Thursday, 28 November 2013 00:00
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Income tax share in total revenue to overtake VAT haul by 2016
As part of rationalisation of incentives and to boost state revenue, the country will see a new set of 216 Board of Investment (BOI) approved companies beginning to pay corporate tax from 1 January 2014.
The development follows these companies ending the joy of tax free period.
“There will be around 216 BOI approved ventures which have enjoyed tax free regime for 10 to 15 years coming in to the tax net from 2014. We have declined request for any extension of the tax-free period because their time to pay up has come,” Deputy Secretary to the Treasury S.R. Attygalle said.
“Given the relatively low rate, the Government has made a firm decision that there will be no more tax holidays except on select investments including those coming under the Strategic Development Act,” Attygalle told a post-Budget 2014 forum organised by the Sri Lanka Forex Association and Thomson Reuters on Tuesday.
In the 2014 Budget, the Government has earmarked Rs. 283 billion from Income Tax, up from Rs. 239.5 billion this year.
In the first nine months of 2013, revenue from income tax rose by 14.4% to Rs. 154.7 billion, which was marginally lower by Rs. 4 billion from the original estimate.
Deputy Secretary to the Treasury Dr. B.M.S. Batagoda also said at the same forum that going forward income tax would overtake Value Added Tax (VAT) in the revenue composition.
“In 2014, VAT’s share is 3.1% and income tax accounts for 2.9%. However by 2016, corporate tax would account for 3.2% as opposed to 3.1% share of VAT,” Batagoda said indicating the Government’s thrust to enhance direct taxation in the medium term.
Atygalle expressed the view that corporate taxation in Sri Lanka was one of the lowest in the region (Two years ago, income tax to 28% from 35% whilst export companies as well as select others enjoy a 12% tax rate) and the Government feels it is comfortable with the rate at present.
“With the expansion of the tax base such as extending VAT to cover mid-size retail trade as well as including financial services for 2% NBT, we feel that VAT rate has the scope to be reduced if revenue effort remains robust,” he added.
In the first nine months of 2013, VAT on domestic consumption rose by 11% to Rs. 91.85 billion, reflecting the improvement in the system under the newly introduced single rate system. VAT from imports amounted to Rs. 85 billion, down by 4.6% from the corresponding period of last year.
The debate whether post-war Sri Lanka needs to persist with long-term tax holidays remains still open. The Government has announced an end a few years ago, a move which was even welcomed by the International Monetary Fund.
Private sector response has been mixed with some especially foreign investors insisting tax holidays are needed whilst others noting a more consistent policy framework, ease of doing business and sound macro-economic fundamentals were key.
Despite downturn globally, and inherent weaknesses in Sri Lanka, Foreign Direct Investments (FDIs) are expected to reach a record figure of $ 2 billion this year according to the Government. Last year the FDI figure was $ 1 billion.
According to the Central Bank’s report released coinciding with Budget 2014, the realised FDI, including foreign loans to BOI companies, increased by 19% to $ 540 million during the first half of 2013 from $ 452 million during the same period of 2012.
It said more FDI flows are expected during the second half of the year with the finalisation of negotiations and the granting of approvals for a number of projects that have been in the pipeline.
“Indicating the prospects for realising new FDIs in the future, the number of investment commitments of contracted projects under FDIs increased during the first half of 2013 from the corresponding period in 2012,” the Central Bank said.
