Tax incentives alone will not draw FDIs: Expert

• Dr. Roshan Perera says stable macroeconomic policies more effective to attract FDIs
• Opines SL lost a lot of revenue in implementation which could have been put into social welfare
• Insists on conducting a cost-benefit analysis to evaluate transparency of investments and tax exemptions 
• Points to resource misallocation, implementation, administration complexities encouraged corruption
• Claims system created opportunities for rent-seeking, misuse of discretionary powers vested to multiple agencies 
• Suggests tax exemption policies must be taken as a strategic decision, not at the discretion of a bureaucrat

By Charumini de Silva

A top policy specialist on Friday opined those stable macroeconomic policies and underlying framework in a country are more effective to attract foreign direct investments (FDIs) than extending tax incentives.

“Many countries or regions have used tax incentives to attract FDIs for years and continue to do so. However, tax incentives are not the most important factor. Doing Business environment, access to the productive labour force and infrastructure are more important factors than tax incentives,” Advocata Institute Senior Research Fellow Dr. Roshan Perera said.

Speaking at the “Let’s reset Sri Lanka” forum organised by the Advocata institute she highlighted that despite having offered tax incentives for decades, in the process of implementing it the country had lost a lot of revenue.

Citing research studies, she said there is sufficient evidence to prove that the tax incentives were seen to reduce the overall welfare of residents in most developing countries that had no stable, transparent policies in place, thus suggesting the tax exemptions could have been put into use in an alternative manner in the interest of everybody.

Dr. Perera insisted on conducting a cost-benefit analysis, pointing out that it assists Sri Lanka to evaluate the transparency of these investments and tax exemptions given over the decades.

“We have offered tax incentives, but we have never done an analysis on what these investments have cost to the economy. Our last International Monetary Fund (IMF) program had a similar move toward tax expenditure analysis, but it never got off the ground. I think it is very important and Sri Lanka needs to do it,” she said.

She also outlined that the misallocation of resources, implementation and administration complexities had encouraged corruption.

“We have multiple incentive regimes and multiple agencies such as the Board of Investment (BOI), the Inland Revenue Department and the Strategic Development Act under which you can give tax exemptions. However, there is a lack of transparency on the basis to offer these exemptions,” she added.

Dr. Perera also asserted that it has created opportunities for ‘rent-seeking’ and misuse of discretionary powers vested to those multiple agencies offering tax exemptions.

“We need to have clear policies and specific targets on who should be eligible, sectors, duration, for the tax exemptions,” she added.

She also suggested that the tax exemption policies must be taken as a strategic decision and not at the discretion of a bureaucrat.