Sri Lanka Brief
NewsStaggering External Debt: Lanka’s Economy May Dip Similar to Greece – Economists

Staggering External Debt: Lanka’s Economy May Dip Similar to Greece – Economists


Tax experts and economic analysts cautioned that the country’s economy may take a dip similar to Greece which needed bail outs to avoid defaults on foreign borrowings. Sri Lanka’s foreign borrowing on high interest rates by the former regime have gone into colossal amounts which would be passed on to the people who will have to pay through their nose by way of taxes.

Sri Lanka recorded a Government Debt to GDP of 75.50 percent of the country’s Gross Domestic Product (GDP) in 2014. Government Debt to GDP in Sri Lanka averaged 90.83 percent from 1990 until 2014, reaching an all-time high of 103.20 percent in 2001 and a record low of 75.50 percent in 2014.

External Debt in Sri Lanka increased to Rs. 3,181,800 million in June from Rs. 3,069,400 million in March of 2015. External Debt in Sri Lanka averaged Rs. 814,798.55 million from 1986 until 2015, reaching an all -time high of Rs. 3,272,700 million in June, 2014.

Commenting on the 2016 Budget, a tax expert said bridging the budget deficit which is Rs. 740 billion for 2016 will be an uphill task given the staggering loan repayment and the projected global economic slowdown next year.

The deficit for 2016 is up from Rs. 675 billion in 2015. However, certain tax experts commended the move in the Budget to widen the tax net and improve administration.

They said the proposal, which will net in around 60 percent of the affluent class who evade paying taxes, is a praiseworthy move but how the government proposes to achieve this feat is left to be seen.

Tax consultant and Partner Gajma and Co., N.R. Gajendran said the government has focused on wooing more FDIs to the country by slashing corporate tax, revising the land lease tax and doing away with the dividend tax for shareholders outside Sri Lanka.

“Policy makers should focus on stimulating more FDIs, promoting exports, research and development, encouraging innovation and investment in human resources development, if it is to get to the next level of development,” Gajendran said.

With regard to income tax being increased from 12 percent to 15 percent for value-added exports, he said we need to see the total picture. Today, the cess on exports has been removed and the devalued rupee is a big advantage for exporters. No country has an income tax structure as low as Sri Lanka. An increase from 12 percent to 15 percent will not have a major impact on exports, he said.

Tax experts said the land alienation policy adopted in the past sent a negative signal to foreign investors who were uncomfortable investing in Sri Lanka. Foreigners could not buy land. There was an upfront cost of 15 percent which meant the cost of commencement of business shot up. The move to revise land lease tax in the Budget will show the country’s appetite for foreign investors and the space for development.

The reduction in VAT (Value Added Tax) by around 3-4 percent will offset the increase of PAL (Ports and Airport Levy) and NBT (Nation Building Tax) which have been increased from 5.0 to 7.5 percent and from 2 to 4 percent, experts said.

However, industrialists said the revision of PAL and NBT will have an adverse impact on capital investment programs.

It has also been proposed to introduce the Revenue Administration Management Information System (RAMIS) in 24 institutions.

Gajendran said the measures taken to simplify the tax system and improve tax administration is good. However, the government will have to walk the talk and the private sector will have to keep pace with the rapid changes taking place across the globe.

Director, Taxation Service, Pricewaterhouse Coopers, Sri Lanka, Charmaine Tillekeratne said Sri Lanka has become a low tax regime country with the reduction of income tax to 15 percent from 24 percent as proposed in the 2016 Budget.

She said tax concessions have been granted to the agriculture, construction and condominium sector to drive growth. The cost of acquisition of machinery for the agriculture and construction sector will get double deduction.

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