Super Gains Tax ends; but payments compulsory this year

9 November 2015 03:00 am - 0 - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe
Companies which were liable to pay the morally ambiguous Super Gain Tax (SGT) are still required to pay this year, despite Prime Minister Ranil Wickremesinghe called to discontinue the tax during his medium-term economic policy speech last week.

According to Wickremesinghe, the tax would be discontinued as the funds raised through it during this year will be enough for the government’s requirements.

SGT was a retrospective tax of 25 percent introduced in the interim budget this January by the new regime on the profits of any company or individual exceeding Rs.2 billion earned in the year of assessment of 2013/14 as a one-off tax.

The SGT is payable in three equal installments—the first installment by September 30, 2015, the second by November 30 and the final by
December 31, 2015.

Widely considered to be an act of political revenge, the new regime was unable to pass the legislation for most of the year due to being a minority government.

But even after securing a victory at the parliamentary elections this August, intense judicial pressure was exerted on the proposed legislation prior to being passed in late October. Analysts point out that while most companies falling under the tax are liquid, some companies may have reinvested their profits into long-term investments, and some may be running at losses this year.

At the same time, the companies which have foreign parents may have already transferred their 2013/14 profits to the parent companies by way of dividends.

The interim budget had envisioned an influx of Rs.50 billion to the cash-strapped state coffers, but Finance Minister Ravi Karunanayake recently had said that the revenue raised would in fact exceed Rs.65 billion.

The revenue was required to fund the interim budget’s populist subsidies on essential goods and to hike public sector wages which were promised in the election manifesto to increase consumer demand and lubricate the economy in the short run.

The country’s finances are in shambles, as Karunanayake said that his 4.4 percent of gross domestic product (GDP) budget deficit quoted in January is set to worsen to 6.9 percent of GDP despite maintaining for months that the 4.4 percent of GDP target would be met.

Further, the government recently went for a US$ 1.5 billion bond issue, and sources say that the government might opt for a billion syndicated loan of the same size in the near future well to service some of its debt obligations.

Further, the increase in excise duties last month—anticipated every October to support shortcomings in the budget—was higher than the usual.
However, the crux of the issue is that this retrospective tax creates a dangerous precedent which could allow both the current government and any future governments to re-enact such a law if necessitated economically or otherwise.

Karunanayake had repeated dozens of times that the taxes would only be one-off, and never repeated.

However, eyebrows were raised during Wickremesinghe’s policy statement.

“This tax served the purpose... and accordingly, we need not maintain the Super Gain Tax,” he said.

Legislation is usually brought in for the future and not for the past, as it leads to a fall in investor confidence and the perceived ease of doing business in a country. This was amply demonstrated when India brought in a retrospective tax against Vodafone India, generating intense international criticism.

In World Bank’s recent Ease of Doing Business Rankings 2016, Sri Lanka fell to the 107th ranking from 99 in 2015 despite improving regulations, while India was ranked 134th.

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Super Gains Tax ends; but payments compulsory this year

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