ECONOMYNEXT - Sri Lanka will join an exclusive club of countries that charge value added tax from health and education, services which are almost universally exempt in tax regimes of free countries where private citizens are not mis-treated by rulers, under proposed tax changes.
The VAT on health and education comes as the country claims to create a 'knowledge economy' and is faced with an 'ageing population'.
Sri Lanka's rulers plan to use the cash collected from taxing the community's own efforts to educate or cure themselves - often pejoratively referred to as 'private' by the elected ruling class - to bolster services given by themselves.
"The value added taxes collected from private healthcare and education will be directly used in the budget for health and education," State Minister for Finance Lakshman Yapa Abeywardene said.
Abeywardene told reporters Sri Lanka has increased salaries of state workers by 10,000 rupees a month last year and also had to find revenue to service debt from earlier deficit spending.
Ministers claimed that rich people send children to 'private' schools.
While charging value added tax at 15 percent, Health Minister Rajitha Senaratne said he was imposing price controls on doctors' channelling fees.
Community vs Ruling Class
Among the few countries that charge value added tax from education is Greece.
In 1985 Greece's left-wing government slapped a 23 percent VAT on 'private' education including tuition classes despite it being against European Union norms.
Like Sri Lanka Greece economy was hit by deficit spending and giving excessive perks to state workers including pensions.
The Economist newspaper said Greece's left wing government plan to tax private education was part of their "manifesto as a blow against plutocracy," and had created mayhem.
"It looked like a double win that would simultaneously please creditors and demonstrate the government’s commitment to helping the underprivileged. Unsurprisingly, it did neither," the newspaper noted.
"Some of the country’s reasonably priced private schools were forced to close, leaving staff jobless. Elsewhere, fees rose. Those affected were not just rich families."
The state education system could not cope as less affluent parents tried to put their kids in state schools, the report said.
Bangladesh, an Asian country which learned about value added tax from Europe, slapped value added tax on education in 2015 withdrew it after protests.
Health is also almost universally exempt from value added tax in free countries.
An entity subject to VAT pays input tax and charges output tax from its customers. An exempt business pays input tax. A zero rated business can reclaim any input tax it pays.
In most countries only exports and exported services are zero rated. All imports are taxed avoiding VAT being charged twice.
In the UK, education, vocational training, health services (doctors, dentists, opticians, pharmacists & other health professionals), Insurance, medical treatment and care is exempt.
In the UK prescription medicine is zero rated, not just exempt. Sri Lanka has exempted drugs but not medical services.
Most foods (except items like chocolate, chocolate covered business, fizzy drinks, ice cream) are also zero rated instead of being just exempt in UK. UK has extra zero rated items due to legacy taxation. However no new zero rated businesses can be added under EU rules.
Energy vs Ill-Heath
Sri Lanka's President Maithripala Sirisena intervened to oppose taxes on electricity and water.
Water supply is almost universally exempt from tax in VAT regimes but not electricity.
Electricity is a controllable steady expense unlike healthcare, which can be sudden and large. Singapore, an authoritarian Asian country which gives very few exemptions, nevertheless has a low 7 percent rate and has other schemes such as Mediserve to absorb shocks. Health expenditures are a misfortune to a family.
But Sri Lanka has a history of subsidizing petrol and electricity sometimes with printed money, in a deadly and elaborate political deception that generates balance of payments crises and currency depreciation hurting the entire population and the poor the most.
Similar deceptive practices have been found in countries like India and Indonesia, where people remain poor.
Leftist parties like the Janatha Vimukthi Peramuna has been in the forefront of mis-pricing energy. Analysts say energy is one area that should be definitely subject to VAT. If necessary using lower oil prices tariff can be adjusted to reflect a part of the tax, analysts have said.
Ironically Sri Lanka's 15 percent VAT on education and health comes as the administration rolled back an initiative to charge capital gains tax.
The taxes are also charged in Sri Lanka by 'Cabinet's Prerogative' in the style of 'Royal Prerogative' without even a rubber stamp from Parliament violating fundamental principles of representative democracy going back to the Magna Carta.
It is not clear whether the 15 percent VAT will be charged from 'paying wards' of state hospitals or whether they will be exempt.
Sri Lanka already mis-treats citizens by charging 'private' retail chains VAT and exempting the LakSathosa chain which is connected to the elected ruling class.
Sri Lanka's rulers also practice a deceptive game of not printing out VAT invoices to the general public.
In countries like Sri Lanka where education and health is provided by the state with cash extracted from the public, expansion of voluntary free levying services will help reduce pressure on the state services.