Sri Lanka has relaxed exchange controls to attract regional offices of foreign firms to be set up here but it may need more than these incentives to attract big players, experts say.
On Tuesday the Central Bank (CB) announced that in a bid to facilitate Foreign Direct investment (FDI) country, a move to facilitate opening of branch offices in Colombo of foreign firms, has been gazetted. “Foreign firms no longer require prior permission from the Controller of Exchange to start their offices in Colombo,” Nivard Cabraal, Governor CB told reporters.
But some say that before such a decision is taken by a foreign company, they will scout around at which point, Sri Lanka will not be seem attractive mainly due to its taxation system.
“Before the budget, the effective tax rate for commercial banks was some 59% to 60% and now it has come down to some 40%, which is a good thing. But one must realise that Sri Lanka is competing with countries such as Singapore whose effective tax rate for firms is at 10% and they’re offering global headquarters of foreign firms to set their offices in Singapore at 10%,” Rajendra Theagarajah, Managing Director HNB told the Business Times on the sidelines of a post-budget breakfast forum organized by audit firm KPMG.
Now the effective tax rate for companies is at 28% from the pre-budget 35%.
However others believe this could be a good starting point. “The country is poised to take off and it’s clear that the budget gave some ‘enablers’ for FDIs. Tax breaks such as what was proposed and the exchange control relaxations are a starting point for FDIs to come in,” Hemaka Amarasuriya, Chairman Singer Sri Lanka PLC told the Business Times.
The breakfast forum saw many participants commending the broad tax concessions proposed in the budget, but they pointed out that the tax base has to rise more than proportionality for the revenue targets to be met. “There are many who are encouraged by the simplification of the taxation process across the board and feel that broad basing of revenue is likely,” a participant told the Business Times.
Mr. Cabraal noted that newly introduced tax measures bode well on corporate cash-flows and entice them towards re- investment and gear them towards organic growth.
Explaining the highlights of the budget, Premila Perera, Partner KPMG noted that the main changes in the tax structure are the increase in tax allowable depreciation, share market listing expenses deductible subject to a maximum of 1% of the Initial Public Offering value, VAT reduced from 15% to 12%, reduction in overall income tax to 28%, withdrawal of Debit Tax Reduction in VAT on financial services from 20% to 12%, etc. |
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