs. 10. So the consumer has to pay Rs. 70 more just to protect 15,000 farmers. That is illogical, but we are still protecting the potato growers because a political decision has been made to do so.


Q.What about the concept of food security?


A. What is the food security that Dubai and Singapore have? But they are not starving and their food prices have been stable for the past 20 years. It’s cheaper to buy a coconut in Dubai or Singapore than in Sri Lanka.


Q.There is the fear that there might be an across the board increase in income tax rates to finance the concessions that have been given to the consumer.


A. No, it will be quite the opposite. We will try to reduce the income taxes if possible. The 38 existing taxes will be reduced to ensure higher tax compliance. But anybody who tries to avoid the lower tax will be penalised five times over. Businesspeople were paying up to 30% in commissions. They don’t have to pay that any more. So that is their saving.