Sri Lankan Business enterprises have started to feel the pinch from higher taxes, even before the new and elevated corporate income tax came into effect from January 1.
This was the sentiment of the respondents to the Central Bank’s monthly survey of business sentiments who expressed heightened concerns about faltering demand amid higher tax rates.
According to the survey findings, the respondents raised concerns about “the impact of tax increases on demand conditions”.
Both direct and indirect taxes were raised in multiple cycles, starting from last June, mostly outside the national budget process to raise revenue to bridge an unsustainable budget gap under what is referred to as revenue-based fiscal consolidation programme proposed by the International Monetary Fund (IMF).
Sri Lanka ran back-to-back blowout budget deficits from 2020 through 2022, largely due to the sub-optimal economic activities resulting from two years of pandemic-related restrictions, subsequent collapse of the economy and tax cuts, which were introduced in December 2019, to provide fiscal stimulus to the then moribund economy.
However, as the country ran out of foreign currency reserves, mostly due to exogenous factors and partly owing to the internal issues faced during this period.
This has resulted in massive economic, social and political upheaval that succeeded in unseating the then president, prime minister and government, the new officials decided to reverse the low tax policy and replace it with a heavy tax regime.
As a result, businesses are seeing a slump in demand, as higher taxes bite into disposable incomes of the people, which have already been thrashed by runaway inflation and margin compression, due to hyperinflation seen in costs.
In this backdrop, some businesses have set up offices in favourable tax destinations such as Singapore, Hong Kong and the UAE, while the exporters are seeking to relocate their operations elsewhere.
Businesses were contending with months-long hyperinflation, due to over 100 percent increase in their costs, the monthly Producer Price Index showed. Higher taxes could become the final nail, which could change their fortunes drastically.
However, Central Bank Governor Dr. Nandalal Weerasinghe defended the higher taxes on corporates, saying that lower taxes hadn’t helped the economy in bringing the desired results in the last three years.
Sri Lanka nearly doubled the Value Added Tax from 8 percent to 15 percent, removed exemptions, raised telco levy, introduced Social Security Contribution levy of 2.5 percent, brought back the withholding tax on deposit incomes and raised the income taxes on both corporates and individuals, effective from January 2023.
While some are leaving the country’s exponential taxes amid the cost of living crisis, corporates also appear to be joining the bandwagon by exiting the country for better destinations, which offer favourable taxes and better business conditions.
Sri Lankan Business begin to feel the pinch from higher taxes
India will extend financing assurances to the IMF to clear the way for Sri Lanka to move forward – Indian EAM Dr Jaishankar
Indian External Affairs Minister Dr S. Jaishankar assured that India will extend financing assurances to the International Monetary Fund (IMF) to clear the way for Sri Lanka to move forward to recover from the economic crisis and had decided not to wait on others, but to do what is right.
He also said that India expects that this measure will not only strengthen Sri Lanka’s position but ensure that all bilateral creditors are dealt with equally.
He said further that India is confident that Sri Lanka will overcome its current economic challenges and will stand by Sri Lanka during this period as a trustworthy partner.
He made these observations during a joint press conference held at the Presidential Secretariat today (20) with the Participation of President Ranil Wickremesinghe and Minister of Foreign Affairs Mr Ali Sabry, to express India’s solidarity with Sri Lanka at this difficult moment.
He also said that Indian Prime Minister HE Narendra Modi invited President Ranil Wickremesinghe to visit India at an early date to discuss how the partnership between the two countries can facilitate Sri Lanka’s strong recovery and handed over an invitation to the President.
He added that India is a reliable neighbour and a trustworthy partner and is prepared to go the extra mile to assist Sri Lanka to meet its obligations. His presence in Sri Lanka is also a statement about Prime Minister Modi’s commitment to the neighbourhood first policy.
He further said that India encourages greater investments in the Sri Lankan economy, especially in core areas such as energy, tourism and infrastructure to assist in its speedy recovery.
