Higher taxes, a key factor driving local businesses overseas: Study

By Nishel Fernando

The current tax system along with policy inconsistency and other restrictions to doing business, are driving more Sri Lankan businesses to relocate operations overseas and also more professionals to migrate, according to National Taxpayer Perception Study - Sri Lanka 2024. 

However, Sri Lanka’s business community had mixed views in terms of the impact of tax burden and incentives compared with other countries or regions in which their businesses operate. 

“Some respondents reported that Sri Lanka’s tax rates were relatively lower than in other countries, but in other countries there is more accountability for how those tax revenues are generated. Others felt that the taxes in Sri Lanka were too high or even with a similar tax burden, given the lack of ease of doing business, Sri Lanka would not be able to compete internationally,” the report highlighted. 

The full study, a collaborative effort between the UNDP and the Ceylon Chamber of Commerce (CCC) was made available to the public last week. It provides an in-depth analysis of public opinions and attitudes towards the tax system in Sri Lanka. 

Meanwhile, the report dwelled into the impact of these tax increases on Sri Lanka’s Micro, small, and medium-sized enterprises (MSMEs). 

It pointed out that increased tax burden has compounded the effects of other crises, causing businesses to downsize, lay off employees, or even shut down entirely. 

“This situation highlights the urgent need for supportive policies to help enterprises navigate these challenging times and ensure their survival and growth,” it said.

According to the business community, the reduction in disposable income of clients dampening economic activity, has resulted in the creation of an informal sector/grey market due to the high tax rates resulting in unfair competition.

According to an ILO study conducted in late 2023,  the financial strain resulted from these tax hikes has made it nearly impossible for many MSMEs to maintain their operations, leading to severe disruptions in business continuity. 

In addition, different sectors are faced with unique challenges under the new tax system   as some tax policy changes were implemented without a good enough understanding of the sector-specific features, which ultimately results in a lack of effectiveness. For instance, the report noted that vehicle importers were most concerned about VAT and import duties whereas those working in the financial sector were more concerned about taxes on income and interest.

Nearly half of the public perceive unfavourably  about the new tax policy introduced in 2023 and more than 40 percent of respondents view  the tax administration to be unfair . 

While the IMF-backed reforms including tax reforms have helped the government move towards achieving the structural benchmarks of the IMF programme and economic stabilisation and towards debt sustainability, the report stressed those have had adverse effects on the disposable income of Sri Lankans. 

“Poverty is estimated to have more than doubled since pre-Covid levels, with increased inequality and food insecurity, and malnutrition,” it added. 

The study, which is the first of its kind for Sri Lanka, integrates findings from a nation-wide survey of 567 participants covering all districts and detailed Key Informant Interviews (KIIs) with 75 experts from various sectors across all nine provinces. This dual approach ensures a robust representation of views, encompassing both broad public sentiments and specialised insights from knowledgeable informants.