Sri Lanka to slash tax holidays to help cut budget deficit

Demonstrators from People's Liberation Front (JVP) political party hold up placards during a march in Colombo

COLOMBO - Sri Lanka, which has attracted more investment since its 26-year civil war ended, says it is cutting the number of tax holidays granted to foreign investors in a move to help trim the country's budget deficit.

The government doesn't publish data, but it is believed to have granted a sizable number of 10-15 year tax holidays during the civil war, which ended in May 2009.

Economist and analysts have said there is no longer a need for tax concessions for foreign investors, as the end of the war has been a significant incentive.

A senior government official confirmed that tax-holiday issuance is being slashed.

"The direction is very clear now. There are no more tax holidays other than for strategic investment projects," S.R. Attygalle, deputy treasury secretary, told a Reuters forum on Tuesday.

He said strategic investment projects that could change the country's landscape, save foreign exchange or generate high numbers of jobs can still be granted given tax holidays.

Attygalle said that this year is the last one of tax holidays for more than 200 companies who haven't had to pay anything for up to 15 years.

"In 2014, they will be paying taxes," he said. "With lower tax rates, there is no justification of giving tax holidays," he said.

Two years ago, Sri Lanka cut corporate tax to 28 per cent from 35 per cent.

HOLIDAYS CAN'T BE EXTENDED

No existing tax holiday will be revoked. But while there were some extensions of expiring holidays in the past, the government will no longer grant these.

The government aims to cut the 2014 budget deficit to 5.2 per cent of the gross domestic products (GDP), its lowest since 1977, from an estimated 5.8 per cent this year.

The International Monetary Fund has repeatedly called on Sri Lanka to widen its tax net and improve collection to raise government revenue.

The 2014 budget aims to widen the tax net and raise state revenue. Revenue in 2013 has been estimated at 12.1 per cent of GDP, one of the region's lowest levels.

For this year, Sri Lanka set a target of getting $2 billion in foreign direct investment (FDI). So far, it has received commitments for just $1 billion, but officials says many planned projects are in the pipeline.