He said that Sri Lanka has enormous renewable energy potential that can become a sustainable source of revenue and Trincomalee can emerge as an energy hub. In its support for Sri Lanka, India is prepared to be a reliable partner in such initiatives. He added that the two countries agreed on a renewable energy framework that would take this cooperation forward.
He further said that Sri Lanka should provide a more business-friendly environment to create a powerful pull factor. “I’m confident that the gravity of the situation is realized by policymakers. So energy security is today one of Sri Lanka’s most serious challenges. A search for solutions must necessarily encompass the larger region. Only then will Sri Lanka get the full benefit of scale,” Dr S. Jaishankar said.
He further said tourism is the lifeblood of the Sri Lankan economy and Indian tourists are expressing their positive sentiments to visit Sri Lanka. He added that there are many more steps the two countries can take to make the tourism industry sustainable. Strengthening connectivity and promoting travel is therefore a very high priority for both countries.
He said that the primary purpose of his visit to Colombo was to express India’s solidarity with Sri Lanka during these difficult moments. He added that last year India extended about USD 4 billion in terms of credits and rollovers to help Sri Lanka get through the economic crisis as it for India, was an issue of the neighbourhood first and not leaving a partner to fend for themselves.
He said that with the same sentiment, India feels strongly that Sri Lanka’s creditors must take proactive steps to facilitate its recovery this year. “India decided not to wait on others, but to do what we believe is right. We extended financing assurances to the IMF to clear the way for Sri Lanka to move forward. We expect that this will not only strengthen Sri Lanka’s position but ensure that all bilateral creditors are dealt with equally.”
He said that India has always supported both the political and economic stability of Sri Lanka. “The President briefed me on the question of political devolution and his thinking. I shared with him our considered view that the full implementation of the 13th Amendment and early conduct for provincial elections are critical in this regard.
He said that durable efforts towards reconciliation are in the interests of all sections in Sri Lanka. I also spoke of the need to pay special attention to the requirements of the Indian-origin Tamil community.”
Minister of Foreign Affairs Ali Sabry recalled India’s significant assistance to Sri Lanka last year when it was going through the most serious economic crisis ever experienced. On behalf of President Ranil Wickremesinghe, he extended gratitude to Prime Minister Narendra Modi, and the Indian Government for the support of a US$ 4 billion credit line provided for the import of essential goods as well as other in-kind humanitarian assistance which enabled Sri Lanka to regain some measure of economic and financial stability.
Foreign Minister Ali Sabry said that Sri Lanka is at a decisive juncture in discussions with the assurances to the International Monetary Fund ( IMF) to reinvigorate the country’s economy with the assistance of the IMF. As a creditor, once again, India has extended its support to officially back Sri Lanka’s debt restructuring program by conveying financial assurances to the IMF.
He said further that India would soon be or perhaps already is one of the largest and fastest-growing economies. Sri Lanka is watching India’s economic success and international prestige with great admiration.
He further added that India’s growth will be beneficial to the region as well as to Sri Lanka. For its part, Sri Lanka is confident it would recover from the current crisis with the goodwill and partnership of India for mutual benefit.
SL’s banking sector faces asset quality issues amidst higher bad loans
Sri Lanka’s banking sector, already facing pandemic-related asset quality challenges, has been further hit by its increasing exposure to the sovereign debts, several banking and finance analysts claimed.
With no access to external funds since 2020, the government has had to depend solely on domestic markets and the central bank to finance the fiscal deficit, they pointed out.
The increasing risk of domestic debt restructuring has reduced foreign investors’ appetite for sovereign debt (T-bills and T-bonds).
This has increased the burden on domestic banks – especially state-owned banks – to buy government paper, tightening their liquidity position.
Meanwhile, foreign banks are parking their excess liquidity with the central bank, as stricter counterparty limits due to sovereign-related risks have made them reluctant to lend to liquidity-deficient domestic banks
Banking-system profitability likely weakened in 2022 due to increases in provisioning, though slower credit growth likely kept banks’ capitalization stable, SL banking sector analytical report revealed.
