Sri Lankan shares hit near 27-month low on tax changes

COLOMBO, March 9 (Reuters) – Sri Lankan shares fell more than 2 percent on Wednesday, hitting their lowest level in about 27 months as a government move to hike value added tax (VAT) and reintroduce capital gains tax to qualify for an IMF loan weighed on sentiment.

Sri Lanka will raise value-added tax and reintroduce capital gains tax to break out of a debt trap, Prime Minister Ranil Wickremesinghe said on Tuesday, ahead of talks on a $1.5-billion loan it is seeking from the IMF.

Sri Lanka’s benchmark share index fell as much as 2.24 percent to 5,802.02, its lowest since December 2013.

The index ended 1.22 percent weaker at 5,862.35, its seventh straight session of losses. It has fallen 5.5 percent in the last seven sessions through Wednesday.

"Market is going down with latest tax reviews by the government, which indicates the economy is going to contract, which will slow down the growth of major companies and put downward pressure on share prices," said Miflal Farook, senior investment adviser at Asia Securities Stockbrokers in Colombo.

The government has no choice but to raise taxes in order to comply with IMF requests to increase revenue and reduce the budget deficit, analysts said.

The index remained in oversold territory for the 10 straight session, with the 14-day relative strength index at 11.656 on Wednesday, compared with Tuesday’s 13.645, Thomson Reuters data showed. A level between 70 and 30 indicates the market is neutral.

Turnover stood at 1.83 billion rupees ($12.7 million), more than twice of this year’s daily average of 738.1 million rupees.

Foreign investors were net buyers for the eight straight session, purchasing 602 million rupees worth of shares on Wednesday. But the bourse has suffered a net foreign outflow of 321.7 million rupees so far this year.

Rising interest rates also pushed investors to shift to fixed interest rate bearing assets from risk assets, stockbrokers said.

Shares in Commercial Bank of Ceylon Plc, the country’s biggest-listed lender, fell 4.95 percent, while Ceylon Brewery Plc slumped 22.79 percent and Ceylon Theatres Plc lost 6.76 percent.