Higher corporate tax threatens to cripple crucial export sector

• 2023 Budget set to hike corporate income tax on export sector to 30% from 14% and zero rate for ICT sector at present
• Hike as part of IMF program to bolster tax revenue and achieve primary surplus
• Last year Corporate Income tax collection amounted to 
• Rs. 252 b up from Rs. 214 b in 2020
• Manufactured exports and IT industry analysts warn hike would jeopardise investments, jobs and forex earnings
• First 8 months merchandised exports up 12.6% to $ 8.9 b; services exports by 5.6% to $ 1.3 b
• Tax hike comes amidst worsening global market conditions for exports

The higher 30% corporate tax proposed by the International Monetary Fund (IMF) and to be unveiled in the upcoming 2023 Budget is likely to threaten the resilience and robust performance of the crucial  export sector, especially the high potential ICT services, industry analysts warned yesterday.

The overall manufactured export sector is taxed at a supportive 14% and the IT services export sector is exempted as a special policy to boost investments, jobs and foreign exchange earnings and  tap high growth potential given the competence in talent and Sri Lanka’s geographic location.

Sri Lanka’s export earnings in August rose by 11% year on year to $ 1.22 billion whilst in the first eight months the figure rose by 12.6% to $ 8.9 billion. This growth was entirely driven by the improvements observed in industrial exports but indications from the apparel sector are that prospects from September onwards do not look very promising given recessionary conditions, rising inflation and impact of the on-going Russia-Ukraine war. In that context the higher 30% tax rate will be a further serious setback, exporters warned.

The ICT sector is targeting $ 5 billion in export earnings in the medium term from $ 1 billion last year. The Export Development Board estimates the value of services exports in the first eight months of 2022 rose by 5.6% year-on-year to $ 1.3 billion. The services exports estimated by EDB consist of ICT/BPM, Construction, Financial services and Transport and Logistics.

However, prospects for existing enterprises appear bleak with the proposed 30% tax apart from luring more global companies and investments. However, some of the investments including by Indian giant HCL Technologies approved under the Strategic Development Act will be exempted from the higher tax. 

“Whilst big sharks might survive, the ordinary startups and small to medium size enterprises in the ICT sector will not be able to,” industry sources warned. The industry body SLASSCOM is yet to react to the proposed higher tax but analysts said it will after a thorough study.

As reported yesterday in the Daily FT, the Free Trade Zone Manufacturers Association (FTZMA) has written to President Ranil Wickremesinghe expressing its opposition to the proposed 30% tax on profit earned, warning it will have a serious impact on their survival and in luring much needed FDIs to Sri Lanka.

In their letter to President, FTZMA Chairman Jatinder Biala and Secretary Dhammika Fernando said the proposed 30% is an “intolerable rate” and not the concessionary rate to exporters who have to compete with regional countries such as Bangladesh, Vietnam, Indonesia and Thailand with whom Sri Lanka exporters have to fight for foreign markets, buyers etc. It said the corporate tax for exporters in both India and Bangladesh is half of the standard tax rate.

“We view this decision as a serious impact on our existing exporters and Foreign Direct Investments to sustain their operation in the country as well as halting reinvestments and discouraging new FDIs,” FTZMA said. It emphasised that peer countries are offering concessionary tax on exports and continuing the export promotion tax rate at minimum level in order to retain their export industry in the prevalent depressed world market.

FTZMA requested the President to review this proposed move and restore the current concessionary tax rate 15% as export promotion tax to protect Sri Lanka’s export industry, including both existing and potential FDIs.

In the letter, President Wickremesinghe has been requested to consider the numerous challenges that the export industry is facing at present due to impending global recession, thus resulting in impacting their entire supply chain process for sustenance of both export earnings and employment.

“The social and political crisis in the country has also been compelling foreign buyers to shift their orders to other countries resulting in detrimental effects in meeting cash flow requirements to finance their working capital for industry continuity,” FTZMA said, urging for Presidential intervention into the matter on an urgent basis with the respective stakeholders.

The new higher tax, part of IMF-initiated and Government agreed measures to bolster tax revenue to GDP. As per the IMF’s $ 2.9 billion four year Extended Fund Facility (EFF) program, raising fiscal revenue to support fiscal consolidation is a key initiative. 

The IMF said starting from one of the lowest revenue levels in the world, the program will implement major tax reforms. These reforms include making personal income tax more progressive and broadening the tax base for corporate income tax and VAT. The IMF program aims to reach a primary surplus of 2.3% of GDP by 2025.

Last year Corporate Income tax collection amounted to Rs. 252 billion up from Rs. 214 billion in 2020. Overall income tax (including those from non-corporate) was Rs. 300.5 billion up by 19%.