Sri Lanka stands out for scale and breadth of tax concessions

Sri Lanka has long been an outlier in the extent to which it grants tax concessions, former Chief Economic Adviser to the Government of India Arvind Subramanian said, warning that such policies lay at the heart of the country’s persistent fiscal and macroeconomic troubles.

Speaking on the sidelines of The Examiner’s book talk, A Sixth of Humanity — India’s Development Journey, held at the Orient Club recently, Subramanian argued that while most countries offer incentives to attract foreign investment, Sri Lanka has gone far beyond international norms. More troubling, he said, is the practice of granting these concessions on a blanket basis rather than in a targeted and time-bound manner.

Subramanian contrasted Sri Lanka’s fiscal trajectory with that of India. While India’s central government tax revenue as a share of GDP has stagnated at around 20 per cent since the early 1990s—a situation he described as regrettable—Sri Lanka’s tax-to-GDP ratio has fallen sharply, from roughly 20 per cent to about 13 per cent by 2023. “The tax-to-GDP ratio is steadily declining in Sri Lanka,” he said. “This is the heart of a much deeper problem.”

He was particularly critical of the decision to grant tax breaks even for recent large-scale infrastructure investments by Indian multinational companies. “You should have just said no,” Subramanian remarked, arguing that Sri Lanka’s weakened fiscal position leaves little room for such generosity.

Beyond tax policy, Subramanian challenged the tendency to attribute Sri Lanka’s serial underdevelopment primarily to external shocks such as colonial legacies or adverse geopolitical forces. While acknowledging that such factors can play a role, he said prolonged underperformance demands domestic accountability. “I understand blaming exogenous shocks in the immediate aftermath,” he noted, “but after 40 years, that is something you have to be accountable for personally.”

Subramanian also cautioned that Sri Lanka is not yet out of its economic crisis and is likely to remain under strain. He expressed concern over the country’s long history of reliance on International Monetary Fund programmes, pointing out that Sri Lanka has been under some form of IMF engagement for much of the period since the 1950s. By contrast, he noted, India has not required an IMF programme since 1991.

Questioning the underlying political economy, Subramanian asked why Sri Lanka has struggled to sustain macroeconomic stability. “If Indian society demands low inflation and macroeconomic stability,” he said, “why doesn’t the same thing happen in Sri Lanka?” (TP)

Source : Daily News