Sri Lanka’s Central Bank believes that the proposed removal of the withholding tax (WHT) on the interest earned from investments in government securities (G-Secs) could facilitate more foreign inflows to the country.
Sri Lanka’s new Inland Revenue Act (IRA), which overhauled the country’s existing tax code, exempted individuals of 10 percent WHT payable on the interest earned from investments in G-Secs but made such incomes liable for income tax up to 24 percent, depending on the amount of the total income.
Under the present law, the individuals investing in treasury bills and bonds are taxed at 10 percent WHT, irrespective of them being domestic or foreign.
Thus, by removing the 10 percent WHT on G-Secs, the new tax law has effectively freed foreign investors from paying any taxes, which could become a substantial tax income leakage to the government.
However, Central Bank Governor Indrajit Coomaraswamy believes that the move will “incentivize more inflows to the country”.
According to the Central Bank data, foreigners had bought as much as Rs.17.3 billion worth of G-Secs so far during the year, while the total G-Secs held by them tops Rs.278 billion, little under 6.0 percent of the total outstanding G-Sec stock.
Deputy Governor Dr. Nandalal Weerasinghe too is of the opinion that the tax removal for foreigners will help Sri Lanka to lure in more foreign investors. “If you want to attract foreign investments, the benefit of foreign investors coming into the market is more than what the government may be sacrificing here,” he said.
But under the existing regulations, foreigners are permitted to hold up to 10 percent of the total outstanding G-Sec stock of Sri Lanka.
Meanwhile, despite the optimism, a number of tax experts Mirror Business talked to believe that the removal of the WHT would allow the interest income on G-Secs going out of the country without any tax being paid.
They said the government may have to bring in an amendment before the implantation of the act to plug in these leaks.
The new IRA is set to come into effect from April 1, 2018.