Over Rs30bn Sri Lanka corporate debt held up over tax uncertainty

ECONOMYNEXT – Sri Lanka’s listed corporate debt issues are grinding to a halt on uncertainty over taxes proposed in the budget for 2017, which has not been legislated and no certainty is available on the tax treatment of interest income.

Maninda Wickramasinghe, Head of Fitch Ratings in Sri Lanka said there is a 30 billion rupee pipeline of corporate debt issues awaiting clarity over taxes.

Fitch had issued expected (EXP) rating for around 30 billion rupees of debt, but they have been withdrawn after delays of several months, he said.

Sri Lanka made interest income on listed debt tax free, which drew criticism as a tax shelter and the current administration said they would be taxed again in the last budget.

At the moment, government debt has a 10 percent withholding tax, which is a final tax. The so-called ‘notional tax credit’ was brought to help secondary market trading after Sri Lanka imposed a withholding tax on interest.

But though taxes have been proposed for corporate debt, they have not been legislated.

There is also uncertainty over the tax treatment of tax free listed bonds issued in the past.

There has been statements from officials that may be only new issues will taxed, while there has been indications given that taxes will be charged only after new taxes are legislated, while other indications suggested that withholding tax will be applied retrospectively.

In free countries where there are high levels of investment security, any tax loopholes or benefits already given in the past, are not taken away but are ‘grandfathered‘.

Analysts say the current administration should be careful about slapping taxes retrospectively on medium term bonds issued in the past and undermine the country’s investment environment which had already been dented by retrospective corporate taxes.

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Sri Lanka has also not drawn foreign direct investment partly over uncertainty over policy and lack of consistency.

A consultation with the industry and firm direction on the proposed tax treatment would help get the listed debt market moving, industry officials say.

After two years of strong credit growth, many Sri Lankan banks are also looking to sell Tier II debt to boost their capital buffers. (Colombo/June09/2017)

 

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