New tax triggers backlash in digital realm amid trade union protests

2025 Budget:

By Vishvanath

Capturing power is one thing, but retaining it is quite another. The JVP-led NPP government finds itself in a situation it apparently did not bargain for during its quest for power. Perhaps, the NPP politicians took the task of governing the country lightly, believing in their own rhetoric, as evident from some of its key members’ much-advertised election pledge to solve many vexed problems with a single stroke of the presidential pen, if voted into power.  

It is not possible for any government to please everyone, not even in the affluent world, but that is exactly what every government has to strive to do to prevent a decline in its approval rating, especially in this country. When the country’s annual budget is presented, everyone wants to know what is in it for them. That is the way the cookie crumbles.

People’s expectations are extremely high, and the NPP government has had to live up to them. Everybody expected relief from the government’s 2025 Budget, given the ever-increasing cost of living. The public sector workers hoped for a substantial pay hike. In fact, the government infused the state employees with much hope, with President Anura Kumara Dissanayake himself saying before the presentation of the 2025 Budget that the state employees would have an unprecedented salary increase. Some categories of public workers were demanding a pay hike of at least Rs 20,000.

The NPP had little leeway when it prepared the current budget due to fund constraints, with the IMF breathing down its neck. It had to perform a balancing act, granting relief to the public to garner favor with voters while facilitating the economic recovery process and spurring growth, within the parameters set by the IMF. Unless it had met IMF conditions such as maintaining a primary budget surplus of 2.3%, a debt-to-GDP ratio of 95%, and an increase in state revenues to 15% of GDP, it would have run the risk of losing the next tranche of the Extended Fund Facility, and facing a drop in the country’s credit rating.

Some trade unions are on the warpath. School principals are threatening to launch a strike unless their salary anomalies are rectified. They say they have not received a satisfactory pay hike from the 2025 budget. A government nurses’ union affiliated to the UNP has begun a protest campaign. Its members walked a picket line in front of the National Hospital, Colombo, on Thursday (Feb.27). Other nurses’ unions dissociated themselves from the protest, but chances are that they, too, will have to do likewise. The protesting nurses claimed there had been a decrease in their allowances, and that will be reflected in their take-home pay. Government doctors have also expressed their displeasure at the budget, which, the Government Medical Officers’ Association (GMOA) says, has not met their expectations. A GOMA delegation met President Dissanayake on Thursday, but their talks ended inconclusively, with the President asking for more time to study the issues the GMOA brought to his notice. The state salary structure is such that if the government agrees to sort out doctors’ pay issues, by any chance, other categories of workers will complain of salary anomalies and demand solutions. Most state sector trade unions are complaining that there will be a decrease in their members’ overtime and holiday allowances. They say the government has given the workers a raise with one hand but taken it back with the other, by reducing allowances.

The government has urged the protesting workers to exercise patience until they collect their April pay and then see if they have got a raise. The Opposition claims that the government is in a mighty hurry to face the Local Government elections before the state workers are paid their April salaries.   

Meanwhile, the government is drawing fire for introducing a new tax to increase its revenue. It needs more money to fund the relief programs. No country can do without taxes. The SLPP government failed due to ill-conceived tax reductions and the resultant steep decline in state revenue besides a drop in the country’s foreign reserves. So, it is only natural that the NPP government has had to boost its tax revenue to the IMF-recommended level. However, it should have trodden cautiously in respect of taxes in the digital service sector, which contribute to the country’s foreign exchange inflow significantly. The tech industry, which generates jobs worldwide, is highly competitive. Sri Lankan is on the radar of the globally renowned IT companies, which have set up operations here. Prudence requires that these IT firms be encouraged to expand their operations, enabling Sri Lankans to increase foreign earnings and help shore up the country’s foreign reserves at a time when foreign direct investment is hard to come by.

The government has sought to justify the 15% service export tax. Its arguments are not without some validity. It needs money, but the pros and cons of the new tax have to be weighed. The general consensus is that the country will gain more if the IT sector, which is becoming a main foreign exchange generator, remains exempted from taxes.

The government cannot be unaware of the political cost of the service export tax, which mainly affects the politically active youth, who are a force to be reckoned with. The success of the NPP’s election campaigns was largely due to support from the digital realm. The NPP became the choice of the netizens, especially the tech-savvy youth, who were disillusioned with the main parties that had been in power. In the run-up to the 2019 presidential election, they backed SLPP presidential candidate Gotabaya Rajapaksa very passionately, giving a big fillip to his election campaign and helping him secure the presidency. They were disappointed in the end.

In this digitally driven world, social media plays a pivotal role in shaping public opinion and influencing the electoral outcomes across the globe. Most of those who backed Gotabaya in the virtual domain in 2019 switched their allegiance to NPP presidential candidate Anura Kumara Dissanayake last year, enabling his victory and that of the NPP subsequently.

The new service export tax has sparked widespread protests in the cyber space. The Opposition has called upon the government to abolish the new tax. The NPP has realized the political fallout of what has come to be popularly known as the digital tax so much so that Minister of Industries Sunil Handunnetti has gone on record as stating that he himself is not well disposed towards it. Participating in an interview with Rupavahini on Wednesday, he said he was opposed to the new tax, but the government had to generate revenue. His position is in sharp contrast to that of other NPP politicians such as Minister of Labour Prof. Anil Jayantha Fernando, who is defending the new tax, claiming that the government has been considerate enough to keep it as low as 15% instead of 30%. Their efforts to justify the new tax are bound to make the tech professionals including freelancers even more resentful with an election only a few weeks away.