Dicey taxes are bad signals for investors
The one-time tax on corporate profits in excess of Rs. 2 billion in FY 2013/14 which was imposed solely to help relieve the fiscal pressure of new President Maithripala Sirisena’s promises is a bad signal to the private sector as it creates uncertainty regarding the future outlook and direction of the government, analysts say.
Immediate fiscal pressure is expected as there is likely to be a mismatch between government revenue and expenses over the next three to six months, according to Purasisi Jinadasa, Chief Strategist, Capital Alliance Securities. He told the Business Times that the wording provided in the mini-budget indicates a blanket accusation across the board regarding unethical business practices (recently retracted, but still a concern).
The one-off super-gains tax, which is more of a stop-gap measure is expected to net in some Rs. 50 billion to the state coffers and limit the revenue loss. Individuals or corporates having made over Rs. 2 billion in profits during FY13/14 are to pay a one-off 25 per cent tax to the government.
“Such statements during a national budgetary speech are extremely disturbing and unprofessional. It points to a lack of foresight during the election process, as the measures announced are not sustainable and purely populist. All this brings a degree of apprehension, particularly amongst the investing community as it may lead to future arbitrary accusations in order to bridge the fiscal gap,” Mr. Jinadasa said. Given Sri Lanka is in need of a significant degree of private sector investment (local and foreign), Mr. Jinadasa said that this concern will have to be addressed in a more professional and transparent manner.
The single biggest effect will be on the 26 listed firms that are in the ‘two billion club’. Analysts say that policy backtracking like this has dangerous, long term consequences with investments.
“We believe such inconsistencies in policy (particularly with ones with retrospective effect) could send dangerous signals to the long term investors of Sri Lankan securities,” an analyst said. He added that the Finance Ministry will need to add more clarity into the legislative areas of administering the ‘super gain’ tax.
Political instability
Mr. Jinadasa said that such policies reflect the current political environment and certain policies may be viewed as temporary (to consolidate power in the forthcoming parliamentary elections). “The mini-budget is a very socialist agenda compared to policies of the previous regime. This raises further confusion as the current regime is composed of the UNP, a party known for progressive policies. The current composition of the government is very unstable. The coalition that won the elections in January comprises parties with highly differing platforms. The UNP is a pro-business party (Prime Minister), while Sirisena (President) comes from a more socialist party. Added to this dichotomy is minority representation from the TNA (Tamil) and SLMC (Muslim) and a Buddhist party (JHU). Such a mix of views does not point to any form of a stable political/policy environment,” he explained, adding that this issue re-emphasises the need for transparency and quick dissemination of new government policies to prevent shocks and unnecessary volatility while assuring the professional community that certain announcements are in order to consolidate power.