REUTERS: Sri Lanka doubled a nation-building tax and adjusted the corporate tax structure in its budget for 2016 on Friday to finance greater government spending in health and education, and accelerate the pace of economic expansion.
Finance Minister Ravi Karunanayake said the island nation’s economy will grow at 6 percent this year and the aim is to achieve an annual growth of 7-8 percent during the next few years.
The coalition government’s formation in August helped complete a peaceful political transition after a long and bitter civil war, but the Indian Ocean island’s young government lacks a steady financial base to launch reforms.
The government increased the Nation Building Tax, a levy imposed on most businesses, to 4 percent from the existing 2 percent and raised charges on the use of seaports and airports.
It also restructured corporate taxes into two bands of 15 percent and 30 percent from the earlier single rate of 28 percent, a move it hoped would yield greater collections.
Slowing global growth and capital flight to industrialised nations has turned investors away from smaller frontier markets like Sri Lanka.
Karunanayake removed a tax imposed on foreigners leasing land and set a time limit on approval for foreign proposals to 50 days in order to revive investment.
“This budget will be the platform and ensure the planned growth levels are achieved,” the budget document said.
The country expects to cut the budget deficit marginally to 5.9 percent of the GDP in 2016 from a revised 6 percent this year. Karunanayake earlier expected this year’s deficit to be 6.9 percent.
The government is aiming a 38 percent jump in the total revenue and grants, including a 23 percent rise in tax revenue, the budget document showed.
“The budget has looked to better the investment climate both domestically and for foreigners while incentives have been given for development and micro industries,” said Shiran Fernando, an analyst at Colombo-based Frontier Research.
Karunanayake reduced foreign holding in treasury bills to 10 percent from a 12.5 percent, to cut exposure.
The rupee ended at record closing low of 142.45/55 and dealers said pressure will persist on the currency.