Sri Lanka's new government on Thursday announced a budget that imposed new taxes on cash-rich firms to pay for pay hikes for workers and tax cuts on key commodities, hoping to woo voters as it approaches a parliamentary election.
At 0712 GMT, the main stock index was 2.64 percent weaker, or down 194.44 points, at 7,182.06, its lowest since Dec. 1, Thomson Reuters data showed.
Finance Minister Ravi Karunanayake imposed a one-time super gain tax of 25 percent on individuals or companies that had earned over 2 billion rupees in profits in 2013/2014.
"The market came off due to panic selling because of the super gain tax which affects the large cap shares and it is quite a blow to the telecom sector too" as they are liable to pay the new tax, said Dimantha Mathew, manager, research at First Capital Equities (pvt) Ltd.
Analysts said the market would trade lower in the coming days on selling in top conglomerate John Keells Holdings , Dialog Axiata, Sri Lanka Telecom, Ceylon Tobacco Company and Nestle as they would have to pay the new tax.
Prime Minister Ranil Wickremasinghe on Thursday said the new government had blocked three casino projects approved by the previous administration, including a $400-million project by Australian gaming mogul James Packer's Crown Resorts Ltd and another by John Keells Holdings Plc.
Shares in John Keells fell 4.49 percent, Ceylon Tobacco Company was 2.27 percent weaker, and biggest listed lender Commercial Bank of Ceylon Plc lost 6.11 percent.
Analysts, however, expect the raft of tax concessions and salary hikes in the budget to increase consumers' disposable income and help the market rally over the long term.
Turnover was 1.26 billion rupees ($9.55 million), less than last year's daily average of 1.42 billion rupees, exchange data showed.
Sri Lankan rupee forwards were steady on Friday as no trades took place due to policy uncertainty and moral suasion by the central bank, dealers said.
One-month forwards traded little changed at 134.00/20 per dollar at compared with Thursday's close of 134.00/10.
One-week forwards traded steady at 133.50/60 per dollar, unchanged from Thursday's close, while four-day forwards also traded unchanged at 133.00/133.40 per dollar.
"There is panic in the minds of exporters, importers and everybody due to the budget, so there are bids but no offers in the market," said a dealer.