Given the banking system’s large exposure to the sovereign (more than 40% of assets), a sovereign domestic debt restructuring would have to be accompanied by regulatory forbearance for domestic banks to mitigate capital erosion from NPV losses.
However, even if such forbearance was provided, the loss of interest revenues due to coupon cuts would erode most of the sector’s profitability, creating growth and lending challenges for banks.
Maturity extension would also lead to a further liquidity squeeze in the sector, reducing banks’ ability to support economic growth, they predicted.
Sri Lanka’s banks are facing higher bad loans as interest rates rise and the economy contracts, the central bank said as the country faces the worst currency crisis in the history of the intermediate regime monetary authority.
Stage 3 bad loans had reached 10.6 percent of loans, while banks were also hit by mark to market losses and possible re-structuring losses.
Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar in 2022 after two years of money printing blew the balance of payments apart and interest rates shot up to 30 percent and the economy is expected to contract more than 8 percent this year.
“The financial sector is likely to encounter significant challenges in the face of the current economic environment with the contraction in economic output, sovereign debt restructuring, high interest rate environment, tax revisions and high exposure of the banking sector to SOBEs,” the central bank said in a report.
“Asset quality of the sector deteriorated in terms of stage 3 loans to total loans ratio. Stage 3 loans increased by Rs. 475.1 billion, recording a growth of 56.9 % and reached Rs. 1.3 trillion as at end August 2022,” the central bank said.
“Furthermore, stage 3 loans to total loans ratio increased to 10.6 % by end August 2022 from 7.6 % as at end 2021 induced by the increase in stage 3 loans and lower growth in credit.
CID to take over investigation into fake fool proof liquor sticker
The Criminal Investigation Department is set to take over the investigation into alleged malpractices in the introduction of fool proof liquor with QR code for all liquor products without addressing practical issues and mal practices in the implementation of this scheme.
State Minister of Finance Ranjith Siyambalapitiya is to lodge a complaint with the Criminal Investigations Department regarding alleged malpractices concerning liquor stickers on alcohol products.
Several bottles containing fake stickers were discovered from wine stores in Thambuththegama, Thalawa and Kahatagasdilliya. Previously it emerged that QR codes affixed to these stickers do not work and provide details on the product and tax paid.
Speaking in Parliament earlier this week, Justice Minister Wijeyadasa Rajapakshe said the tender to supply tax stamps had been awarded to one of the most corrupt companies in the world, which has been blacklisted in many countries.
The company has been found guilty of distributing tax stamps to companies for payment, leading to millions in losses to State coffers.
The State Minister of Finance received a report on the matter from the Excise Director General recently and the Ministry has decided to refer the matter to the CID.
The Ministry has also assigned a service provider to verify reports on malfunction of QR codes, whilst a separate unit was formed at the Excise Department to investigate tax collections in relation to stickers issued.
The Sri Lankan Excise Department launched a special app recently titled ‘Excise Tax Stamp Validatot’, whereby consumers could verify the authenticity of tax stamps and report any discrepancies to the department.
The government has introduced the fool proof sticker scheme for all imported and local liquor products amidst industry protests and mounting allegations against the sticker printing deal.
The department will take action to cancel the licenses of liquor traders who fail to comply with the relevant regulations of the fool proof sticker scheme under the Excise Notification No. 01/2021, he added.
The previous regime has continued the contract given to Indian company Madras Security Printers Pvt Ltd by a tender initially called in 2016 and recalled in 2017 due to technical issues.
According to the 5-year contract, the Indian company has to supply 384 million stickers per year and 32 million per month, but its supply has been irregular and their printing paper quality was low and it could easily be duplicated by anyone, a senior Treasury official said.
Several local liquor manufacturers noted that the quality of the samples of fool proof liquor stickers was not suitable for use in their high-speed machines.
