Moody’s gives thumbs up for SL’S new tax law

Moody’s Investors Services (Moody’s) yesterday expressed its satisfaction over the new Inland Revenue Act passed in parliament last week as it will boost Sri Lanka’s revenue front and support the country’s credit profile by ensuring longterm fiscal stability.

Currently, Sri Lanka’s credit profile is “weighed down by the country’s large debt burden and relatively weak debt affordability”, as a result of the continuously high fiscal deficit, mostly resulting from lower state revenues, said Moody’s Sovereign Risk Group Vice President William Foster.

Moody’s has a ‘B1’ speculative rating on Sri Lankan sovereign but revised its outlook to ‘Negative’ in June 2016 mainly due to fiscalside concerns adding in to the high level of government debt.

Last week Sri Lanka passed its brand-new Inland Revenue Act despite resistance from some quarters as the new law has taken away a number of tax exemptions hitherto available on certain sectors and imposed a host of new direct taxes such as capital gains tax.

“Through past additions of multiple tax exemptions, Sri Lanka’s income tax efficiency and tax collection are weak relative to other sovereigns,” Foster stated in his note issued days after the new law was passed.

Sri Lanka’s general government revenue-to-gross domestic product (GDP) ratio was only 14.3 percent in 2016 and was among “one of the lowest among B-rated sovereigns”. It has also been the single most crucial issue in the post-liberalized economy, which destabilized the macro-economic fundamentals.

Higher fiscal deficit leads to higher nominal interest rates, higher inflation and over-valued exchange rate making Sri Lankan exports uncompetitive in foreign markets and results in higher borrowings to bridge the ever expanding fiscal deficit, creating a vicious cycle difficult to move out from.

However, Sri Lanka’s macroeconomic fundamentals have shown signs of improvement with the interest rates easing and stability being brought into foreign exchange market largely due to the able leadership of the country’s Central Bank Governor Indrajit Coomaraswamy.

With the implementation of higher value-added-tax in late 2016 and the revenue reforms from the new Inland Revenue Act, if implemented successfully, Moody’s forecasts the general government revenue to increase to about 14.7 percent of GDP in 2017 and 15 percent by 2018.

The new Inland Revenue Act will come into force from April 1, 2018.

Meanwhile, the International Monetary Fund (IMF) projects revenue to rise further to about 16 percent of GDP by 2021, after the new tax law come into play.

However, during the weekend, some tax experts voiced their concerns over the implementation of some of the taxes included in the new law without running into public protest as some areas lead to definition confusions and certain sectors get hit badly by the new tax proposals.