By Mario Andree
A reasonable uncomplicated taxation regime to lure investments into the country would be a better incentive than offering tax holidays which would also help the government collect much needed revenue, a senior tax consultant said.
Tax and Investment Consultant P. Guruge told a recent forum that under the present taxation regime, various tax incentives offered to investors were more attractive than tax holidays. His argument being that despite receiving tax holidays, investors were still subject to duties and other levies.
"We do not need to offer tax holidays to attract investors to Sri Lanka. All we need is a simplified tax regime with reasonable rates," he said, adding that efforts to improve the business climate would also help greatly.
"Addressing the concerns about competitiveness in Sri Lanka, may be another urgent requirement to attract investments even without tax holidays. In this regard several supply side factors such as continuing free market policies, clear commercial, investment and exchange control laws, sufficient infrastructure facilities, enforceable and fair regulatory procedures, minimum and efficient bureaucracy, an independent and efficient judicial system and after all the proper enforcement of law and order, are major vital areas where much has to be done to improve them to acceptable levels," Guruge said.
He said the country has not benefitted by granting tax holidays either.
While the post-conflict FDI performance has been well below expectations, tax revenue collections have not been impressive either, although the government has taken steps to simplify the regime, which was undone by ad-hoc policy changes.
"By looking at the GDP growth rates over the years since tax holidays were introduced, one can say the country has not achieved impressive growth as a result of tax holidays. The strong growth rates we saw since the conflict ended in 2009 was not because tax holidays brought in investments, but was a natural phenomenon of post-conflict economies.
"Policy makers should understand that offering a reasonable lower rate without complicated calculations is the best incentive for investment.
Even within the suggested and approved tax holidays any rational criteria has not been adopted. For example certain investment requirements are prohibitively high in relation to the relevant areas.
"The biggest failure may be in the area of strategic import replacement incentives due to the problem of raw materials.
"Another, lacuna is not giving a post exemption rate regime for many incentives given. This is necessary to encourage the investors to continue in such activities, when the tax holiday is expired."