They have protested over the selection of this printer with allegations of its involvement in two scandals in India and Kenya in 2017 and 2018 and the impracticality of the fool proof liquor scheme.
The Indian company’s bid for the deal was US$5.99 to print 1000 stickers during the second tender although its initial bid was $3.19; other bidders claimed adding that one of them has placed a bid of $4.57 per 1000 stickers and the lowest bid was $2.8 per 1000.
Therefore the then government has been compelled to pay an additional amount of $1075200 (or slightly over $1 million) for 384 million stickers obtained in the first year, the Auditor General’s relevant report revealed.
Mujibar Rahman resigns!
Mujibar Rahman, Member of Parliament of Samagi Jana Balavega, says that he will resign from the position of Member of Parliament.
He stated that he is resigning in order to compete for the position of Mayor of the Colombo Municipal Council.
He stated this in Parliament today (20).
CARAT-2023 bilateral exercise commences in Colombo and Trincomalee
Cooperation Afloat Readiness and Training (CARAT) 2023, the annual bilateral exercise hosted by the U.S. Pacific Fleet, got underway in Sri Lanka (19th January 2023). The opening ceremony of CARAT-2023 was held at the Colombo harbour premises and Naval Dockyard in Trincomalee.
The opening ceremony at the pier side of Colombo harbour was held under the patronage of the Deputy Chief of Staff and Director General Operations of the Sri Lanka Navy, Rear Admiral Pradeep Rathnayake and Deputy Commodore Commander, Destroyer Squadron Seven, Captain Sean Lewis. Meanwhile, Commander Eastern Naval Area and Commandant Volunteer Naval Force, Rear Admiral Dammika Kumara and Lieutenant Max Cutchen of the U.S. Navy presided the opening ceremony held in Trincomalee.
CARAT Sri Lanka is a bilateral exercise between Sri Lanka and the United States designed to promote regional security cooperation, maintain and strengthen maritime partnerships, and enhance maritime interoperability and preserve a free and open Indo-Pacific region. The bilateral exercise will feature participants from the Japan Maritime Self-Defense Force and Maldives National Defence Force aside from the Sri Lanka Navy, Sri Lanka Coast Guard and Sri Lanka Air Force.
Meanwhile, training exchanges of CARAT will be held both ashore and at sea in Colombo, Trincomalee and Mullikullam from 21st to 26th January. SLNS Gajabahu and SLNS Samudura of Sri Lanka Navy will take part in the sea phase of CARAT-2023.
CARAT is designed to enhance abilities of the partners to operate together in response to traditional and non-traditional maritime security challenges in the Indo-Pacific region and build relationships through sports, cultural, and information exchanges. Meanwhile, taking part in naval exercises of this nature would open up new avenues for the Sri Lanka Navy to share knowledge, strategies and experience as well as to build trust and strong relationships to step up the readiness and interoperability that allows to overcome common maritime challenges.
In addition, the Band of Sri Lanka Navy is expected to partner with the US 7th Fleet Band to showcase band performances at the Galle Face Green and Colombo Lighthouse (20th January), Dutch Hospital – Colombo (21st January), Viharamahadevi Park (22nd January), Diyatha Uyana, Battaramulla (23rd January), Independence Square (24th January) and One Galle Face premises (25th January) from 6.00 p.m. onwards each day.
Period to deposit the cash bonds for the LC election ends today
The period given to deposit the cash bonds for the local government election ends today (20).
Accordingly, the Election Commission states that it is possible to make deposits until 12.00 noon today.
The acceptance of nominations for the local government election is scheduled to end tomorrow (21) at 12.00 noon.
By now, many political parties and independent groups have deposited money and submitted nominations.
Navy receives state-of-the-art camera used for advanced underwater shooting
Naval personnel who followed the Forensic Diving Course at the Hulhumalé Coast Guard Base of Maldives National Defence Force (MNDF) presented an Olympus TG – 06 underwater camera and peripherals to Commander of the Navy, Vice Admiral Priyantha Perera at the Navy Headquarters (18th January 2023).
