Budget moves hotels out of subsidized corporate tax rate

„By Chandeepa Wettasinghe The Sri Lankan tourism industry was treated to a shock with the recent budget proposals, which call for increased taxation on the industry despite the government assurances as recent as a fortnight before the budget that the industry would be protected. “Hotels (taxes) were 12 percent, now they have come up to 28 percent,” Finance Minister Ravi Karunanayake told a post-budget meeting in Colombo last week, organised by Ernst & Young. Previously, all tourism enterprises only had to pay a subsidized corporate income tax of 12 percent due to their virtue of creating foreign exchange for the country,

as opposed to the standard rate of 28 percent. The new 14 per cen t subsidized corporate income tax rate does not include tourism. Central Bank Governor Dr. Indrajit Coomaraswamy, in the days leading to the budget, had said that the country’s tourism and apparel sectors need to contribute more towards government revenue after being protected for a long period of time.Hotel Association of Sri Lanka (THASL) Immediate Past President Hiran Cooray told Mirror Business that there may not be an immediate impact on future investments into the tourism sector.

“It will hurt most of the established companies that are making profits. But you have to understand that it’s not only the income taxes, other taxes were also increased, so if the existing companies are not making money, there might not be many new entrants,” he said. The value-added tax—charged from the end customer—was increased from 11 percent to 15 percent last month, while the travel agents are now liable for the Nation Building Tax of 2 percent as well. The profits of Sri Lankan hotels have been in a declining trend over the past couple of years, as oversupply of hotel rooms, coupled with the 50 percent market share the supplementary and informal sectors that aren’t liable for taxes have managed to capture, have driven down average room rates of hotels. Analysts believe that the slowdown in hotel construction coupled with increased arrivals over the next three years, would address the issue.Cooray noted that the tourism industry may not pass on the effects of the tax increases to the customer. “The customers aren’t just going to accept increases in prices because our products are worth a certain amount. I don’t think that there will be a big increase in prices,” he said. However, the industry has many options at its disposal that aren’t highly visible, such as cutting down less popular amenities, decreasing food and beverage portions, etc. Tourism Development, Land and Christian Affairs Minister John Amaratunga had assuaged the fears of hoteliers that they would come under increased taxation during the THASL Annual General Meeting a fortnight ago. “The finance minister is now in very close touch with the hoteliers’ association and the travel agents, knowing the capability, capacity and ability to contribute for his deficiencies in the budget. But that does not mean we will encourage him to burden you,” he had said. Amaratunga had added that after a long discussion, Finance Minister Ravi Karunanayake had decided not to increase taxes on hotels.Meanwhile, the informal and supplementary sectors, which are for the most past not tax liable since their revenues and profits fall below the thresholds, were slapped with a 0.5 percent Tourism Development Levy (TDL). The websites, which had facilitated the rise of such small and medium enterprises to claim a 50 percent share in the market, will also be taxed the same as businesses operating in Sri Lanka, and the Treasury hopes to collect Rs.25 billion through the proposal, though many such companies may be exempted under international double taxation agreements. The hotels were also allocated Rs.500 million to draw concessionary loans for refurbishment.