Saner counsel prevails over replacing VAT
View(s):Two years ago in April, a top Sri Lankan hotelier grumbled that bookings for the next few months were not looking good. The story drew industry attention since tourism was on the up after the end of the conflict in May 2009 and arrivals were growing by leaps and bounds – from 447,890 (2009) to double that (1 million in 2012)A few months later, figures showed a rise in arrivals disproving the hotelier’s lament that the industry was not doing well. However a close analysis of the figures and hotel stays revealed that bookings at 4-5 star hotels had in fact dropped as predicted. So where were they staying? At boutique hotels (small percentage), guest houses, home stays and other varied accommodation options that is growingly on offer in Sri Lanka.
The non- formal, non-taxed sector of tourism is growing fast, in fact rapidly, that most of the stock market listed hotels in the latest 2015-2016 quarter are reporting losses or barely covering costs. On the other hand there is huge development of new hotels with many international chains – Shangri la, Marriot, Sheraton -, and rapid expansion of the unorganized sector, which could result in an over-supply of rooms in coming years.
A destination promotion campaign is yet to take off after the end of the conflict, a complaint by many hoteliers including the main tourism associations. Sri Lanka is just banking on the fact that the country is no more at war and piggy backing on that to draw hordes of travellers. Yes, visitors are coming from new markets like China but new age travellers are looking for cheaper accommodation. Hotels thus have been forced to offer giveaway prices to locals during off-peak seasons through credit card companies, some as attractive as 50 per cent discounts.
This sense of ‘despair’ by the industry burst into the open this week when a veteran trade industry operator poured his woes through the media saying that lack of proper regulation was helping booking websites and unregistered companies to make ‘a killing’ without paying taxes. His problem is that many established firms struggled through the conflict to raise the country profile overseas without state support and keep the industry afloat but now new players are piggy-backing on that foundation to make hay while the sun shines.Further industry concern was connected to government proposals to replace VAT with the old Business Turnover Tax, which the world is moving away from. Both the main industry bodies (TASL and SLAITO) say it would increase prices and make Sri Lanka very uncompetitive.However saner counsel prevailed as the government, it was learnt on Friday morning, decided to continue with VAT and collect additional, much needed revenue by increasing the Nation Building Tax (NBT)
However, irrespective of whether taxes are increasing or not there is a wider picture to consider in the development of tourism. This is the fastest growing sector in the post-2009 period and could possibly overtake other key sectors like garments or worker remittances – given the right policies.Government ministers and budget planners also need to be aware or at least ask someone how industries like tourism operate. For example, most hotels sign up contracts which are valid for 12 to 18 months. This means that arrivals in December 2016 or February 2017 have already been contracted for at rates that wouldn’t be changed over this period. At the first meeting of the Tourism Advisory Committee appointed by the government, industry representatives urged the authorities to give a one year grace period while others pleaded for a moratorium on any increased taxes for three years until new hotels under development are build and the industry is on its feet.
The industry has valid concerns. Sector companies paid a total of Rs. 10 billion in taxes last year and rapid expansion means more people are paying taxes and on the scale of operations, the government ends up earning more. An over-taxed sector is akin to “killing the goose that laid the golden egg”!Last year in neighbouring Maldives which is totally dependent on tourism, authorities were forced to suspend the imposition of a new tax decision and impose it one year later – in November 2015. Those complaints are similar to what the Sri Lankan industry is facing – contracts where rates cannot be changed and over-taxation would affect the destination.Many issues emerge when taxing tourism. For instance, the informal sector needs to pay up rather than expect the ‘big guns’ in the industry to subsidise the rest of the sector. Secondly, the lack of regulation of the informal sector means important data is not coming in about room nights, facilities and even complaints.
Though there are only 300 registered units by the Tourism Ministry, many online booking websites like TripAdvisor offer over 4000 accommodation units of all categories in Sri Lanka. If hundreds of these units also pay at least a small tax consistent with the facilities they offer or room numbers, that’s a sizable revenue stream. But in doing so, the authorities must not be seen as harassing these accommodation units but encourage them to pay taxes as a national obligation.Industry veterans say that it was tourism, and tourism alone, that kept the Sri Lankan flag flying during the war as a destination to visit with little support from the state. It is only right then that the state now plays its role in recognizing these pioneers instead of overtaxing the sector and destroying it even before it has raised its head and reached the peak when tax revenue will roll in.Short sighted policies have always been the bane of Sri Lanka. Seeking quick revenue to overcome a crisis (revenue shortfall in the budget) is making a fast buck without thinking of the consequences.(Note: This editorial was written on Friday morning before the budget was presented.)