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Sri Lanka capital markets urged to break tax holiday dependency

ECONOMYNEXT – Sri Lanka’s capital markets will have to grow out of the habit of being dependent on tax benefits with some instruments becoming tax shelters for the rich, a former revenue chief said.

Dayani de Silva, a former head of Sri Lanka’s tax office said she was concerned to hear that the Colombo Stock Exchange was lobbying for tax holidays again this year.

"It was clear that you have kept up the momentum on what I would call a dependency syndrome," de Silva told a forum organized by Fitch Ratings.

"Why do we have to depend on a tax concession? After all tax concession is a mere push in the correct direction."

Colombo Stock Exchange Chairman Vajira Kulathilake said they required ‘support’ to develop the capital markets especially derivatives and the feed back for tax lobbying was "more positive than before."

De Silva said the country should move towards a low, uniform tax rate.

She said the case of unit trust or mutual funds she was involved when the tax holiday was originally offered in the 1990s.

"It was introduced for a mere 5-year period," she said. Every time the tax holiday is due to run out, lobbyist used to ‘come running’ to extend the holiday, she recalled.

"I cannot recall any other tax concession that has been continuously extended other than that for the unit trusts," De Silva said.

"Has it had the desired effect? It was more to motivate the small investors to come into the market via the unit trusts. But what really happened definitely is a tax sheltering device for the affluent tax payers."

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There was something wrong if the market thought a tax holiday was needed for it to function, she said.

Mutual funds however invest money on behalf of ultimate beneficiaries and like real estate investment trusts they should only be taxed once, analysts say.

If a unit trust is taxed once the returns should not be taxed again after they are distributed to the beneficiaries.

There is also a complication where a 10 percent tax on interest is charged on government securities at source, which should also be taken into account.

Sri Lanka’s capital markets has also lobbied and got tax holidays for listed bonds, which have also become a tax shelter for the rich analysts say.

Analysts say that move is also dangerous since it may incentivise investors to buy riskier debt than they would otherwise have done. Bond should ideally be bought on credit risk and not as a tax shelter.

Sri Lanka also does not have capital gains tax on stocks unlike so called ‘capitalist’ countries, but that also means capital losses are not deductible when money is lost.

High rates of income tax in particular can destroy capital and transfer money that would generate jobs for the poor to the hands of politicians to throw away it away in consumption spending like building a bloated state or giving deceptive subsidies to buy votes.

At the moment Sri Lanka is printing money heavily and the currency is falling, destroying salaries and bank deposits of all citizens, after a massive salary hike given to state workers and rulers are looking for new sources to tax private citizens and their activities.

A retrospective tax that damages the country’s investment environment has also been slammed on the workplaces of Sri Lanka’s citizens. The Middle East for example it generating millions of jobs for people in South Asia because income tax is largely absent and revenue is from fees.

"The proper direction in tax reform is to move clearly to a lower tax regime," de Silva. "A neutral low tax regime is what is needed."

Murtaza Jafferjee, head of JB Securities agreed that tax holiday dependency was not correct.

"As an industry we should not be a tax planning industry," he said. "Having said that I will have sleepless nights if they take it away."

 

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