The tax concessions and relief proposed by the government to woo foreign direct investments which the country desperately needs to accelerate infrastructure development, create jobs and stimulate the economy is welcomed by the business community.
However, tax experts and economists noted that tax concessions and relief alone would not suffice to entice investors.
Rather Sri Lanka should be seen as an investment destination with right macroeconomic fundamentals, political stability and policy consistency.
Tax experts say, tax concessions to attract investments in the long term would not augur well for the economy as it would reduce revenue to the government coffers.
Ernst and Young Partner/ Head of Tax Services, Duminda Hulangamuwa says, “Sri Lanka should be viewed as an investment destination beyond tax concessions.
Investors should look at Sri Lanka’s opportunities based on its macroeconomic fundamentals, political stability, policy consistency, as investment friendly and a destination that could be used as a gateway to other markets.
Investment relief
“These are more sustainable criteria based on which the country should be viewed. In this context I am happy to note that in the policy statement of the Minister, there are no exemptions from income tax, but rather, grant allowances in terms of accelerated capital allowances and investment relief as a deduction against income tax,” Hulangamuwa said.
He noted that an investment relief will in effect reduce the tax liability that one would otherwise pay. However, whether the tax incentives alone will attract investment is doubtful, given the fact there was ample exemptions granted but inadequate investment flow.
This is mainly due to instability in the macro -economic fundamentals and policy inconsistency.
Tax experts also said, the new tax law due to come into effect shortly will not help in the long run, to achieve the revenue targets and create a sound tax administration in the country.
They said, they do not see that replacing a well founded law by a new law will enable to boost state revenue.
Hulangamuwa too subscribing to this view said, bringing in a new law and doing away with the well-entrenched law will not help enhance state revenue.
“My view is that it may work on the reverse. I am yet to come across a country that had a well-entrenched common law tax code that is replaced in its entirety.
If the government is keen to drive tax revenue then what is needed is policy changes to strengthen tax administration,” he said.
He said, in terms of policy the government must remove reliefs as much as possible and while granting a reduced tax rate for industries it must have a reasonably lower tax rate bringing in more tax payers to the tax net by removing exemptions.
In terms of its administration the Inland Revenue Department must be supported with better HR polices where promotions and other rewards are based on performance, improve soft skills of staff, improve legal, accounting and technical skills, increase the use of IT with better remunerations to the staff.
Senior tax consultant and Partner Gajma and Co. N.R. Gajendran said, the proposed new income tax law is a fundamental change and a total departure from the existing Income Tax Law. In the present Income Tax Law, the principles and legal concepts arising from the Common Law principles are well established and settled.
“The proposed law is a paradigm shift where the language and principles are substantially different. Thus, it would impose a challenge and there would be a gestation period for learning.
It will take some time before clarity is brought into the understanding of the law. Disputes and misconceptions may emerge and some of the language and principles in the law may have to be settled through judicial process,” Gajendran said.
Complications
Tax experts said the new law is expected to come into effect in June or July and it is very likely that for the year 2017-2018 there can be two income laws, which could create complications.
The government last week gazetted the new income tax structure which was proposed in the 2017 Budget. It also proposed relief for investors.
The tax relief will be granted to investments, over USD 2 billion for Port development. Such investments will be exempt from corporate tax. Tax concessions will also be offered to large scale investments and investments that generate a large number of jobs.
However, according to the Finance Minister, tax holidays would be granted only when the investment is made and not as in the past, when investors agree to make the investment.