As part of the European Union Critical Maritime Routes in Indian Ocean (EU CRIMARIO) Programme, the Gendarmerie Law Enforcement Forces of France has organized this Forensic Diving Course.
The course was conducted by a group of experts in Forensic Diving at the Gendarmerie Law Enforcement Forces of France, from 09th to 13th January 2023 and it was attended by 03 officers and 03 sailors from the Sri Lanka Navy Diving Unit. It covered a range of areas including Underwater Search, Underwater Photography of the Crime Scene and Evidence, Labeling of a Crime Scene, Fingerprint Detection and DNA Collection, Packaging of Evidence Underwater, Corpse Recovery and Inspection and Evidence Collection of Sunken Aircraft.
Upon successful completion of the course, the Gendarmerie Law Enforcement Forces on 13th January gifted a state-of-the-art ‘Olympus TG – 06’ underwater camera and peripherals to the Sri Lanka Navy. Calling on Commander of the Navy at the Navy Headquarters today, the course participants presented those equipment to the Navy.
Sri Lanka Navy regularly provides diving support to government and non-government organizations for underwater inspections. The Navy will be able to use this state-of-the-art camera and equipment efficiently in the future when conducting underwater crime-related investigations.
Sri Lanka Original Narrative Summary: 20/01
- Treasury Secretary Mahinda Siriwardene says Govt’s cash flow management is extremely challenging at present with foreign and domestic financing channels exhausted: also says difficult to find additional resources for an election: laments even regular payment of public sector salaries on time, is challenging.
- President Ranil Wickremasinghe appoints SLPP MP Pavithra Wanniarachchi as Cabinet Minister of Wildlife & Forest Resources Conservation and CWC leader Jeevan Thondaman as Cabinet Minister of Water Supply & Estate Infrastructure Development.
- Indian Minister of External Affairs Dr S. Jaishankar says he had a “good meeting with Foreign Minister Ali Sabry and other ministerial colleagues” in Colombo: also says India-Sri Lanka cooperation in infrastructure, connectivity, energy, industry and health was discussed: adds India is committed to the increase of investment flows to Sri Lanka to hasten economic recovery.
- Regulation of the Election Expenditure Bill passed in Parliament with a majority of 61 votes: 97 in favour and 36 against.
- Chairman, Election Commission says Police protection has been provided to the 2 members of the Election Commission who faced threats.
- Veteran film Producer and Director Dr. Sumithra Peries, wife of late Dr. Lester James Peries, passes away at age 88 years.
- Minister Manusha Nanayakkara says although the Samurdhi allowance will continue to be paid, measures are underway to remove all other benefits given to low-income families along with the Samurdhi allowance.
- Hector Kobbekaduwa Agrarian Research and Training Institute study reveals over 200 mn coconuts have been destroyed by toque macaque, monkeys and giant squirrels in 2022.
- SLPP MP Gevindu Cumaratunga says President Ranil Wickremesinghe should seek a fresh mandate if he intends to fully implement the 13th Amendment to the Constitution: asserts the President’s responsibility is to complete the remainder of Gotabaya Rajapaksa’s 5-year term.
- ‘Paying Wards System’ in state-run hospitals grabs spotlight at a time when the lauded free healthcare system is becoming a burden on the economy: medical practitioners accuse Govt of attempting to privatise the state health service under the guise of finding solutions to the country’s economic crisis.
Ambassador of Japan to Sri Lanka meets Commander of the Navy
The Ambassador of Japan to Sri Lanka, H. E. Hideaki MIZUKOSHI met with Commander of the Navy, Vice Admiral Priyantha Perera at the Navy Headquarters (18th January 2023).
The ensuing discussion between them mainly focused on several matters of bilateral importance. The Defence Attaché at the Embassy of Japan in Colombo, Captain Yuki YOKOHARI was also present on this occasion.
The cordial discussion drew to a close with and exchange of mementos, symbolizing the cooperation and goodwill.
SL Navy