National Chamber has its say on new Inland Revenue Act

The National Chamber of Commerce of Sri Lanka, in a recent statement on the Inland Revenue Act, underscored the compelling reasons for the new Act and praised the Government’s “very positive approach” during the draft stage where the advice of the private sector and experts was sought for ensuing amendments.

The following is the full statement.

As the National Chamber of Commerce of Sri Lanka, we understand that there was a compelling requirement for the Government to introduce a new Inland Revenue Act. Some of the reasons being, in the recent past, the Government tax revenue as a percentage of GDP has come down to approximately 12%; total interest payment of the loans taken by the Government also remaining in the range of 36% of Government revenue and the fact that the debt to GDP ratio is in the range of 79%; the FDI to GDP ratio is also below 1% which is an unhealthy situation for the progress of the economy. 

With this background, it has become extremely important for the Government to streamline the revenue side through the newly-introduced Inland Revenue Act.

It is noteworthy that the Government has taken a very positive approach during the draft stage of the Inland Revenue Act where they accommodated a large number of amendments based on the private sector and expert consultations. Initial steps of revenue side policy changes took place around November 2016 by increasing the VAT percentage which resulted in an increase of inflation in the country.

After consulting some of the corporate taxpaying companies, it was noted that some of the conditions included in the Act were not export-friendly, especially for start-up companies engaged in exports. To be more specific, any company producing services or goods will have to export more than 80% of their produce in order to qualify for tax benefits given for exports. In an environment where the total exports of the country remain around 15% of GDP, more lucrative policy changes are required to address the prevailing situation. 

Further, the Small and Medium Sector (SME) threshold previously was at Rs. 750 million and now it has been brought down to Rs. 500 million, which might not be an encouraging environment for SMEs. SMEs play a vital role in the economic development of a country, both by way of contributing towards the overall productivity of the country as well as providing jobs both for skilled as well as semi-skilled workers. Hence the Government should have a tax structure for SMEs and should be one that will motivate and encourage more investments in SMEs in the future.

In Sri Lanka, the market capitalisation as a percentage of GDP is around 25%, which has a negative effect on the collection of taxes, therefore it is essential that every measure should be taken to increase market capitalisation as a percentage of GDP, whereby the collection of taxes is made possible with formal listed companies in the economy. 

From the point of the business community, the main advantages are the provisions of the new Act are easier to read and understand and taxpayers may be able to manage their tax affairs on their own, rather than under the old Act.

The New Inland Revenue Act proposes to do away with the deduction of Withholding Tax on Government Securities and Bonds and the granting of notional credit for Withholding Tax which can be set off against future tax payments. This comes into effect on 1 April 2018. 

The effect of this for investors after April 2018 is that the interest income earned will be taxed on whatever tax rate that is applicable for them. However, investors who have invested in Government Securities and Bonds maturing beyond 1 April 2018 will be subjected to being taxed twice, i.e. once by way of Withholding Tax for which no notional credit is available and secondly when their Interest Income is taxed upon maturity at whatever tax rate that is applicable to them.

The National Chamber believes that the competitive tax structure should be retained to encourage the most sought-after FDI inflows to the economy. Since it is the expectation of the Government to connect the economy to the global value chain, the National Chamber is of the view that the introduction of a tax structure will be competitive enough to attract FDIs and to maintain a competitive cost advantage.

Furthermore, payment of NBT on an accrual basis will be a difficult matter for the construction Industry due to a cash flow issue resulting from the delayed collection of revenue.

The National Chamber believes further improvements in the Act should be discussed with the relevant stakeholders in the private sector, with the view of creating a conducive business environment. 

The Chamber fully endorses efforts to modernise the tax system and we look forward to an early opportunity to engage with the authorities to discuss our suggestions and concerns.