Holistic approach to FDI

Unfurling the latest in a bundle of measures to attract more Foreign Direct Investment (FDI), the Government has decided to withdraw a 300% tax on property and give perks to investors on a preferential basis. But these measures need to be linked to far-reaching efforts of trade liberalisation, policy consistency and transparency to make a significant impact. 

The amendment to withdraw the Land Lease Tax for foreigners will come into retrospective effect from 1 January this year, according to the Bill which was gazetted last week. Under the amendment, the provisions relating to the Land Lease Tax will not apply to a lease of any land to a foreigner.

It will also not apply to any company incorporated in Sri Lanka under the Companies Act, where any foreign shareholding in such company, either direct or indirect, is fifty per cent or more to a foreign company, under and indenture of lease executed on or after 1 January this year.

Finance Minister Ravi Karunanayake in the last Budget announced that the tax on land lease on foreigners would be removed. He said the Government would also withdraw the restrictions on ownership on identified investments — restrictions imposed through the Land (Restrictions on Alienation) Act, and seen as an impediment for attracting investments.

The Government has been slowly rolling out reforms with the intent of increasing FDI. Over the last few months, new insolvency laws have been suggested, arbitration has been included in the proposed International Financial Centre and investors have been offered residency. The Government has also pushed forward with Free Trade Agreements (FTAs) with India, China and Singapore and marched ahead in regaining GSP+. 

Such efforts have to be applauded. After years of stagnation reforms are slowly starting to take shape. Sri Lanka has reached the 107th rung of the World Bank Ease of Doing Business index in 2016 and could well break into the top 100 next year, behind Nepal and Bhutan. But economists have voiced concern that the reforms are too piecemeal and do not concentrate sufficiently on an overall trade policy that puts the onus on streamlined tariff, liberalisation and export competitiveness. Officials are fearful that without a larger strategy to define and drive trade, especially FDI focused exports; Sri Lanka will continue to flounder behind other developing countries vying for a shrinking pot of investment. 

Sri Lanka’s last trade deal was signed a decade ago and since then local companies have been outpaced by other countries and often struggle to be part of a level playing field that provides them market access. Even if FTAs are signed quickly they must go beyond goods and incorporate non-tariff barriers as well as Customs access. 

There can be lots of barriers that make companies non-competitive. It can be institutional inefficiencies, it can be the more macroeconomic environment: tax policy, infrastructure, lack of information, rules and regulations, complying with various government requirements: all of this can affect competitiveness of markets, and result in lesser investment. Currently Sri Lanka’s tax system provides about 200 exemptions, making it a complicated system to navigate. Other sectors are protected discouraging FDI. 

All these different aspects have to be looked at to build a cohesive framework to change Sri Lanka’s FDI fortunes.