An Echelon Media Company
Tuesday December 5th, 2023

Lack of retrospective ‘revenge tax’ to punish Sri Lanka bond buyers explained

ECONOMYNEXT – Sri Lanka’s 2024 budget which did not contain the usual plethora of secretly hatched ‘black box’ taxes, also did not have a retrospective or ‘revenge tax’ on bonds to undermine rule of law as called for by some interventionists.

President Ranil Wickremesinghe himself told parliament that a new tax was being contemplated on bond buyers who prevented a freeze of a g-sec market like in Ghana, helping reduce money printing, though at high rates, since a deliberate default on rupee bonds was feared.

“Any tax measure of that nature would have to be retrospective in basis,” Advisor to the Finance Ministry Deshal de Mel told a post-budget seminar organized by the central bank.

“We have to make a change to the taxability of an instrument that at the time of transaction was a different tax regime.

“Our track record in terms of retrospective taxes has not been ideal. We have the surcharge on corporate income tax from 2022, and then before that you had the super gains tax.”

Sri Lanka imposed several revenge or punitive taxes in a 2015 budget called a ‘super gains tax’ supposedly on ‘ill gotten gains’ and followed up with a similar one later, despite the country trying to attract private investment.

In 2023 several urban intellectuals called for a ‘revenge tax’ on primary dealers and other bond buyers who stood to make large profits later, from buying bonds at high yields in an uncertain environment.

Some critics say the call for revenge taxes on bond buyers show that Sri Lanka’s post-independence decline, lack of policy stability, nationalism and bad governance is largely due to an illiberal urban intelligentsia which is egging on politicians to unleash the coercive power of the state upon unarmed citizens through ad hoc, arbitrary action.

High yields of around 20 percent were seen in bonds in previous currency crises. But in previous currency crises triggered by mis-targeted rates, banks were large buyers of bonds.

When rates fell, the capital gains helped off-set some of the losses from bad loans of banks in previous currency crises.

However, this time, banks also stayed off the bond market, with some also staying off bills, pushing up yields leaving only some insurance companies, non-bank primary dealers and their clients as buyers.

Pension fund managers also have ethical constraints on buying bonds which are destined to default.

“In general, I think any kind of retrospective measure is detrimental to the investment environment,” de Mel explained.

“Certainty and clarity is important in any investment decision. So any measure that is retrospective is contrary to those principles.

“I think that was one of the reasons why there was reluctance to go down that road.”

The International Monetary Fund in a governance diagnostic report also warned against retrospective taxes shortly before the budget saying they reduced the “predictability of the tax system with detrimental effects on long-term investment.”

The Rule of Law

Retrospective taxes and ad hoc tax changes of any kind undermines rule of law and governance.

“Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law,” explains economist and philosopher Friedrich Hayek.

“Stripped of all technicalities this means that government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s individual affairs on the basis of this knowledge.

“Although this ideal can never be perfectly achieved, since legislators as well as those to whom the administration of the law is entrusted are fallible men, the essential point, that the discretion left to the executive organs wielding coercive power should be reduced as much as possible, is clear enough.

“While every law restricts individual freedom to some extent by altering the means which people may use in the pursuit of their aims, under the Rule of Law the government is prevented from stultifying individual efforts by ad hoc action.”

Rule of law “means, in the first place, the absolute supremacy or predominance of regular law as opposed to the influence of arbitrary power, and excludes the existence of arbitrariness, of prerogative, or even of wide discretionary authority on the part of government,” explains British constitutional theorist A V Dicey.

The IMF said both retrospective taxes and repeated tax amnesties undermined the system.

“Policy makers have introduced repeated tax amnesties while imposing additional tax, sometimes retrospectively, on compliant taxpayers,” the IMF said in a governance diagnostic report.

“Such a system undermines the trust of taxpayers, reduces predictability of the tax system with detrimental effects on long-term investment, distorts decisions, and complicates administration.”

Primary dealers are already taxed at 30 percent on all business income. (Colombo/Nov15/2023)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

Sri Lanka stocks close up as some investor interest returns

ECONOMYNEXT – The Colombo Stock Exchange closed up on Monday, CSE data showed.

The All Share Price Index was up 0.22 percent, or 23.33 points, at 10,743.59.

