A new Act is to replace the Board of Investment (BOI) Act where a new investment promotion agency will be created rationalising Sri Lanka’s investment incentive regime.
The amendment bill is to be referred to the Department of legal Draftsman shortly, a senior official of the Finance Ministry told the Business Times which in recent weeks exlusively reported on the decision to create a new agency to replace the BOI which is seen as inadequate to meet the investment challenges of post-war Sri Lanka.
A new strategy has been formulated in which investment is targeted to raise from the current level of 25 % of GDP to 33 - 35 % (of GDP). A 10 % increase in investment is required over the next few years for this purpose, he said.
“That means doubling the current level of investment and such inflows will support Sri Lanka's growth prospects. This task will be vested in the proposed investment promotion agency,” he revealed, adding that the name of the new agency is yet to be finalised.
He said the BOI Act currently supersedes the IRD Act when it comes to tax treatment of BOI companies. BOI tax holiday companies are not exempt from having to submit tax returns, but this requirement has not been fully enforced. To tackle these issues, a proposal has been made to bring all tax incentives under the purview of the IRD. The IRD will set up a joint committee with the proposed investment promotion agency to review tax concessions being granted to prospective investors, he said.
It has been estimated that while FDI flows to the Sri Lankan economy amounts to just 1.5% of GDP, revenue losses due to BOI tax exemptions cost as much as 1% of GDP. “So, while it certainly has promoted greater investment and more export-orientation, the BOI tax incentive regime has resulted in an erosion of tax revenue as it has granted, and continues to grant, broad tax incentives,” he added.
Although attempts were made in 1994 and 2001 to streamline the incentive regime and bring it all under the purview of the IRD subsequent policy reversals saw a continuation of broad tax holidays and exemptions being granted under the BOI law. This law will be amended to streamline the incentive regime as well as to avoid complexity, lack of transparency and the erosion of the tax base, he added.
The Government is also planning to introduce a regime of lower, overall corporate tax rates in order to reduce the number of tax exemptions, tax holidays and concessionary tax rates given to foreign investors. Incentives will be granted according to the amount of foreign capital brought in and also the size of the investment so as to encourage only the right type of capital, under the new set up, he said.