flawed-tax-policies-led-to-sri-lanka-s-economic-meltdown-report

Erroneous tax policies adopted by successive Sri Lankan governments over the years led to the island nation’s economic collapse in 2022, says a report by a New York-based non-profit group.

Of the flawed financial decisions, the Human Rights Watch (HRW) group flags corporate tax exemptions and lack of education funding as two of the key reasons for the country to declare its sovereign default in April, 2022, as its economy went bankrupt.

In a 101-page report released this week, the HRW contends that historically the Sri Lankan governments had “adopted policies that resulted in inadequate revenues contributing not only to Sri Lanka defaulting on its debt, but also to a decades long decline in public education spending as a share of GDP to among the lowest in the world”.

The report says in 2022, the cost of tax exemptions reached as high as 56 per cent of the government revenue.

“Low corporate and personal tax revenues have led to an average of 80 per cent of taxes coming from goods and services which generally are regressive because they claim a higher share of poorer people’s income,” the report adds.

 

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The IMF (International Monetary Fund) bailout caused Sri Lanka’s economic revival after bankruptcy. But, it required external debt restructuring, which prompted the Sri Lankan government to pay 57 per cent of its revenue to creditors in 2024.

The group called for scrapping the tax holidays allowed for corporates as it leads to abuse and opined that “the government should consider eliminating corporate tax exemptions given their high cost, questionable effectiveness, and vulnerability to abuse”.

It stressed that Sri Lanka is a case where many governments are deprived of the necessary revenue to fulfil human rights.

“Sri Lanka’s economic quagmire makes clear that growth alone is not enough to fulfil human rights, the government should finally establish a progressive tax system and use its income so that it adequately funds education and other public services that benefit all Sri Lankans,” the report said.