CB offers strongest defence against calls for lower tax rate on forex earnings

• Asks if the lowest tax rates Sri Lanka had for years generated desired results
• In October govt. proposed to raise corporate income tax rate to 30% across the board 
• But it soon met with heavy push back particularly from exporters and IT/BPO sector
• They claimed that higher tax rate will make them non-competitive and hinder foreign investments  

Staging strong defence against those who sought preferential tax treatment on foreign exchange earning companies, Central Bank Governor, Dr. Nandalal Weerasinghe yesterday questioned whether the decades-long practice of taxing the exporters and others who earn in foreign currency lower had delivered the country the desired objectives. 

As a part of the slew of upward tax revisions which came into effect since June this year, the government in a gazette issued in October proposed to raise the corporate income tax rate to a single 30 percent rate from multiple rates that were hitherto available for all entities including those who earn in foreign currencies. 

But, it was soon met with heavy push back particularly from exporters and IT/BPO sector claiming that the absence of concessionary tax rate could undermine their competitiveness, adversely affect foreign direct investments into the sector and thus would force them to relocate their operations elsewhere.

“The question that I would like to ask is that for how long did we have these preferential tax rates for foreign exchange earners? As far as I can remember we had these preferential tax rates in Sri Lanka at 14-15 percent compared to 24 or 28 percent for others,” said Dr. Weerasinghe. 

“So with these preferential tax rates, have we been able to see the results and have we been able to stop them from going out?” he asked, speaking at a post-budget seminar organised by the Centre for Banking Studies of the Central Bank, yesterday. 

Earlier, Sujeewa Mudalige, the Chief Executive Officer at PwC Sri Lanka speaking at the semiar raised serious concerns on taxing exporters and other foreign exchange earning entities at the same level as the rest of the entities at the proposed 30 percent, which could be inimical to attract badly needed foreign exchange. 

Even before the tax rate was raised to 30 percent, he pointed out that companies had been expanding overseas instead of expanding in Sri Lanka due to decades-long policy inconsistencies and poor doing-business conditions in Sri Lanka while they receive very generous tax incentives from countries like Bangladesh, Vietnam, Egypt etc.

Hence he said, while agreeing that everyone has to pay more taxes, it is appropriate to revise the corporate tax on foreign income earnings along with the personal income tax, which is taxed at 36 percent at its highest bracket,which puts Sri Lanka a complete outlier among its regional peers. 

However, in response Dr. Weerasinghe asked if the higher tax rates were the only reason why the companies are expanding overseas and queried if the lowest tax regime Sri Lanka had in the last two years was able to prevent companies from moving out. 

“Why didn’t they expand (at home)? Had we continued with the lowest rates, would they have expanded locally and why didn’t they do it during the last years?,” he asked.

Dr. Weerasinghe said lower tax rate at overseas markets may not be the only reason why local companies expand overseas as when they reach scale at home they anyway seek cross border expansions.

 “And if the tax payers in the receiving countries are willing to subsidise our companies going there, through lower tax rates, it is perfectly alright” he remarked.

He on the other hand asked if the tax exemptions and concessions offered by the Board of Investment (BOI) and other authorities expecting to attract foreign direct investments have yielded the desired results.

Sri Lanka in June reversed its low tax regime by raising both the direct and indirect taxes to extremely high levels to raise revenues and thereby trim the unsustainably high budget deficits which were partly responsible for the current economic crisis.

Pix by Pradeep Dilrukshana