Shedding light on the budget proposal to impose a 10 percent tax on capital gains made on immovable properties, country’s finance minister said such a tax would be only on the properties which are less than 10 years old and would be by no means apply for inherited wealth transfers. Reading the budget for 2017 fiscal year last week, Minister Ravi Karunanayake proposed to reintroduce the Capital Gain Tax (CGT) effective from April 1, 2017 at a rate of 10 percent.
“We basically ensure that it ring fences at 10 percent and also that for any item which is held less than 10 years and not more than that,” Karunanayake told a post-budget forum organised by KPMG Sri Lanka last Friday. The implementation of the CGT again appears to be with retrospective effect in nature as the government could tax any property acquired or built within the last 10 years. While the tax is progressive in nature and is an attempt to increase revenues from tax in agreement entered into with the International Monetary Fund as part of its US $ 1.5 billion loan, the coalition regime still seems to be trying to go behind the alleged illgotten wealth under the previous regime. The tax revenue, which is expected to hit a low of 11.6 percent of gross domestic product this year, is projected to increase up to 13.5 percent in 2017. Further, it is still uncertain as to how the proposed CGT could play out on the booming luxury condominium market in Sri Lanka as investment in condos could get adversely affected when reselling them. Nevertheless, much clarity is warranted from Minister Karunanayake in this regard as many have expressed fears of an imminent condominium bubble. Banks are also seen cutting their exposure in this area.
Hence, any such attempts — tax or otherwise — which could harm the apartments and condominium sales might be of a grave concern for the developers at a juncture when oversupply of apartments is projected. However, the minister categorically said the proposed CGT would not apply for profits from buying and selling equities. In 2002, Prime Minister Ranil Wickremesinghe abolished the 25 percent CGT on land, which was reduced from a high of 45 percent in 1978.