ECONOMYNEXT – Sri Lanka’s businesses have started to feel tax hike pressure from this month and they see a decline in the sales volume as President Ranil Wickremesinghe’s new revenue boosting measures have dampened domestic consumption, analysts say.
The upward tax revision comes as the government is in discussion with the International Monetary Fund (IMF) for a $2.9 billion loan which Wickremesinghe banks to move out of the current unprecedented economic crisis.
Wickremesinghe, in his capacity as the finance minister, has raised corporate taxes to 30 percent from 24 from this year, after almost doubling the value added tax (VAT) last year. The higher taxes comes as the inflation is hovering around 57 percent while borrowing cost is running around 30 percent.
“Lot of companies fall under the tax pressure and then basically their goods have to be sold at a higher price to consumers,” Dimantha Mathew, Head of Research at First Capital Holdings, told Economy next.
“When the corporate tax is increased, then again the return for the shareholder significantly comes down. So ultimately the business owner has a significant decline in profitability.”
The latest tax increase was considered after the island nation’s tax revenue to GDP ratio slumped to less than 8 percent last year, one of the lowest in the world.
The central bank under former president Gotabaya Rajapaksa was compelled to print billions of rupees to finance the government at an artificially low interest rate fixed by the central bank, which also fixed the rupee exchange rate.
Sovereign debt default
Wrong economic policies by Rajapaksa and borrowing without returns for white elephant infrastructure projects mainly under his brother Mahinda Rajapaksa-led era resulted in the country to a sovereign debt default in April last year.
Since then millions of Sri Lankans have been forced to cut their daily meals to survive amid job losses and declining disposable income.
Wickremesinghe has estimated to raise the overall tax revenue by 69 percent this year compared to the last year.
The new tax policies have removed many exemptions maintained earlier as well as imposed taxes on goods and services exporters as well.
“Basically there is a significant increase in terms of corporate taxes,” Mathew said.
“There could be a shift from Sri Lanka to other destinations, then there could be a shift from import industries and export industries in order to take advantage of the currency and exposure.”
Already some of the exporters are in the process of shifting their manufacturing plants to other countries while some have already opened subsidiaries in countries like Singapore, Hong Kong and United Arab Emirates to pay less taxes.
“With regards to operational cost also there will be an increase because the suppliers will try to cover the increase of the tax cost,” Danushka Samarasinghe, Chief Executive Officer/Director at Nation Lanka Equities (Pvt) Ltd, told Economy Next.
“All the sectors have been affected because of the tax increases but the sectors which have lost the most which have earlier enjoyed the tax rate. The IT sector, import sector and tourism sector all that. I don’t think there are any winners from the tax increase.”
“The exporters will be reluctant or discouraged to do operations here. So, they might try to do operations in other countries. People might be encouraged to move their business operations.” (Colombo/Jan09/2023)
