Financial Times

Lanka's tax structure weak to attract investors-report
A UN report has pointed out that Sri Lanka should aim high in attracting foreign investment and to do that, the country should rectify weaknesses in the regulatory and tax environment for private investment.

“Sri Lanka’s ambition to be an international business hub is realisable if regulatory, tax and institutional reforms are made and Sri Lanka’s strong points are developed and promoted well,” the report, “Investment Policy Review: Sri Lanka” said.

The report has been drafted by an expert team from UNCTAD working within the framework of UNDP’s 'Invest-in-Peace' project. It is currently being reviewed by the country’s planners. The study, detailing the problems and issues relating to investment, says that the most serious negative factor is the over-regulation and unpredictable administration of labour severance. “A package of reforms is recommended. If fundamental reforms are not made, any ambition to be the first-choice regional business hub will have fallen at the first hurdle.”

Expected to serve as a baseline document for investment policy review implementation, the report has recommended an overhaul of business taxation to correct a non-competitive system which is insufficiently developed to cater to highly tax sensitive activities.

Other recommendations include:

*Given the weaknesses in pro-competition policies, all foreign direct investment (FDI) entry restrictions should be re-examined.

*Examine continuing legacy of intrusive state powers in commercial matters.

*Provision of high quality regulatory services through the Board of Investment (BOI) restricted to large investors.’

*Prospective full foreign exchange liberalisation.

*While recognising the relatively low level of administrative corruption by regional standards, the need to have a comprehensive good governance programme to lift Sri Lanka above regional standards.

The UNCTAD team has suggested an overhaul of the BOI, saying that it has weak capacity in attracting investment and policy advocacy. It said the BOI should concentrate on four issues – attracting foreign investment; research, advocacy and planning, regional services and regulation of FDI entry. The BOI should divest itself of activities like development and management of zones and industrial parks, investor regulatory services and granting and administering fiscal incentives.

“The new BOI strengthened as needed in its core functions would require a total staff of 250 compared with the current staffing of about 1,300 positions.

This is still a large agency but similar in size to the highly pro-active agencies that are models for Sri Lanka,” it said. (A detailed version of the report will appear next week).

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