Tax hikes could force Sri Lanka exporters shift to other countries – exporters

ECONOMY NEXT – Sri Lanka exporters could go to other lower taxed destinations if they cannot compete with the other foreign competitors after the latest tax hike proposed by President Ranil Wickremesinghe, the island nation’s dollar earners say.

Wickremesighe in his capacity as the finance minister has announced bold tax hike to raise the government revenue and reduce the budget deficit. Sri Lanka is in discussion for a $2.9 billion International Monetary Fund (IMF) loan and the global lender has requested some drastic measures to boost tax revenue as preconditions for the loan, government officials say.

The tax revenue is expected to be raised by 69 percent in 2023 to 3.13 trillion rupees compared to this year with increase in many taxes including personal taxes. The corporate tax is raised to 30 percent from 24,  most concessions given to economically important sectors were removed.

Key sectors amongst the affected are exports and agriculture where the tax rate was increased from 14 percent to 30 percent, exporters say.

“Exporters understand that we have to contribute in a bigger way in the current
circumstances. But the government should have discussed it with us before going up to 30 percent,” Rohan Masakorala, Director General of Sri Lanka Association of Manufacturers and Exporters of Rubber Products, told Economy Next.

Investors have already started to find other routes to continue their export business at a lower cost and they are likely to go to other export destinations and set up their business since they always look at the profit side of their business, exporters say as high taxes have discouraged them to invest in Sri Lanka in future.

“They will look at the tax benefits in those export countries and will invest in those countries,” Masakorala said.

“Investors coming into Sri Lanka for manufacturing and exporting will not see Sri Lanka as an attractive destination compared to other destinations. These are the challenges.”

Sri Lanka’s monthly good export earnings have been over $1 billon despite the unprecedented economic crisis. However, this earnings are expected to fall as looming global recession has reduced export orders from Sri Lanka.

Related: Looming global recession threatens dollar earning of Sri Lanka’s top exports

“The exporters begin transfer pricing and setting out partnerships in other countries, where the tax rates are between 12% to 15%. They can do their expansions in third countries,” Masakorala said.

“Since they are experienced and some of the products are experienced in different areas so they technically know how that market works. There are emerging markets where they call for investors.”

Value Added Tax (VAT) and Social Security Contribution Levy (SSCL) have already hit a booming IT sector, industry experts say.

The Joint Apparel Association Forum (JAAF), the body which deals with the country’s top export earnings garments, in a statement said the removal of the concessionary rate granted to exporters could make the country’s apparel industry “very uncompetitive when compared with regional peers”.

“The competitor countries’ tax  25 percent to 30 percent but effectively exporters pay about on average between 12 percent to 17 percent because of rebates and other benefits whereas in Sri Lanka exporters do not get that and the that leads to lower profitability,” Maskorala said. (Colombo/Nov26/2022)