The S&P SL20 index was up 0.68 percent, or 20.60 points, at 3,067.73.

Turnover was at 708 million. The banks sector contributed 189 million, while the food, beverage and tobacco sector contributed 176 million of this.

Sri Lanka’s stock market has seen some investor interest return after last week’s news that the country had managed an agreement on a debt restructuring deal with an official creditor committee, and foreign funds for some development projects resumed.

Top positive contributors to the ASPI in the day were Sampath Bank Plc (up at 71.50), LOLC Holdings Plc (up at 379.00), and Commercial Bank of Ceylon Plc, (up at 90.90).

There was a net foreign outflow of 52 million.

Citrus Leisure Plc, which announced that its banquet hall and revolving restaurant at the Lotus Tower would launch on or around Dec 9, saw its share price rise to 6.20 rupees. (Colombo/Dec4/2023).

Continue Reading

Sri Lanka rupee closes broadly steady at 328.10/30 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 328.10/30 to the US dollar on Monday, from 328.00/10 on Friday, dealers said.

Bond yields were stable.

A bond maturing on 01.06.2025 closed at 13.70/14.00 percent from 13.70/95 percent.

A bond maturing on 01.08.2026 closed at 13.90/14.10 percent from 13.90/14.05 percent.

A bond maturing on 15.01.2027 closed at 14.00/14.10 percent from 14.05/10 percent.

A bond maturing on 01.07.2028 closed at 14.20/35 percent from 14.15/25 percent.

A bond maturing on 15.05.2030 closed at 14.25/45 percent, from 14.20/45 percent.

A bond maturing on 01.07.2032 closed at 14.05/40 percent, from 14.00/45 percent. (Colombo/Dec4/2023)

Continue Reading

Gov minister highlights abortion rights, sex-ed for children, and Sri Lanka men killing their women

ECONOMYNEXT – Sri Lanka’s legislators have politicized the topics of rape and violence without addressing the elephant in the room, Jeevan Thondaman, Minister of Water Supply and Estate Infrastructure Development said in parliament on Monday (4).

“All the members here are talking about rape. What happens after that? We must talk about abortion rights. That is not something anyone wants to touch on, and that is why we are in this place right now,” Thondaman said.

“Despite alarming statistics on rape and violence, women are often blamed and punished for it. The criminalisation of abortion is a major example of this.”

Sri Lanka has some of the most restrictive abortion laws in the world. According to a 2016 estimate by the Health Ministry, he said, approximately 658 abortions take place a day, and close to 250,000 a year.

“That’s 250,000 women whose lives you are endangering.”

He added that what was needed at this point in time was comprehensive sexual education (CSE) for children and young people.

“Only through CSE in schools will children and young people develop, accurate, age appropriate knowledge attitude and skills; positive values such as respect for human rights, gender equality, diversity and attitude and skills that contribute to a safe, healthy and positive relationship.”

Thondaman pointed out that CSE plays a pivotal role in preparing young people for a world where HIV, AIDS, sexually transmitted infections, unintended pregnancies, and sexual and gender based violence still pose a risk to their well-being.

“CSE basically empowers children take control and make informed decisions freely and responsibly.”

Thondaman also highlighted the findings of a 2021 study (Fatalities_20211109_UNFPA) by the UNFPA and the University of Kelaniya that showed that a majority of women killed in Sri Lanka were murdered by those close to them.

“62 percent of homicides of Sri Lankan women are committed by either an intimate partner, ex-partner or family member. 84 percent are killed in their own homes by someone they know.”

Police and the judiciary have failed Sri Lanka’s women, the minister pointed out.

“Only 5 percent of these cases, between 2013-2017, were ever concluded. Men claim they were provoked, or are of unsound mind or have mental illness: These have been successful defenses. And the Police often express sympathy to this narrative as opposed to the victim’s.”

“We have a history of protecting oppressors.”

It takes 7-10 years for a child rape case to conclude, he pointed out.

Establishment of child courts are needed, he said, as well as several legislative amendments. “The government is working on a new law to reform the domestic violence act, reform of marriage and divorce laws to ensure there is an easier path to divorce: no one should be forced to remain in a marriage that is either abusive or not healthy.” (Colombo/Dec4/2023)

Continue Reading