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Tuesday May 11th, 2021
Economy

Sri Lanka Port City attempts to fix broken government, but tax breaks excessive: Samarajiva

ECONOMYNEXT – Sri Lanka’s Colombo Port City is a useful attempt to address a broken government system and is recreating for services what the Board of Investment did for manufacturing decades ago, but excessively tax free status in the area should be re-considered, a top policy specialist has said.

The Colombo Port City Commission Bill had put the area out of the jurisdiction of many laws and regulations of multiple state agencies, including local government, and also given it powers to give tax concessions under several laws.

Déjà vu

The Greater Colombo Economic Commission and its successor the Board of Investment also did the same thing to speed up and create a better environment for export zones, Rohan Samarajiva, the founder of LirneAsia, a regional policy research organizations aid.

“It gives me almost a sense of déjà vu – even the name gives me a sense of déjà vu – because back in the 1970s there was an outfit called the Greater Colombo Economic Commission,” Samarajiva said in an interview with Leader TV, an online portal.

“What we are saying is that the overall systems in the country are inefficient, are clumsy, are problematic, therefore we are going to create an exception in the Port City.

“So for example, the master plan, the building approvals, all kinds of things that were developed as an exception to the general way things were done in Sri Lanka for the Katunayake and then the Biyagama
Zones are found here for the Port City.

“The difference being earlier it was for manufacturing, here it’s going to be for banking, service industries entertainment, hotels and also gaming which means casinos.”

Single Fast Track Window

The Single Window which fast-tracked investments was expected to make it easier for businesses to set up.

“The general idea of having single windows was first talked about in the BOI” Samarajiva said. “The idea was that, there would be a single window.

“You just go deal with well-paid people in plush offices at the Greater Colombo Economic Commission and now the Colombo International Port City Economic Commission and they will satisfy all your requirements so you don’t have to go anywhere else”

“Now this is not a bad idea.While I say that it’s necessary given the situation that we are in, I would also say that we shouldn’t really think of this as a long term solution.”

Commercial contracts would be referred to an arbitration centre to be set up within the area under international rules. Other legal cases are expected to be tried through a fast track process in Sri Lanka’s courts.

“Why? Because I think our justice minister himself has said on record the time to get a commercial contract enforced in this country is 1318 days on average,” Samarajiva said.

“That is three and a half years. So we are going to create an alternative path, a fast track inside the Port City.

“Further, in case they have to interact with the with the local legal system and these cases have to be given priority”

“So inside our court system also there will be the ordinary cases that are going to take on average 1,318 days and now we have the other people overtaking us and cutting the line and getting ahead of us.

“Meaning that our 1318 days is going to be even longer because these people are now jumping the queue. This is not a very productive path to go.”

Fixing Broken Government

He said the government should think of improving the entire system. The Port City should only be a temporary solution.

“We should really think of it as a short term holding action and the government should be putting absolutely all of its efforts to improve the performance of the courts, improve all the other approvals,” Samarajiva said.

“The visa, approvals the work permits and various other things should be improved, so that there is no need to make an exception.”

Justice and rule of law is a fundamental responsibility of a properly working state mechanism in civilized society.

A fair trial is the only service the government should give to people according to the US constitution, while most of the rest of it deals with what it should not do so that freedoms of the people are not robbed by an armed state.

However Sri Lanka’s government is involved in so many things including businesses through state enterprises that its effectiveness in failing.

Samarajiva is writing on how to improve Sri Lanka government in a series of columns on EconomyNext.

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What the Sri Lanka state should prioritize

Core elements of a Sri Lanka state; public goods, national defence, justice: Arthashastra

Dollarized Stability

The Port City will also protect workers and businesses from the policy errors of the Monetary Board of Sri Lanka that had led to steep inflation, currency depreciation and balance of payments crises and negative growth shocks that come in their wake since its creation in 1950.

Port City workers will be paid in currency issued by better central banks (dollarized) and contracts will also be dollarized giving more stability than the depreciating rupee.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency,” John Maynard Keynes himself wrote in Wealth of Nations, before his General Theory was used to print money and impoverish millions in countries like Sri Lanka.

“The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Quoting Lenin Keynes added that it not only impoverishes workers but businesses themselves cannot operate.

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

“As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

The economic program of the last administration involving free trade and the creation of ‘Social Market Economy’ ended in trade controls and currency collapses amid monetary instability coming from output gap targeting, critics have pointed.

By dollarizing the Port City hopes to become an offshore financial centre which will be free from the exchange controls and balance of payments that come from money printing.

However it is not clear whether countries that suffer currency collapses and credit downgrades, and rising default risk could have ring fenced financial centres.

Analysts have called for reform of the central bank to block is ability to generate monetary instability or to abolish it altogether and re-create a currency board or currency board like systems that are found in stable financial centres such as Hong Kong, Singapore, Dubai or the Cayman Islands.

Taxation Black Hole

Samarajiva said the Port City seems to have extensive tax breaks and also zero tax salaries, which may reduce its usefulness to the country as a source of tax revenues.

In the GCEC and BOI the tax breaks were originally for foreigners in the two zones.

Then they were extended to units set up outside the zones by foreign investors. Then domestic investors lobbied for a ‘level playing field’ asking for the same tax breaks.

The BOI then not only gave income tax relief but also value added tax and import tax exemptions, resulting in higher overall taxes for others including house builders, amid a rise in protectionism where taxes that the government would have got was channeled to businesses (tax arbitrage) critics say.

The plethora of tax breaks gave rise to concerns.

“So that became a serious problem and I was happy that the government decided about five six years ago that they were not going to go on this tax break situation,” Samarajiva said.

“They were going to simply tell these companies we will give you a stable tax environment, we will give you stability in the policy setting but we are not going to going to give you tax breaks because people don’t decide on whether to invest based on tax breaks

“Unfortunately the tax break is out and they’re going to be giving tax breaks in the international Port City economic commission which is going to be another problem”

“The issue is that with these tax breaks the government is going to lose revenue while another issue is that people working in these recognized companies can be paid in foreign currency and they are exempt from income tax”

“That means the government of Sri Lanka is not going to get revenue that it needs in order to provide the services that it must provide in a middle-income country”

Samarajiva said the length of the exception and the whole idea of tax breaks and exceptions being made permanent for 40 years as mentioned in the act needs to be carefully thought. (Colombo/ April17/2021)

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