Saturday, March 12, 2016

Ripple effect from VAT and other tax changes

From The Sunday Times
Planned increases in VAT, other taxes and the re-introduction of the Capital Gains Tax announced this week by the Government will have a ripple effect on Sri Lankan society, economists say urging authorities to take proper stock of the situation.
Declining foreign revenue from key sources like remittances from Sri Lankan workers in the Middle East due to lower oil incomes and a likely drop in demand for foreign workers is also impacting on Sri Lanka’s mounting debt crisis. According to Central Bank data, foreign remittances fell by 0.5 per cent to US$6.9 billion (or Rs. 949 billion) in 2015, from $7 billion (Rs.916 billion) in the earlier year.
The crisis, precipitated by the previous regime’s rampant spending in addition a lack of financial discipline by the present administration, forced the Government to announce tough measures this week.
Asked to comment on the crisis and its causes, Indrajith Aponsu, senior lecturer at the Colombo University’s Economics department, said that for people economic growth matters as it brings in jobs, creates opportunities and ensures more cash in hand.
The growth momentum has been stalled, he said, adding that the government was not focusing on economic growth in rural areas.
“The crisis reveals that the government is living for the day with a credit card syndrome emerging – paying with money that has to be borrowed elsewhere,” he said.
Given below is a snap-shot of the impact of the recent tax increases announced by the government compiled by Business Times economic columnist Prof. Sirimevan Colombage:
  • Instead of the previous 11 per cent VAT rate the Budget 2016 proposed to introduce dual rates 8 per cent and 12.5 per cent
  • The PM has proposed to have a single rate of 15 per cent
  • This will raise the prices of goods and services subject to VAT.
  • Only non-essential goods will be subject to VAT, which are yet to be listed.
  • If it is passed on in full to customers, a VAT rise from 11 per cent to 15 per cent implies an increase of around 3.6 per cent in the prices of the goods and services that are subject to VAT.
  • However, as VAT is to be imposed on selected goods, the actual impact on consumer prices with full pass through effect would be less than 3.6 per cent.
  • Capital Gains Tax Not levied since 1987
  • A capital gain (or loss) generally refers to the price of an asset when it is sold compared to its original purchase price. A capital gain occurs if the value of the asset at the time of sale is greater than the initial purchase price.
  • Capital gains taxes can raise revenues for government but they do so with considerable economic costs.
  • Capital gains taxes have a cost on the economy as they reduce returns on investment and thereby distort decision-making by individuals and businesses.
  • This can have a substantial impact on the reallocation of capital, the available stock of capital, and the level of entrepreneurship.
  • The stock market is already affected.
  • This is a time that foreign investors are pulling out their capital from emerging market economies. While Sri Lanka is experiencing net capital outflow from the stock market in recent months, the capital gains tax will further aggravate this trend.
  • Corporate tax rate rise to 17.5 per cent from 15 per cent Will affect profitability of companies
  • Discourage investments, entrepreneurial activity
  • Erode export competitiveness
  • May reduce the tax base, may cause job losses
  • Who pays corporate taxes? The man on the street may incorrectly think it is borne by the companies. Company executives may think incorrectly that it can be passed on to consumers. Politicians take advantage to impose it.
  • Any reduction in corporate taxes helps companies to reinvest surpluses and expand business, and vice versa.

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