News
All’s not sunny in booming foreign-run businesses
Emotive problem
The Sunday Times delved into the increasingly emotive issue of foreigners operating untaxed, unregulated ventures around the country. We interviewed both Sri Lankans and noncitizens in Ahangama, Midigama, Arugam Bay, Kalpitiya and their environs. Nobody wished to be named, fearing repercussions. Everybody said these businesses were growing in number; and suspected that the bulk of their earnings were banked outside of Sri Lanka.
The venues that are most popular with tourists are run by foreigners. And driven largely by commercial self-interest, these entrepreneurs promote Sri Lanka better than any old brochure or formulaic road show does.
Many of them started out as visitors, stayed on or came back. Others swooped in when they learned how the lax implementation of laws made it easy to set up unregulated businesses in Sri Lanka (notwithstanding other challenges, like bribery and corruption).
There are also travelling teachers—mostly yoga and surfing—who go where the season takes them. And there are “volunteers” that hold tourist status and work to pay for their stay. Some are happy with just food and accommodation.
Another group escapes turmoil back home by residing long-term in Sri Lanka. They lease properties and sub-let them to tourists or conduct other activities. Again, how much of their earnings are ploughed back into the local economy is unexplored territory.
And sometimes their politics triggers ugly sparring. Recently, supporters of the Palestinian cause found themselves the target of abuse, and even an avalanche of negative online reviews of their establishments.
The rule-followers
But there is a category, too, that does everything by the book—finding Sri Lankan partners, investing money, registering their ventures and getting liquor licences (via the local associate), contributing taxes, securing the appropriate visas for themselves and any foreign staff, employing locals and paying mandatory retirement benefits while helping local communities.
“It’s absolutely not difficult,” said one such European business owner. He found a lawyer, registered his company and, after obtaining a resident visa, applied for and obtained a trade licence from the pradeshiya sabha. He pays taxes every year and encourages other foreigners to follow the rules.
These ethical players evoked the cautionary tale of Bali, that idyllic Indonesian island where authorities have cracked down on tourists and foreigners violating their visa conditions to run accommodation and other ventures while avoiding tax.
The activities that the Balinese regulators had found so objectionable are identical to the practices now drawing criticism here. But while Bali has introduced effective procedures to curb irregular business and tax avoidance, Sri Lanka is still at the initial stages of a problem that threatens to get worse if not nipped in the bud.
What Sri Lanka is seeing, said one local yoga teacher, are the “Bali spillovers”. “After Ubud in Bali got too crowded, word got round that Sri Lanka has potential, is untapped and you can do certain things, they all started flocking here,” he said.
They made it cool
Historic Ahangama in the Galle district is today a changed place. A recent influx of enterprising foreigners has transformed this sleepy seaside town into a hip, laidback surf-and-yoga destination where trendy cafes and restaurants dish up global cuisines produced by international cooks.
The positive impact these foreigners have had on the Ahangama tourism landscape is widely recognised, even by those who question their financial model.
“I know this village from childhood,” said a Sri Lankan businessman whose family has owned and run a hotel in Ahangama for decades. “After the influx of tourists, the local boys who were born and raised on this beach have seen what these foreigners do and they’ve done better.”
Property prices have skyrocketed, meaning that the local owners earn more. The rents are “more than Colombo-7 prices”. For instance, a small space of 500 sq ft can go for around Rs. 200,000 a month (there is another discussion about gentrification to be had here). And the Sri Lankans who work at these foreign-run enterprises gain expertise and training that take them closer to being global citizens.
“Someone was saying that, in the village, a cup of coffee is a cup of coffee,” said one South coast resident. “A cappuccino, a latte, a caffe Americano, these things are new to them. Having these (foreign) businesses helps because the locals get elevated. They’re seeing a new world—from the aesthetics to the design to how things are run. It’s an education they would otherwise not be able to get.”
“It’s good for the community, in terms of the wealth of knowledge and expertise that has come in,” a yoga teacher said. “We all have to admit that there’s a better brand of wellness tourism, better brand of yoga here, because of these travelling teachers.”
Nagging questions
But this is a double-edged sword and it’s starting to cut.
Recently, an Instagram account called “southcoast.busted” drew widespread attention to how foreigner-run tourism ventures were evading taxes. It publicized how an Israeli group openly organised an outdoor party for which it hired DJs on tourist visas. Ticket sales were linked to an offshore account. “Thank you for contributing to the bankruptcy of this country!” it said. Within weeks following a concerted effort by these foreign parties to track the page owners, the account was twice hunted down and is no longer online. Meanwhile, more parties are expected in the future and there is no compulsion yet for the payment model to change.
The most popular overseas credit card reader used is called SumUp. Meanwhile, one local South coast resident described how a restaurant asked her to make a Euro payment for the food she purchased into a PayPal account, despite this venture even having a Sri Lankan bank account (so not all entities engaging in such practices are unregistered).
As visitor numbers balloon–but are not translated into revenues for the country–people are starting to do the math. A wellness guru said a class goes for around Rs. 3,000 per attendee. The teacher gets 60 percent and the venue (hotel, or yoga studio or just the space) gets 40 percent. On average, there are around 10-12 people per class and there are, at most, three sessions per day. Separately, there are yoga workshops which are priced at Rs. 4000-5000.
Ceremonies can cost up to Rs. 8,000 depending on the number of practitioners, materials or implements used. Retreats have different pricing, from US$ 200-2000 based on the duration and location. Foreign-operated yoga schools offer one-month courses for between US$ 4,000 and 5000 while local schools can cost US$ 1,500-3000 per training.
