Sri Lanka has passed amendments to the law governing Colombo Port City, limiting tax holidays to 15 years for billion dollar investments and shorter terms for smaller investments, which are based on predetermined rules, Deputy Minister of Finance and Planning Anil Jayantha Fernando said.
“Earlier very long tax holidays up to 25 years were given without pre-set criteria,” Minister Fernando told parliament on Wednesday.
“We have introduced criteria based on investment volume and the number of jobs created.”
Primary businesses of strategic importance have been classified as : A – billion dollars, B- 500 million dollars, C-100 million and D – 25 million dollars.
The law was approved by parliament.
In its history, Sri Lanka has not got many billion dollars investments, with the Colombo Port City reclamation project being 1.4 billion dollars. However, its land sales could give the government around 700 million dollars.
Businesses of secondary strategic importance will be given a reduced tax rate of 7.5 percent for 4 years, Minister Fernando said.
Under another controversial law, called the Strategic Development Project (SDP) Law, personal income taxes were also freed for senior employees.
There is general agreement in Sri Lanka that discretionary tax holidays which can be ‘negotiated’ leads to corruption.
When companies set up offices with reduced corporate income tax, personal income tax and value added tax are the key sources of revenue for the government.
In a major setback Sri Lanka does not have value added tax for electricity unlike in East Asian countries, analysts say.
Deputy Industries Minister Chathuranga Abeysinghe said under the new Port City Law, personal income tax would be the same if a person worked in or outside the special economic zone.
Sri Lanka however, is seeing information technology companies in particular shifting to Dubai and some other places despite a 15 percent income tax rate in the island for services, compared to 10 percent in the UAE, according to people in the industry.
UAE in the past had no income tax, and created millions of jobs for South Asians.
East Asian nations with monetary stability and less activist central banks or currency boards have 20 percent corporate income tax.
Dubai also has monetary stability without a discretionary central bank, and its currency does not depreciate.
Sri Lankan companies and also people have to pay high taxes for a few years at least to get the country out of sovereign default.
“The sovereignty of the financial decisions have been killed by you guys,” Minister Abeysinghe told opposition members who criticized the government for going with IMF conditions.
Sri Lanka defaulted after aggressive macro-economic policy involving rate cuts enforced by inflationary open market operations and tax cuts to target ‘potential’ output.
The Port City is a ‘dollarized’ special economic zone with currency competition, but instability from inflationary rate cuts or flawed exchange rate policy in the broader nation may undermine investment appetite as it had done in the past, analysts say.
However the Treasury should charge income and other taxes in foreign currency in the zone, breaking the privilege of ‘Government Acceptance’ given to the money monopoly which is choking the Exchequer of dollar revenue streams and shunting the country into debt traps, analysts say.
As the economy and private credit picked up, the rupee has depreciated steeply in recent months. Currency depreciation has led to the ouster of successive administrations in Sri Lanka as fuel, electricity and food prices went up.
Port City officials told Sri Lanka’s Committee on Public Investment that greater stability in the past two years seems to have encouraged businesses who expressed interest in the special economic zone despite the withdrawal of a 25 year tax holiday and its replacement with smaller durations.
Sri Lanka has a history of hiking income taxes under International Monetary Fund programs after the central bank cuts rates and triggers currency crises.
The problem started in 1952 and has not stopped yet.
Analysts have blamed the parliament for not reigning in the central bank’s powers to create currency crises by following spurious monetary doctrines which have intensified recently under ‘monetary policy modernization’ that reject classical economic principles.
Countries with monetary stability in East Asia have income tax rates of 20 percent with Singapore even lower.
Sri Lanka is under pressure from the International Monetary Fund to expand capital decumulation taxes (income and wealth taxes) which critics say destroys domestic capital formation, kill jobs, make the country dependent on foreign borrowings, as does currency depreciation which destroy domestic financial capital and people’s wholesale.
Economic analysts have pointed out that the Wealth Tax proposed by the International Monetary Fund is Marxian in nature synonymous with what happened to the UK until 1978, and in line with recent ‘progressive’ ideology in America as well as stimulus that has destroyed western public finances.(Source -ECONOMYNEXT )
