Higher depreciation incentive to north via new IR Bill? AG enlightens on bone of contention

By S.S. Selvanayagam 

The Attorney General on Monday countered the contention that in the Inland Revenue Bill special concessions are being afforded to those who invest outside Colombo and Gampaha.

Additional Solicitor General Farzana Jameel with Senior Deputy Solicitor General Arjuna Obeysekera and State Counsels Suren Gnanaraj, Kaniska de Silva, Chaya Sri Namuni and Hashini Opatha appeared for the Attorney General and Finance Minister Mangala Samaraweera.

She made her submission before the Bench comprising Chief Justice, Justices Anil Gooneratne and Nalin Perera.

She replied to the contention of President’s Counsel Manohara de Silva PC complaining that granting a higher depreciation allowance to those investing in the Northern Province is discriminatory and violating the right to equality guaranteed in the Constitution with the allegation that since 90% of the occupation in the Northern Province is by a particular ethnicity and that the concessions amounts to violation of equal protection of law as well.

The Additional Solicitor General portrayed that the petitioner is misconceived and explained that both fact and in law, the present Act No. 10 of 2006 contains similar provisions that permit the development of areas known as lagging regions and as well as special concessions being afforded to those who invest outside Colombo and Gampaha.

She stated that the second schedule contains the investment incentives that would be offered under the proposed law. Paragraphs 1-9 contain the depreciation allowances that would be granted to investors. The percentage of the allowance that could be claimed as depreciation have been categorised according to the amount invested and the part of the country in which the said investment is made. It would thus be seen that those investing in the Northern Province can claim a depreciation allowance of 200% whereas those investing in other parts of the country are permitted a depreciation allowance of 100%, she said.

She stated that this country was ravaged by a war for over 30 years. No part of the country was spared by the terrorists whose sole aim was destruction of life and property. The worst hit region of course was the Northern Province, followed by certain parts of the Eastern Province.  

She cited the Budget Speech of 2011 that gives an idea of the development goals of the Government with regard to the Northern Province.

She explained that the said Budget Speech gives an insight on the special emphasis that was placed by the Government on the development of the Northern Province. She added parallel to the development of the war-affected areas, development activity was being carried out in other parts of the country as well.

Thus, one would see that much effort was being made by the Government to develop the rest of the country with large amounts of money being invested in those regions and attractive fiscal incentives being offered to those keen to invest in those areas, she said.

It is in this context that one must look at the following paragraphs from the Budget Speech delivered in November 2016 for the year 2017, which has been approved by Parliament:

The Budget Speech states: “Honourable Speaker, we have continued to address issues pertaining to the Northern and Eastern Provinces on separate basis in the past. I wish to lay emphasis on the fact that the Government is committed to eliminate existing socio-economic gap between north and east with the rest of the country by 2020.

“Our Government is committed in pursuing an economic policy that will ensure creation of wealth and equal distribution of incomes. Given the GDP per capita is the lowest in the Northern, Eastern and Uva Provinces, it is incumbent upon us to make a concerted effort to correct this situation.

“As such, I propose to grant a 200% capital allowance for businesses which make investments in the Northern province and 100% allowance for businesses which make investments in the Uva and Eastern provinces of over $ 3 million (excluding land) and generate new employment opportunities for 250 or a three- or five-year 50% tax holiday will be granted for such businesses which will create 500 or 800 new employment opportunities respectively.”

The Additional Solicitor General stated that the above submissions demonstrate that all provinces cannot be developed simultaneously, in once and that over the years, different provinces have been developed at different stages. It is also seen that given the limited resources available, such resources must be stretched to the maximum, she added.

She submitted that the criteria for investing in a province would vary from province to province, depending on its attractiveness for investors. For example, lower incentives can be offered for investment in the Western Province as the Western Province has well developed infrastructure, access to a world class port, availability of utilities such as power and water, etc.

 She stated that higher incentives must be offered to those wanting to invest in the Northern Province as the resources available to attract investors to that province are limited. Thus, one would see that special considerations applied when it came to the Northern Province.

She said that the concession is in respect of tangible assets and that the Northern Province is an area which consists of large extents of unutilised land. It is submitted therefore that the said concession was accorded with a view to ensuring that there is more attraction to invest in the readily available land in that province as opposed to the other provinces.

She said quoting a Cabinet Memorandum that the investments incentive scheme now contained in the proposed Bill was submitted to the Cabinet and received approval as a modality to encourage investment by taking the following factors into account – capital assets, employment generation and the area in which the investor invests.

She contended there is no violation of Article 12(1) and (2), equality provisions must be applied between equals. If a particular province has been at a disadvantage and an incentive is being offered to create parity that special opportunity cannot be deemed an undue advantage, she explained.

Accordingly, she submitted that the granting of a higher depreciation allowance, which applies only to capital assets that are permitted to be depreciated,  does not per se amount to unequal treatment of equals and therefore not unconstitutional.