Sri Lanka’s capital gains tax will be nightmare to implement: Abeysuriya

Feb 22, 2017 (LBO) – Sri Lanka’s capital market players are not expecting a capital gain tax (CGT) on the share market as it will have a cascading effect on the already deprived stock market in the island.

Group Director of Candor Group Ravi Abeysuriya, speaking at a capital market conference organized by UTO Edu Consult, said CGT will be a nightmare to implement on stocks.

“We do not expect CGT to be applicable to stocks. But if it comes it’s a nightmare to implement or collect taxes because of the complications,” Abeysuriya said.

“If there is a CGT people will stay out of it. This has been proven in so many countries. Government will get less revenue if you implement CGT on the stock market.”

Budget 2017 reintroduced a 10 percent capital gains tax on gains from the disposition of immovable property, effective from 1 April 2017.

Additional details are still expected including the liable assets, exemptions, and determination of the gain, among others.

Speaking at the event Principle of Tax Division at KPMG, Suresh R I Perera said CGT will be mainly for the people who buy and sell lands and apartments.

Perera however said it is important to make a distinction between trading profit and capital gains using the concept of badges of trade which is important in accounting because non-trade transactions are taxed differently.

Badges of trade originate in case law. Examples include the nature of the subject matter being exchanged, the length of ownership, and the reason for the transaction.

“If I buy a land today and sell it in another 2 years, because the holding period is short, it will be trading profit and the existing inland revenue act has the highest slab of 24 percent for that,” he said.

“It determines at the point of buying an asset, are you buying an asset with the intention of holding on to it in the long run or are you doing it with the intention of selling it and making a profit.”

Perera therefore said people who disposed property where they have been holding on less than 10 years but more than 3 or 4 years will be liable to pay capital gains tax from 1st of April.

Even though there is no legislation on CGT yet, he expected that people may not be liable for CGT when they sell their own residential property.

Perera however stated the capital gain tax that is being introduced is a white elephant in the Inland Revenue Act.

“If someone holds a property for 8 years, he will wait another 2 years to get the exemption. So we have a locking effect coming into the economy and the government will not get significant revenue.”

Perera said the perception that Sri Lanka has CGT even for immovable property will have a negative effect on investments.

“Even when the CGT was there before 2002 it did not contribute significantly to the inland revenue department.”