ECONOMYNEXT – Sri Lanka is planning to amend a Strategic Development Act which gave discretionary tax holidays and personal income tax free to up to 30 top executives in each project is to be amended, Treasury Secretary Mahinda Siriwardana has said.
The SDP Act has come under fire from the International Monetary Fund in particular for long negotiated discretionary tax holidays given to projects, exposing the country to corruption vulnerabilities.
A bizarre incentive given for SDB Projects is to make salaries of top executives completely free of tax.
“A comprehensive review of the costs and benefits of past tax incentives granted
will be initiated to have a more rigorous approach to the granting of new
incentives to investors,” Siriwardana said in a speech this week.
“This approach will have specific and transparent criteria and processes, and include sunset clauses to limit the duration of incentives and include assessment of benefits and costs.
“Amendments to the Strategic Development Projects Act will be submitted to the Parliament by February 2025 to introduce transparent, rules-based eligibility criteria, to increase the effectiveness of granted tax incentives, and to limit the duration for which incentives can be granted.”
Sri Lanka has ben unable to attract foreign investments like East Asian countries with monetary stability, have been able to do.
“We need to have sound macro-economic management,” Thilan Wijesinghe, a former Board of Investment Chief told a forum organized by Advocata Institute, a Colombo-based think tank.
“Prudent economic management is an absolute sine-qua-non for investment promotion and attracting investment, and that goes hand in glove with policy consistency.”
“The period between 1995 to 2000, a six period, during which time I was a full-time employee of the government, was the longest Sri Lanka did not go under an IMF program.”
At the time, A S Jayewardene, a person who did no believe in inflationism unlike now, was at first Treasury Secretary and member of the monetary board and in 1996 central bank governor.
Jayewardene inherited a 9.1 percent budget deficit and 95 percent debt to GDP ratio and 70 percent of GDP foreign debt.
Treasury bill yields touched 19 percent and call money rates rose above 50 percent in 1995 amid a renewed civil war but a currency crisis was avoided till 2001.
Only other period for more than a year that Sri Lanka was without an IMF program was a three- year period between1985 to 1988, after IMF programs began in 1965.
IMF programs typically lead to ad hoc tax hikes in a so-called ‘stabilization crisis’ after central bank’s inflationary rate cuts coming from a deeply flawed operations framework, triggers the original external crisis.
After the latest peacetime currency crisis fired by macro-economists who printed money to target potential output, even small IT firms are setting up alternate offices in Dubai, a country with monetary stability, critics say.
Sri Lanka does not have monetary stability due to spurious doctrines promoted by macro-economists requiring in aggressive inflationary open market operations to suppress rates and trigger inflation as high as 5 percent, blowing the balance of payments apart in the process.
East Asian countries with monetary stability, that do not experience repeated ‘stabilization crises’ disrupting growth and tax revenues, have standard corporation income tax rates of around 20 percent.
In Sri Lanka a 20 percent tax rate is considered an incentive and a tax cost. Colombo/August19/2024)