Sri Lankan Government ready for an Economic Turnaround (Part 4)

Abolishing of the advance tax collection system

It is also proposed to play a similar game concerning personal income taxes. The current early tax collection scheme “pay-as-you-earn” tax – is to be abolished for employees in both the private and corporate sectors. The government will also reduce the marginal tax rate currently at 24% to 15%.

At the similar time, in the case of employment income around Rs. 700,000, the tax-free limit will be raised to provide extra relief for workers who are filing annual tax returns. This portion will also reduce the monthly cash inflow to the Treasury, close to the cut in corporate income tax.

But, after the elimination of the PAYE tax, all responsible workers and others will have to file annual tax returns and pay taxes not only on income from employment but also on other income types. If this occurs, despite the low tax base, it will undoubtedly increase the total tax revenue. If not, the government will again face an expanded gap in the budget.

Scrapping out offensive taxes

Other types of ancillary fees are also being abolished or reduced. The government will abolish the Nation Building Tax or NBT, Economic Service Charge, or ESC and Tax or WHT withholding, and will reduce the added value of tax or VAT from 15% to 8%.

Two other tax proposals aimed at encouraging companies appear to be non-working. One is the five-year holiday for small and medium-sized enterprises and agriculture. As these companies are not currently in the tax net, the specific tax holiday is irrelevant for the purpose.

The other is the zero VAT rate given to tourism businesses as long as they use 60% of local inputs when providing tourists with their services. Since it is the common practice that VAT is passed on to tourists in the sector, this particular vacation does not leave a surplus to businesses in the cash-strapped tourism sector.

 OSL Take: The assumption of office by President Gotabaya Rajapaksa and the stability brought about the appointment has given a boost to the country’s business sector. Following Rajapaksa’s swearing into the office, the country’s stock market recorded an increase. All this along with the confidence expressed by the country’s business chambers indicate the growth potential for Sri Lanka’s business sector.

The present focus of the government of Sri Lanka is on increasing the inflow of foreign direct investments to the country. Contemplating the need to modernize the country’s laws to attract more foreign investments to Sri Lanka is a positive sign for international businesses/investors looking at doing business with the state.

Sri Lanka’s geographical positioning in the Indian Ocean, the ease of doing business environment in the country and the many trade agreements, as well as trade concessions enjoyed by the state, have made it an attractive business destination in the South Asian region. Given the strength and growth of the country’s private sector, foreign businesses/investors could explore business/investment opportunities in Sri Lanka. Also, international businesses could look at possibilities of forming partnerships with local companies and expand their businesses to other countries.

VBS/AT/23122019/Z_TB4