Year after year Sri Lanka continues to rely heavily on foreign trade taxes as a key source of government revenue, and the latest fiscal numbers for 2016 show that this trend has not abated. Taxes on foreign trade accounted for 50.5% of the total tax revenue generated in 2016, and a handful of import tariff lines contributed the bulk of import duties.
Even within Sri Lanka’s heavy reliance on foreign trade taxes there is a high concentration in a narrow number of tariff lines. Just eleven HS codes (at 6 digit level) contributed to 77.5% of import duty revenues in 2016, and is a sharp rise from 50.3% a year earlier.
The heavy reliance on trade taxes as a key source of revenue needs to become a critical focus area of trade and fiscal policy reforms. This no doubt course becomes challenging when the majority of trade tax revenue comes from a handful of import lines. Yet, it becomes easier to make substantial reforms to non-sensitive import lines – ones that would have a minimal revenue impact but disproportionately high impact on spurring international trade. For a small trade-dependent economy, Sri Lanka must structure a sensible trade tax structure; one that promotes import and export trade, does not unduly burden large numbers of consumers in favour of a small number of producers, does not create uneven playing field for domestic producers vis-à-vis importers, and most importantly, spurs Sri Lanka’s participation in global production sharing (‘networked trade’) and international logistics.