ECONOMYNEXT – A host of tax cuts by Sri Lanka’s new government will provide an immediate boost to economic growth and corporate profits but are damaging in the long term given big budget deficits, a new research report said.
Bartleet Religare Securities said the tax cuts will spur consumption with the effective increase in disposable incomes benefitting consumption sector stocks.
Sri Lanka’s government headed by newly elected president Gotabaya Rajapaksa announced the tax cuts after the first meeting of its cabinet of ministers.
Valued added tax (VAT) was almost halved to eight percent from the current 15 percent.
“The estimated VAT income for the state coffers, calculated at 15% is about 530 billion rupees for 2019,” Bartleet Religare Securities said.
The new government also announced reduced PAYE (pay as you earn) tax, and agricultural and telecommunication taxes.
“This we believe would provide an immediate impetus to consumption and would add a short term injection to GDP growth,” BRS said in an analysis of the tax cuts.
“However for the long term macro health of the economy, this would be visibly injurious,” they said.
“Sri Lanka has long struggled with twin deficits and more notably so with revenue / GDP. We saw the post-2016 VAT increase, this gap closing, although it came at the expense of consumption led growth.”
BRS said other tax cuts in addition to the reduction of VAT, could improve profits of listed firms exposed to sectors like consumption, banking and insurance, construction, tourism, agriculture and information technology.
“The saving in disposable income means that consumption sector stocks will stand the most to benefit going by how the reversals in 2016 affected the sector performance.”
(COLOMBO, 28 November 2019)