ECONOMYNEXT – Sri Lanka’s highest personal tax rate at 24 percent is lower than most South and East Asian nations, though some countries had lower corporate tax rates, State Minister for Finance Eran Wickramaratne said.
Sri Lanka’s highest personal income tax was 24 percent, compared to 30 percent for Bangladesh, 27.5 percent from Brazil, India 35 percent, Malaysia 28 percent, Mexico 35, South Africa 35 percent, Thailand, Vietnam and Turkey 35 percent, he said.
"Our income tax rate is lower than these countries," Wickramaratne told parliament.
"But the corporate tax rate is 28 percent, Bangladesh is 35 percent, Brazil 34 percent, India 30 percent. Malaysia, Vietnam and Turkey is lower than us."
However the highest rate is not necessarily a clear indicator of the rate the broader population pays. In the UK, the tax free threshold is 11,500 sterling pounds (about 2.2 million rupees) compared to 1.2 million for Sri Lanka.
The UK’s ‘basic rate’ is 20 percent which applies to a slab of up to 45,000 sterling pounds a year. Sri Lanka also does not allow deductions. There are separate tax free thresholds for income from savings.
Married families are taxed at a lower rate in many developed nations. In Sri Lanka healthcare is taxed at 15 percent VAT. In the UK health spending is zero rated.
Wickramaratne said while the basic tax rate for corporates is 28 percent, the lower rate is 14 percent, which applies to areas like exports.
Analysts say with tax holidays being phased out it is important to have a tax rate which is not very much out of line with competitor countries.
They say the government should consider announcing a time bound plan, like Singapore did to bring down the corporate tax rate over 5 to 8 years, giving predictability.
Singapore has progressively brought down its corporate tax rate to 17 percent by 2010, while implementing value added tax. It is said to be the third lowest in the world. Indonesia is considering going down the same path.
But Singapore income tax collections are large partly due to profits from state enterprises and wealth funds. In Sri Lanka state enterprises, where henchmen are appointed to top positions consume taxes of the people.
Unlike indirect taxes, income tax is a tax on capital and investment. High corporate taxes means future investment and jobs will be lost. Countries like the UAE which have no corporate tax and has created jobs up to 10 times the native population.
Middle Eastern nations have resisted pressure from the International Monetary Fund to start corporate income tax.
Maldives which taxed hotels with a room rate to raise most of the taxes for the government came under pressure from the IMF to imposed corporate income tax.
However Sri Lanka is now going through a fiscal crisis after salaries of state workers were hiked sharply in 2015 – over the last two years wages were frozen – and there is also high levels of foreign debt taken during the current and last regime in addition to loss-making state enterprises.
Wickremaratne said the benefit of tax holidays went to large corporates and not ordinary people.
The new tax law will create a ‘rule based’ system where is less room for discretion, he said. (Colombo/Sept09/2017).