Tax-free too far?

Monday, 12 May 2014 00:00 -     - {{hitsCtrl.values.hits}}

HOW far is too far when it comes to tax holidays? Having passed three massive hotel projects worth an estimated $ 1.4 billion complete with tax concessions and, if latest reports by the Cabinet Spokesman are to be believed, sneaking though casinos, the Government is now focusing on pushing through more tax holidays for foreign investors. Weekend reports indicate the Government now wants to give attractive tax and other concessions to two Hong Kong firms which want to build apartment units, club houses, shopping complexes and car parking facilities along R.A. de Mel Mawatha (Duplication Road) in Colpetty for $ 250 million. The rationale for the project, according to Investment Promotion Minister Lakshman Yapa Abeywardena, is for the “promotion of tourism,” though he has failed to explain why high-paying tourists would eschew star class accommodation at hotels nearby to stay at apartments. Moreover, a Rs. 2 billion World Bank project to provide grant money to local small and medium hotel entrepreneurs has been abandoned by the wayside after the Government changed its policy and diverted the funds to a dam safety project in the north and east. It seems only large-scale projects are allowed to “promote tourism” in this land. Inconsistent economic policies are of course at the heart of the Government’s ineptitude and many point it out as the main reason for the lacklustre attraction of Foreign Direct Investment (FDI), which has remained stubbornly low despite the end of the war. It is also the culprit in Sri Lanka falling in the ‘Ease of Doing Business’ rankings, with many other countries implementing reforms at a faster rate. FDI needs to be taxed, albeit reasonably and fairly, for public good. As part of rationalisation of incentives and to boost State revenue, the country saw a new set of 216 Board of Investment (BOI) approved companies beginning to pay corporate tax from 1 January 2014. Even though gains from this have not been specifically stated, in the 2014 Budget, the Government has earmarked Rs. 283 billion from Income Tax, up from Rs. 239.5 billion this year. Yet targets are usually missed, as demonstrated by the first nine months of 2013 where revenue from income tax rose by 14.4% to Rs. 154.7 billion, which was significantly lower by Rs. 4 billion from the original estimate. Pro-tax payer lobbyists point out duty free BOI companies do pay taxes as imported capital goods and machinery are subject to around 13% tax as well as in the form of other levies such as Port and Airport Levy. In addition companies that sell part of their products in Sri Lanka are also taxed, as is repatriation of profits. Yet politicisation and an expanding crony system are threatening to siphon off benefits to the public. Instead of having universal rules for investors, the Government has made it clear that certain parties can come, negotiate independently and get better deals including sizeable tax cuts. Yet on one hand such systems not only make international investors wary, they also cost much in terms of good governance. From the infamous CATIC deal to delayed payments on the Krrish project, not to mention possible casinos and port cities, the Sri Lankan Government has chosen to largely ignore the checks and balances put in place for corruption-free, transparent and profitable investment for the country. Unsolicited proposals, questionable Government policies, Expropriation Acts and corruption are simply the tip of the iceberg clogging FDI into Sri Lanka.