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Platforms and policy

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Establishing regulatory frameworks for an industry can be tricky because technological advances can throw challenges that require nimble changes but they can only be made after much discussion. Sri Lanka’s tourism industry is facing such a challenge where the formal sector wants their counterparts in the informal sector regulated but such steps could hamper competitive inclusive growth. 

At present an estimated 50% of tourists that come to Sri Lanka stay in home stays, guest houses or apartments. The formal sector feels that since they pay taxes and those in the informal sector do not, the latter has an unfair advantage and is also hurting revenue. They believe for Sri Lanka to position itself as a high-end tourist destination the informal sector needs to be reigned in and more focus has to be given to the formal segment through international promotions, tax exemptions for capital investment and refurbishment as well as other assistance.   

Payment platform websites such as Airbnb and other forums are used extensively by the informal sector to provide a competitive offer to low and mid-range tourists. Unregistered room providers, the formal sector argue, are not legally expected to maintain standards and in the case of an accident could dent the overall reputation of the destination. For the Government the informal sector represents valuable tax rupees.  

While regulating the informal sector would result in improvements in service and management standards those stakeholders feel that being made to pay 14% of taxes would be both challenging and detrimental to their development. One of the reasons the tourism industry has become perhaps the most inclusive employer in the country is because the informal sector allows families or stay-at-home-moms and others from limited backgrounds to enter the sector. Many of them do not have the revenue for high capital investment but often provide competitive services that have allowed tourism numbers to grow steadily over the last eight years. 

Many in the formal sector agree that Sri Lanka is being priced out by their East Asian competitors but the existence of a robust informal sector actually helps to keep local prices modest and encourages higher volumes that are still relevant given that tourism dollars are essential to Sri Lanka’s economy. In managing the transition to a high-end destination policy makers have to be careful in maintaining the inherently inclusive nature of this structure, especially since more and more tourists are deviating from standard hotel stays and wants the different experience offered by the informal sector.   

Most tourism regulators agree that the first step would be registering the informal stakeholders but this is significantly hampered by taxes. Therefore one incentive could be to stagger taxes according to the size and other elements of the unregistered business. This will be tricky as most owners would do everything within their power to avoid paying taxes. Registration without taxation would allow authorities to rate and assign stars for those establishments. Imposing taxes, however, may have to come with incentives rather than penalties. 

Once the initial steps are comprehensively implemented then policy makers can consider other regulations. Singapore, for example, restricts tourists from renting apartments unless the stay is longer than a week; other countries are considering regulations for Airbnb operators. Yet the crucial point remains engagement and transparency because consumers should still have the power of choice.

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