Tax, duty relief package planned to kick start investments in Sri Lanka

ECONOMYNEXT – A package of investment relief to identified sectors which will also encourage the inflow of funds held abroad is being planned to kick start investments, officials of President Gotabaya Rajapaksa’s party said.

“There is a tax phobia (badu beethikawa) in this country, which is holding back investments,” former trade minister Bandula Gunewardene said.

“We want to free people fro that phobia that and encourage investments. That are multiple taxes now such as capital gains taxes and high income tax rates that are discouraging investors.

“Investments were first discouraged with the retrospective taxes in 2015 and more were added later.”

Among areas that are being planned for relief are agriculture, machinery, transport, construction, he said.

Though the last administration came to office promising to simplify and reduce the number of taxes, under an International Monetary Fund backed program, a number of withholding taxes, which brought little revenues but alienated many were imposed.

A 16 percent flat personal tax rate was replaced by progressive taxation again.

The program called ‘revenue based fiscal consolidation’ placed heavy emphasis on raising taxes but no attention was placed on cutting spending. Most the money from taxes were given to state workers as salary hikes.

The program also failed to address monetary instability, critics have said, and further worsened money and exchange policy contradictions in a soft-pegged exchange rate regime, leading to multiple currency crises and output shocks which brought down growth.

Sri Lanka is now experiencing an East Asia crisis style output shock and a spike in bad loans.

A currency crisis triggers a cyclical credit contraction and killing demand, which is worsened by the weaker currency which also destroy real salaries, and bad loans spike.

Gunewardene said there were also plans to encourage foreign exchange inflows.

Sri Lankans holding money abroad may also be given an opportunity to bring them back by paying a one-off tax of around 3 to 5 percent.

The fund would have to be invested in areas such as agriculture, construction, tourism, residential development, which will create jobs and economic activity, he said.

President Gotabaya Rajapaksa’s election manifesto has proposed multiple changes to the tax regime.

Personal tax rate would go back to a flat 15 percent, replacing progressive taxation.

The Corporate income tax would be reduced from 28 percent to 18 percent, (in Singapore the standard corporate tax is 17 percent).

However changing income tax laws is more difficult than import duties.

The economic service charge and withholding tax will be scrapped, the manifesto said.

The value added tax would be cut to 8 percent, Nation Building Tax scrapped.

However a ‘special tax for different categories of goods and services’ would be introduced. Whether the tax on goods and services will be an NBT style non-recoverable tax is not clear.

It is not clear whether the taxes would be a big-bang change, or they would be phased over a long time.

The manifesto also said that import duties of goods competing with domestic product will be raised.

An official however said import duties will be cut on imports to encourage investments. (Colombo/Nov21/2019)