“Some places conduct back-to-back courses and they’re full house,” the wellness teacher said. “If there are around 20 attendees, do the math and calculate the profits. I think the Sri Lankan authorities should understand that there is taxable income in this industry.” He maintains that these payments rarely, if ever, enter the local banking system. And most travelling yoga teachers are on tourist visa.
“I think the authorities should recognize the taxable income in this industry, as it is booming and expected to increase in the near future,” he said. “This is easy revenue if you introduce a feasible regulatory measure.”
And surf camps were another lucrative venture with Ahangama and Arugam Bay topping the list. “It’s the yoga camps and surf camps, more than cafes and restaurants, that are really making big bucks,” another Ahangama resident said.
Problems everywhere
The brazenness with which these overseas entrepreneurs bend the rules hurts those who pay their licence fees, tourism development levy, employee trust and provident fund dues, local authority rates and personal and corporate taxes, all the while also dealing with escalating costs brought on by sweeping utility price increases and heightened VAT. The tariffs eat into their margins in a difficult economic environment while the rule-breakers exploit implementation loopholes to rake in profits.
Similar issues have arisen in Kalpitiya on the North-Western coast. Last year, the Kalpitiya Peninsula Tourism Association wrote to the authorities raising several issues. One of them was to encourage all tourism service providers in the area to register with the Sri Lanka Tourism Development Authority (SLTDA). It was also recommended that the Tourist Police and Department of Immigration and Emigration be empowered to crack down on the illegal tourism business “who run on tourist visas and not adhere to the laws of the land”.
A longtime tourism source in Kalpitiya confided that they had been “talking about this for a long time” but gave up when it had no impact. They also ran the risk of angering members of the local community that had formed partnerships with some of these outsiders and benefited from land or property leases, and so on.
“Now it’s come to a point that we don’t want to make a noise about it because, if the authorities are not doing their work and we speak up, then these village guys make a big problem,” this source said. “It becomes very uncompetitive for us because they just slash prices. Tourists don’t look at who is registered or not. They go with the lowest price.”
Unfair competition that hits their revenues also impacts the social work they do. “When you have the volumes and people are coming and paying a good price, you have extra money to pump into other projects,” he said. “We are just tired of telling the authorities.”
Another Sri Lankan business owner explained how he had invested all of his foreign earnings, millions of rupees, on his legal, registered, tax-paying hotel and water sports venture only to find foreigners coming in, renting houses and grabbing customers for lower prices.
“They don’t bring in money to invest,” he explained. “They earn it here. And when guests make bookings, they make the deposits into foreign accounts. Nobody checks. When we complain we are told to give it in writing. If we do that, the report will leak out and we will be exposed.”
Solutions?
Sri Lanka’s tourism authorities, and even President Ranil Wickremesinghe, are aware of these challenges, ground sources said. It has been brought to their notice many times. But there has been no action and that was “frustrating”.
Part of the reason could be the delicacy of trying to strike a balance. What if a crackdown backfires? Then again, doesn’t the violation of immigration and emigration rules–never mind the other violations–warrant harsh action? Bali did it. And the regulatory processes they introduced are working.
A foreign entrepreneur in Ahangama strongly raised the point that “nobody, not even local businesses” were compliant. He felt it was unfair to target foreign ventures. “I started to follow the law,” he said. “But I talked to the community and I clearly saw that 90 percent of them don’t pay tax. They have no building permission or liquor licences. There is no system.”
So bribery and corruption are thriving, sources at ground level overwhelmingly said. “If you want to sell alcohol in your establishment, you have to apply for an alcohol licence,” one businessman said. “And if you have a foreign-registered business, you cannot ask for it. Only Sri Lankans can. That’s where there is a big amount of bribery going on.”
According to the sources, regular payments are made to inspectors from multiple branches of the Excise Department, sometimes totaling up to Rs. 90,000 a month per enterprise. The Sunday Times could not independently verify this. But this government institution was the bane of tourism sector businesspeople who just wanted to run viable hospitality ventures.
One solution proposed by a large number of interviewees was that Sri Lanka makes it easier for foreigners and locals to do business the right way, especially where the liquor licence and banking procedures were concerned.
It was suggested also that special visa categories be created for yoga and surf camps with higher one-off fees. Higher rates could be charged for certain business trade licences. Deploying the police to inspect and take action would work subject to there being no bribery. There must also be clear regulations regarding revenues and incomes, to ensure Sri Lanka benefits.
Why not SLTDA have a pop-up desk (say, for two weeks or a month) where unregistered businesses are given fast-tracked licensing? This would draw the outliers into the net, suggested one resident.
Moral obligation
As for the foreigners, there is a clear moral aspect to consider, said a European yoga teacher. “In yoga, we try to do good things,” the yoga teacher reflected. “We promote happiness, health and wellbeing. So it is also our responsibility to do right by this country. The same applies to other foreigners. We can contribute a lot. You are contributing to the betterment of Sri Lanka by paying taxes.”
“We are privileged to be here,” he continued. “A Sri Lankan that goes to Europe is not privileged. They have to go through heartbreak to make a living. And here you come and you think you are ‘King of Paradise’. No. Be humble.” Don’t, he said, be exploitative.
Sri Lanka, it was universally predicted, “is going to boom”. The level of offerings, the quality of service, food and accommodation is getting better. But government support must extend beyond futilely counting arrivals and running overpriced promotion campaigns. And the authorities can no longer shut their eyes to new realities.
The best way to say that you found the home of your dreams is by finding it on Hitad.lk. We have listings for apartments for sale or rent in Sri Lanka, no matter what locale you're looking for! Whether you live in Colombo, Galle, Kandy, Matara, Jaffna and more - we've got them all!