Sri Lanka tax cuts to shave off Rs560bn govt. revenue in 2020: Asia Securities

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Dec 10, 2019 (LBO) – Sri Lanka’s recently announced tax cuts will likely shave off 560 billion rupees from government income in 2020, launching its equity outlook report for next year, Asia Securities Research said.

Even though a pick up in consumer activity and higher collections compared to 2019 will lead to a partial clawback, the firm sees the fiscal deficit widening to 6.9 percent in 2020.

Along with strong consumer spending, Asia Securities expects inflation to rise to 6.2 percent in 2020 with upward pressure from the demand side and excluding any supply-side shocks such as floods and droughts.

“While we opine the current government mechanism is better than the previous coalition government, we believe that alignment on policy implementation is key for the new government,” Asia Securities Research said.

“A combination of spending cuts, the multiplier effect of over 3.0 times, sale of non-core assets of SOEs and clear measures to sustained tax revenue collections must be in place to maintain fiscal discipline.”

Speaking on the impact of tax cuts, Chairman of John Keells Holdings Krishan Balendra said that lower prices and more disposable income will drive a sharp uptick in 2020.

“Maybe not as sharp an uptick as we saw in 2015 which was driven by a drastic drop in utility expenses; this is not the case today. Overall, however, the impact for 2020 will be quite material.”

“In the leisure sector, the impact comes to the customer where you will see taxes levied on room rates come down to 11.0% from the current 30.0%. This will have a very material (positive) impact on leisure earnings.”

Talking about the reduction in Telco levies, Dr. Hans Wijayasuriya said that the Telcos have been very responsive to any change in levies and the gap between value, and the amount paid for that value.

“This would lead to an uptick in consumption and potential revenues for the sector. There would also need to be some degree of redirection of the levies towards the longer-term development of the infrastructure for digitisation,” he said.

“Because the long-term game here is to build a digital economy, there are deficit zones in our country and surplus zones where digitization is concerned. Therefore, rebalancing at both the level of the private investor and as well as at the level of the government can be done using the levies, so that is something that structurally the industry would look forward to.”

Commenting on how the Banking sector will benefit from the tax cuts, CEO of Hatton National Bank Jonathan Alles said that the banking itself has just a marginal input cost improvement with the removal of NBT.

“However, the fact that some of the other industries will see better income from lower VAT and corporate tax effectively means an improvement in NPLs and impairments for the banking sector,” Alles said.

“The immediate impact will be from the consumption side which should see to a rise in consumer finance. We also see the potential for greater recoveries and disbursements as well. However, we will need to watch and see what unfolds in terms of corporate confidence and its impact on the corporate lending side.”