Colombo bourse nosedives on tax woes

The Colombo Stock Exchange yesterday nosedived as the main All Share Price Index (ASI) closed below 6,000 point mark amid Prime Minister Ranil Wickremesinghe presenting upward revisions to the tax proposals in the budget 2016 with the reintroduction of capital gains tax after 29 years.  

The ASI lost 122.50 points or 2.02 percent to close at 5934.72, hitting a near two-year low, while more liquid S&P SL20 lost 64.27 points or 2.01 percent to close at 3140.23.  

Prime Minister Ranil Wickremesinghe explaining the rationale behind introducing capital gains tax said there had been a huge accumulation of wealth in the higher strata of the society due to the higher property and stock prices in the last 10 years. 

Sri Lanka stopped charging capital gains tax in 1987. Capital gains tax generally applies to both corporates and individuals. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price.

“The rich should also pay taxes,” Wickremesinghe told Parliament. He also said the concessions in the interim budget in 2015 January boosted the aggregate demand in the market place. 

However, in his speech to Parliament, Wickremesinghe did not give out the percentage at which capital gains will be taxed. “These amendments by the Cabinet add further uncertainty to the country’s policy environment. Specially, with the re-introduction of capital gains taxes yet without a specific rate mentioned, has hammered the equity investors in an already deteriorating equity market,” Manager Research at Asia Securities Srimal Liyanage said.  Softlogic Stockbrokers COO and Head of Research Danushka Samarasinghe shared Liyanage’s views.

 “Introduction of capital-gains tax without mentioning a rate would disturb the investment and business sentiment. 

Also the personal income taxes increased to 17.5 percent from the earlier announced 15 percent would be more of a psychological blow.”

Premier Wickremesinghe yesterday announced an increase in value added tax (VAT) to a single standard rate of 15 percent from 8 percent (manufacturing or import sales of goods ) and 12.5 percent (services sector).

However, he pledged that VAT increase would not be imposed on essential goods but only on a few “selected” items. 

The 2016 budget brought down the VAT threshold to Rs.3 million from Rs.12 million per annum.  
Meanwhile, Premier Wickremesinghe said Nation Building Tax (NBT), a tax charged on turnover, would be retained at 2 percent as opposed to the 2016 budget proposal to raise it to 4 percent. 

Samarasinghe was of the opinion that the VAT increase to 15 percent would eventually lead to cost-push inflation and also demand contraction which could weigh down on economic activity. 

“These proposals are aimed at increasing the government revenue and narrowing the deficit. But it would have been better if the government started off trimming the freebies, before asking the public to cough up more taxes. 

An initiative could have been displayed by doing away with free vehicle permits for the parliamentarians and other deep discounted privileges. Overall market sentiment would be further weakened,” he added. 

“The changes might be to satisfy the IMF to obtain the much needed loan facility where narrowing budget deficit is an essential criterion,” Liyanage opined. 

The IMF has long called on Sri Lanka to reduce its budget deficit, raise revenues, and bolster its foreign exchange reserves.

Last week Fitch Ratings downgraded the country’s sovereign rating by a notch to ‘B+’ from ‘BB-cautioning on the country’s ballooning budget deficit, higher foreign debt and dwindling foreign reserves. 

Revising the numbers presented in the November budget, Premier Wickremesinghe said the government owed Rs.9.5 trillion as the former government headed by Mahinda Rajapaksa had not included Rs.1.04 trillion in borrowing by state enterprises in the national debt, which was estimated at Rs.8.48 trillion at the end of last year.