Sri Lanka’s 2006 budget plan announced last week could spur investment in less developed areas of the country, although the government’s pro-poor focus also means higher taxes which could hit corporate profitability, analysts and investors said. Sri Lanka’s 2006 budget plan announced last week could spur investment in less developed areas of the country, although the government’s pro-poor focus also means higher taxes which could hit corporate profitability, analysts and investors said. Among the proposals announced Thursday by Sri Lanka’s President and Finance Minister Mahinda Rajapakse is a plan to exempt companies investing more than Rs.30 million ($300,000) in areas outside the more-developed Western province from income tax for five to 10 years.
The budget plan also contained development and welfare-oriented measures, which Rajapakse said were a continuation of the government’s pro-poor policies. The government intends to spend more on subsidies for farmers and wages for public servants, which would contribute to a widening in the budget deficit to 9.1% of gross domestic product next year from 8.5% this year.
A final vote on the budget is scheduled for Dec. 22.
“(The tax exemption) will take industry back to the villages, so it is a good proposal,” said E.M. Wijetilleke, the secretary general of the National Chamber of Commerce.
The tax plan requires companies not just to invest in poorer areas but also to employ at least 200 people. Analysts said small-scale companies in the island’s growing software development sector may not be able to meet the 200-employee mark.
“There is a shortage of labor in metropolitan areas so this proposal will also address that by encouraging companies to locate in areas which do not have a shortage of labor,” said Tuli Cooray, the secretary general of the Joint Apparel Association Forum.
The proposal would encourage companies in the services outsourcing, food manufacturing and garments industries to invest in rural areas, they said.
As an additional incentive for the important garments industry, Rajapakse announced tax cuts for companies which take work, subcontracted from garments factories. Exports of clothing accounted for more than half the island’s $5.8 billion in export revenue last year.
To fund spending, the government is proposing raising the corporate tax rate for exchange-listed medium- to large-size companies to 35% from 30%.
“Most listed corporates are likely to face a higher tax burden (next year),” C.T. Smith Stockbrokers said in a research report.
Financial institutions also would have to pay a value-added tax of 20%, up from 15% at the moment, which the research report said would act as a “quasi-income tax.”
The government is also proposing lowering the sales threshold of companies required to pay a 1% turnover tax, referred to as an economic service charge.
Companies with a minimum Rs.40 million in sales would be subject to the tax, versus companies with a minimum Rs.50 million in turnover this year. (Dow Jones)