Rs 257 bln state revenue loss in tax breaks
Sri Lanka is estimated to have forgone a massive Rs. 257 billion
in state revenue owing to numerous corporate tax and customs duty
exemptions given to investors since the economy was opened up in
the late 1970s, the Board of Investment chairman Saliya Wickramasuriya
indicates a cost of some Rs 233,000 per employment opportunity,
he said giving a cost-benefit analysis of investment while delivering
the annual oration on taxation organized by the faculty of taxation
of the Institute of Chartered Accountants of Sri Lanka recently.
true total cost can be much higher since the apparent total cost
of incentives, Rs 257 billion, assumes no tax evasion or leakage.
"We all know that this is hardly the case. I therefore appeal
to the financial community to be vigilant and take action."
It is widely acknowledged that much of the local investment would
have taken place without tax incentives in place.
simply means that we have rewarded investors at cost to state, and
unconfirmed benefit to the end-users," Wickramasuriya said.
"To make matters worse, the qualifying companies were typically
larger organizations, and the benefits denied the smaller players
allowed them to grow even more. An unnatural state of affairs in
a nation where more than half of its GDP comes from more than 125,000
small and medium enterprises."
BOI currently has 1,695 commercially active projects, exporting
nearly US$2.5 billion a year, amounting to just over half of Sri
Lanka's exports, and providing employment for 434,000 direct, and
651,000 indirect workers. Cumulative exports from 1978 to 2003 amount
to Rs 2.25 trillion, in order to do which Rs 1.67 trillion worth
of capital goods and raw material were imported, Wickramasuriya
cumulative FDI realized to effect the above business is Rs 186 billion
equivalent, which when combined with Rs 91 billion of local investment,
totals Rs 277 billion. "We have analyzed the structure of our
current tax incentives and found them to be wanting in both the
areas of local investment promotion and FDI quality," Wickramasuriya
said. "We have realized that the revenue losses to state they
cause may be unsustainable for long-term economic growth, and have
recognized the need to revise both the type and application of tax
incentives offered if we are to achieve our development goals."
regional comparison of economies in terms of their corporate income
tax regime, revenue collection, and attracted investment shows that
Sri Lanka is the worst performer by a good margin in terms of both
revenue to GDP and efficiency ratio (defined as revenue to GDP divided
by the standard tax rate, expressed as a percentage).
countries sampled include Sri Lanka, Singapore, India, Indonesia,
Malaysia, Philippines, Thailand and Vietnam. "The above discussion
leads us to the clear conclusion that the general fiscal incentive
regime Sri Lanka has practiced over the years may not have been
in our best long-term interests," Wickramasuriya said. "We
therefore need to use the benefit of hindsight to make the necessary
study has been done to recommend different methods of tax incentives
other than straight corporate income tax holidays and blanket duty
exemption, and these should be evaluated carefully for the correct
mix, possibly on a time variant sector-by-sector basis, he said.
also said Sri Lanka could consider "tax shifting" - lowering
income taxes while raising taxes on environmentally or socially
destructive activities. "This forces the market to tell the
truth, and reflects the indirect cost to society of an economic
activity," he said. "For example, a tax on coal would
incorporate the increased healthcare costs associated with breathing
polluted air, the costs of damage from acid rain, and the costs
of climate disruption and ground water pollution."
tax reform is spreading, along with other forms of tax like congestion
tax, Wickramasuriya said. "Introduced effectively by Singapore
decades ago, London implemented it in early 2003. Since then, traffic
in the city has been reduced by 24 percent, permitting freer flow,
less pollution, and more revenue from public transportation mechanisms."
forms of such taxes include a stumpage tax in Bulgaria and Lithuania
where anyone wishing to cut a tree would have to pay a tax equal
to the value of services provided by the tree. "This will force
the market to decide, as forest services may be worth many times
more than the timber or pulp, which will in turn encourage wood
and paper recycling."