Published by Daily News on 21st June 2018

InlandRevenueActCcreatesTransparentTaxRegime

Photographs by Sarath Peiris

Over the years, a lack of economic stability has been a major hindrance to doing business in Sri Lanka. As a result, economic growth in the post war years has been dominated by debt financed state investments. Such a model is unsustainable.

These sentiments were expressed by the Minister of Finance and Media Mangala Samaraweera addressing the Ceylon Chamber organized Investor Conclave at Cinnamon Grand recently. "With a growing debt stock the government finds it difficult to balance public investment and debt servicing. It is in this context that our government has shifted to a private sector, export, and FDI, led model of economic growth."

The state will play a key role in smart regulation, setting a robust institutional framework, and targeted interventions to ensure social justice and equity. The government was able to introduce several key reforms towards ensuring long term economic stabilization and in 2017 Sri Lanka achieved a primary budget surplus for the first time in many decades.

The Inland Revenue Act that came into force last April creates a transparent and predictable tax regime, shifting away from adhoc tax changes that hinder investment. "Our objective is to establish a level playing field which will encourage competition and contestation which would be of benefit to consumers and a competitive economy".

In addition to the fiscal policy reforms, the Central Bank has been successful in bringing down inflation to 1.6% in April 2018, reserves reached a record high of US$ 9.5 billion, and credit growth has been managed to a sustainable level.

"All of these developments have set the stage for a take-off in economic activity and growth."

A crucial element of the investment decision is ensuring a competitive business climate and several other steps are being addressed relating to ease of access to and registration of land, construction permits, and other elements relevant to the business climate.

Investment related incentives have also been reformed with open ended tax holidays being replaced by targeted capital allowances which directly reward the investment in capital. There are also benefits for investment in R&D and the IT sector, and for investments in the Northern Province. Sri Lanka is in the process of implementing comprehensive unilateral trade liberalization. The government has been working on bringing in key reforms during last two years.

"It is clear that macro economic conditions have stabilized setting the stage for investment and economic growth."

Meanwhile Malik Samarawickrama, Minister of Development Strategies and International Trade addressing the event said that global investors remain positive about Sri Lanka and at the recent sovereign dollar bond issue of US$ 2.5 billion it was nearly three times over-subscribed. 

"Our government is much focused on improving the investor climate and easing the burden for investors who are interested in locating here and have taken several meaningful steps in this regard, the Minister said.

The new Inland Revenue Act which came into effect from April this year was developed with technical advice from the IMF, is a modern, transparent and streamlined Act that is based on international income tax principles.

"The top rate of corporate income tax is now lower than Bangladesh, India, Brazil, Mexico, and on par with South Africa. The top rate of personal income tax is now lower than all of these countries plus Thailand, Vietnam, and Turkey."

There is a popular misconception that the new Act has removed tax incentives. "This is incorrect. Under the Act, an investor would receive capital allowances and accelerated depreciation based on the size of the investment, and you can set off your investment against future taxation. In effect, you don"™t have to start paying income tax until you recover your investment."

"For every capital investment, there is an additional 100% capital allowance and for investments above US$ 100 million the capital allowance goes up to 150%."

"Sri Lanka"™s new incentives regime may not be blanket tax holidays, but it is effectively the same when it comes to your tax burden."

And even after that, if you are in an export-oriented industry you will only pay corporate income tax at the low rate of 14%. "This targeted tax relief is attractive for genuine investors who believe in investing in the future of Sri Lanka."

"We are also looking at further reducing the upfront costs of investment by cutting the various border taxes that you face. We are also looking at making the taxable period start only after commercial operations have commenced."

"We are focusing on opening up our economy, learning from the lessons of Singapore, Vietnam, Thailand, Malaysia and others in the region.

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