Former CBSL governor lies utterly in claiming an utter lie

Fact Check

In a newspaper interview, former CBSL Governor Ajith Nivard Cabraal was questioned about the revenue losses during his tenure. In response, he claimed that the revenue losses in 2020 were primarily due to (1) the cessation of motor vehicle imports, and (2) the Covid-19 pandemic—not due to tax reductions in 2020.  

To verify the claims, FactCheck.lk quantified the loss in tax revenue from the Ministry of Finance Annual Report 2023 (MoFAR), Budget Estimates 2022 and Central Bank Annual Economic Review 2023 (CBARE). 

On the impact of ceasing motor vehicle imports – MoF data shows that excise duty on motor vehicles decreased by LKR 82 billion in 2020 compared to 2019, accounting for only 15.6% of the overall reduction in government revenue. 

On the impact of COVID-19 – CBARE shows that the country’s nominal GDP decreased by 1.7% in 2020 compared to 2019 consequent to the Covid-19 lockdown periods. If revenue declined in proportion to GDP, this would explain a reduction of LKR 25 billion—which is 4.7% of the total decline (see Additional Note 1). 

On the impact of tax cuts – Between end-2019 and beginning-2020, the government implemented several tax policy changes, including: (1) the removal of several specific taxes, and (2) the reduction of tax rates.  

The removal of the Nation Building Tax, Carbon Tax, and Debt Repayment Levy in 2020 eliminated all revenue from these taxes. The GDP-growth-adjusted revenue reduction from these tax removals is LKR 99 billion, which is about 19% of the revenue reduction.  

The reduction in revenue from VAT, Corporate Income Tax, and Personal Income Tax, after the tax revisions, can be calculated from reported data. 1.7% of this reduction can be attributed to a contraction in GDP. The remaining reduction attributable to tax policy changes is LKR 207 billion for VAT (see Additional Note 2), and LKR 155 billion for corporate and personal income tax revenue (see Additional Note 3). 

In sum, the simple GDP-adjusted estimates of revenue lost due to tax removal or reduction amount to LKR 461 billion (almost 90%) of the total revenue reduction from 2019. The loss from motor vehicle tax and economic decline, as cited by Cabraal, can account for no more than LKR 107 billion of the reduction.  

The emphatic claim made by Cabraal about the overarching explanation for revenue reduction (import reduction and Covid-19) is contradicted by the data. He compounds this error by describing the explanation that is supported by the data (tax reductions) as an “utter lie”  

Therefore, we classify Cabraal’s statement as BLATANTLY FALSE. 

Additional Note 1: Typically, tax revenue is expected to change in proportion to nominal GDP when there are no changes in the tax structure.  

Additional Note 2: VAT was reduced from 15% to 8%, except for financial services. The VAT revenue reduction calculated can also be derived by dividing the total VAT for 2019 (excluding financial services) by 15% and then multiplying by 8% and after adjusting for a 1.7% Nominal GDP reduction. 

Additional Note 3: This includes revenue from Withholding Tax (WHT), Pay-As-You-Earn (PAYE) tax, and Economic Service Charge (ESC), which were replaced or removed in 2019/2020.