Sri Lanka sharp tax changes, weak economic freedoms hurting progress
ECONOMYNEXT – Sri Lanka’s sharp hikes in tax rates and weak economic freedoms are undermining the hotel investment environment, despite a firm government desire to allow the sector to grow and generate more revenue, frontier market investors said.
A recent budget has hiked corporate income tax sharply from 12 percent to 28 percent.
The effective rate of taxation has gone up to 38 percent, Roman Scott, from Singapore-based Calamander group, a private equity firm that had invested in the country, said.
It was not clear how the 38 percent was arrived at, but Sri Lanka also has been withholding tax and an illiberal deemed dividend tax that discourages re-investment of profits.
Sri Lanka had also hiked value-added tax from 11 percent to 15 percent. VAT, however, is not a tax on capital and does not hurt investment and job creation like income (direct) tax. Unlike income tax, which hurts the more efficient and successful firms, VAT is borne by customers.
Foreign investors will have to pay another 10 percent dividend tax on distributed profits, taking the rate up to 48 percent, he told a forum in Colombo at the Asia Hotel & Tourism Investment Conference.
Scott said he had funds committed to Sri Lanka and, due to personal bias, wanted to invest in Sri Lanka but not all investors would do that. An investor sitting in Singapore had many other choices, he said.
Calamander, a frontier market investor who moved into countries early, was aware that there were higher risks, but not all investors were willing to move into countries with such risks.
Rahul Chaudhary, executive director of CG Hotels and Resorts, which had a long-term involvement in Sri Lanka through its investments with India’s Taj Hotels group said it was also going slow.
Sri Lanka’s current administration clearly understood the importance of tourism with President Maithripala Sirisena himself attending the conference.
Finance Minister Ravi Karunanayake told the conference there were more than 600 tourist hotels, but only about 30 were paying taxes.
There are also rising concerns that the Finance Ministry, egged on by established operators who are feeling the heat of competition, will crack down on small and medium start-ups using international booking engines to draw tourists.
The Finance Ministry in its budget for 2017 said the government would set up a common booking platform.
Scott said Sri Lanka’s trade restrictions and protectionism was also hurting the hospitality sector.
The firm, which had invested in an international franchise, found that import duties were prohibitively high, he said.
Inputs imported from abroad were charged total duties ranging from 112 percent to 120 percent, he said.
East Asia, which is part of the Association of South East Asian Nations, has low import duties and the organisation has also struck deals with other trading blocks, creating freer markets that had allowed the region to overtake South Asia.
"India can afford to restrict trade and survive because it has a large domestic market," Scott said. "Sri Lanka, with a small domestic market, cannot afford it."
Freedom to trade, freedom to move capital and freedom for labour to move are vital for an economy to grow, he said.
Scott expressed disappointment that Britain had voted to discourage the movement of labour through Brexit. A wave of nationalist hate had started to sweep the West with so-called ‘far right’ parties gaining ground amid an economic downturn.
Economic analysts say British economic philosopher had led Western Europe in spreading classical liberal thinking, which brought free trade and ended slavery early in the 18th and 19th centuries.
British liberals had managed to defeat both nationalism and Marxism for more than a century and maintain human values, while vast swathes of Central and Easter Europe succumbed to totalitarian rule.
Nationalism started to grain ground particularly in Eastern Europe from the mid-19th century with the break-down of old empires and monarchies, culminating in fascism and Nazism in the first half of the 20th century. (Colombo/Nov29/2016)