Tax regime changes causing problems to formal and informal accommodation providers

30 November 2015 03:28 am - 0 - {{hitsCtrl.values.hits}}

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By Chandeepa Wettasinghe
The informal sector accommodation providers in the country could face problems in transitioning to the formal sector, while formal sector small and medium scale enterprises (SMEs) will have trouble expanding due to the changes to the tax regime in the Budget 2016.

Finance Minister Ravi Karunanayake increased the rate of Nation Building Tax (NBT) from 2 percent to 4 percent while decreasing the threshold to Rs.3 million from Rs.25 million, while also increasing the Corporate Tax from 12 percent for SMEs—which most of the informal sector are—to 15 percent.
Further, the Economic Service Charge was increased from 0.25 percent to 0.5 percent.

However, Karunanayake wants the informal sector to transition to the formal sector.

“I am aware that almost 60 percent of the hotels operating in the country are not registered. This has caused many issues in terms of maintaining proper standards in the hospitality industry in the country. As such, I propose that all hotels be mandatorily registered under the Tourism Development Authority by 1 June 2016,” Karunanayake had said.

Registering an establishment with the Sri Lanka Tourism Development Authority (SLTDA) would require it to adhere to the SLTDA guidelines. Most informal establishments are not up to SLTDA standards, which would require major refurbishments and capital investments.

Since the informal sector used to pay no direct taxes or EPF/ETF payments, registering with the SLTDA and investing to improve standards while simultaneously having to pay high levels of taxes and employee benefits within a short period of time could lead to a number of businesses closing down or remaining unregistered.

“Strict action should be initiated by the Tourism Development Authority against hotels that are not registered,” Karunanayake had also said.

This could lead to Sri Lanka facing a shortage of accommodation for its arrivals-based tourism targets. However, since the government also wants to target luxury tourists, the closure of informal establishments may be convenient, despite robbing customers of a choice.

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Tax regime changes causing problems to formal and informal accommodation providers

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