The controversial new Land (Restrictions on Alienation) Act has the potential to attract more foreign investment but the administration’s inability to instill confidence is restricting domestic and foreign investors.
“We are a small country and space is limited so it is understandable that there need to be restrictions on foreign ownership of land, and this is not unique to Sri Lanka. However, the new Act can actually be a tool to attract more investment but unfortunately it is not being projected in a positive light by the state,” a senior taxation expert N. R. Gajendran says.
Earlier, foreigners buying land had to pay a 100% tax upfront. Under the new law, foreigners can only take out a lease for 99 years and pay a 15% tax upfront. “As far as costs are concerned this is a lucrative proposal. Foreigners don’t have to actually own the land, but with the lease they would become de facto owners and they can invest and carry out commercial activities and make their money. So, instead of being overwhelmed by patriotic sentiments, there needs to be a lot more focus on presenting the new law as an opportunity,” Gajendran argues.
With several post-conflict developments, significant changes to the tax system (simplifications and reductions) and concessions, Sri Lanka should have by now transformed itself into the darling of global investors. Instead FDI fell 2.7% year-on-year to US$ 916 million in 2013.
“The Economist recently highlighted that over US$ 2.5 trillion in cash are hoarded by Japanese and South Korean corporates. What is Sri Lanka’s FDI requirement, US$ 5 billion? Or let’s say its US$ 7 billion. This is a mere fraction of the multitude of funds floating out there in the global financial system. Why can’t we attract even this fraction when our tax laws are among the best in the world and when we can offer several growth sectors to choose from” Gajendran asks.
Lack of institutional independence and integrity, poor governance and law and order are the roadblocks. The new land law has also left room for ‘rent-seeking’ with special concessions provided to certain projects deemed eligible by government and bureaucratic officials.
“There seems to be undiscovered anxiety preventing foreign investments from coming in. We have everything in place to become the darling of investors but we need to strengthen our institutions and improve governance and law and order. Multinational and transnational companies prefer to invest in countries with strong institutions and clear-cut policy. We have a problem in this regard,” Gajendran
says.
He also points out that low tax rates and simplified taxes are not drawing in new investors and new payers to the tax net, not in the large numbers expected by the state (with existing tax payers feeling squeezed-in by the revenue administrators hellbent on achieving targets). People are still uncertain whether or not it is safe to do so. Noted for its excess, who can blame them for not wanting to get trapped in the net and fall prey to a government that lacks fiscal discipline.
Domestic investors, as much as foreign investors are grappling with the problem of rent seeking and the absence of a level playing field.
The reduction in tax rates and simplifications over the past few years has taken its toll on the Treasury with revenue growth failing to keep pace with economic growth. In order to keep its fiscal deficit targets intact, the government sacrifices public investments and withholds funds from critical ministries. But with expenditure still rising, debt keeps piling up.
Tax revenue-to-GDP has gradually fallen from over 20% in the 1990s to 11% in 2013. Sources close to the Presidential Taxation Commission said its recommendation could push the ratio well beyond 20% but implementation is piecemeal. The International Monetary Fund (IMF) and Sri Lanka Economic Association keep calling for more reforms on the tax administration side in order to boost revenue and minimize the risk of getting into a debt trap.
With post-conflict GDP growth largely boosted by construction and consumption, fiscal indicators tend to be underestimated although shown to be improving. The IMF is working closely with the government to reconcile its estimates with the over-optimistic estimates of the government.
“Spending promises made by the government are unreliable with key sectors such as transport and communication, agriculture and irrigation, energy and water supply, public order and safety and health being ‘bled’ to compensate for “poor accounting and financial management,” economic think tank Verite Research said in a report published last March.
With over 70% of total tax revenue coming in from indirect taxes and where gazette notifications play an increasing role in changing taxes overnight willy-nilly, citizens’ economic freedoms are being violated with the state having no incentive to improve governance, as argued by the 2012 Sri Lanka Human Development Report of the UNDP, for which the Institute of Policy Studies provided research
material.
There should be more controls on the expenditure side. The parliament is virtually unable to exercise the rights and freedoms of the citizens that it holds in its custody. Excessive, wasteful expenditure is maintained and people are forced to pay taxes and bear the full load of rising debt.
With the focus on Presidential and possibly parliamentary elections, the key word this year ought to be ‘reforms’ even more so than ‘change’.