President Ranil Wickremesinghe 

• Says by giving tax exemptions, SL is actually subsidising export industry which otherwise is not competitive 
• If companies say they can be profitable when tax-free, then in the long-term they are not competitive
• Admits 30% is high but hints at adjustment in tandem with country’s recovery
• Stresses SL must avoid being an export-oriented economy but with less Govt. revenue 
• Says time for transformation for all enterprises local or export-oriented to be competitive and need not be in any way subsidised by the State
• Dismisses higher taxation cause for several apparel exporters to establish business in other countries
• CBSL Chief says only export sectors are making profits given the favourable foreign exchange rate and this is at the cost of local industries relying on imports
• Questions whether exporters have expanded with preferential rates in the past 
• Stresses taxes on profits have to be fair and equal to all

By Charumini de Silva

President and Finance Minister Ranil Wickremesinghe on Friday defended the Government’s decision to slap higher taxation on vital export income saying subsidising via lower rates in effect means the sector isn’t competitive. 

He also said that time has come for transformation for all enterprises local or export-oriented. “We have to ensure that they are certainly competitive and need not be in any way subsidised by the State,” the President emphasised during a very interactive one hour plus engagement at the Daily FT-Colombo University MBA Alumni Association organised post-Budget Forum. 

“We have to remember that in most parts of the world, the export industry pays the same tax as other local industries. There is no differential. Then the question comes whether by giving tax exemptions we are actually subsidising the export industry which is otherwise not competitive," he said.

“We have to look at both aspects. We want a competitive economy and a competitive export industry,” the President said in response to a question that though 2023 Budget emphasises an export-led economy, the doubling of income tax rate on exports was counter-productive.  

“We give them (exporters) concessions to start with but thereafter we certainly have to get the revenue from the export industry. Otherwise, you have an export-oriented economy and you have less revenue than you have today. The Government has a duty to maintain a stable exchange rate. So, both combined let’s go ahead,” Wickremesinghe pointed out.

Merchandise exports in the first nine months of this year have grown by 11.7% to $ 10 billion whilst the entire export community is up in arms over higher taxes given the need to boost Sri Lanka’s foreign exchange reserves. 

However, the President underscored the dire need to raise Government revenue hence higher taxation. “You have to look at the dilemma of the Government and the country first. If you say the companies are profitable when you’re tax-free, then in the long-term you are not competitive. Maybe we have gone as high as 30% at the moment and it will be adjusted as we recover,” emphasised the President.  This was in response to a question to the effect that exporters are in a dilemma because of the doubling of income tax apart from mandatory conversion of earnings proceeds thereby leaving little for re-investment and this will lead to exporters setting up operations elsewhere. 

The Government via 2023 Budget aims to increase revenue to 11.3% of GDP from 8.2% in 2021.

Wickremesinghe also dismissed the question over timing of higher taxation when the global outlook for exports weakening especially for the apparel sector. Whilst admitting that apparel exports will come down, the President asked: “the question is how do we find the money for the people?” 

“We asked the IMF too — you have to tax everyone alive. At some stage, you have to adjust to it and might as well adjust now. In the US, whether you are an importer or exporter, you have to pay the same tax. It is unfortunate, we are bringing it in this time but the export sector has made good money. You have to be competitive,” he added.

He also rejected that higher taxation was the primary cause for several apparel exporters and others to relocate in other countries. “The exchange rate has been very favourable to exporters this year, but there are other issues. Are we competitive enough? We have low-wage and high-wage apparel industries. 

“The low-wage apparel industries will keep moving out. Companies have to see how you all could increase technological inputs and go upmarket. We must do our best to retain them, but as our wages go up, this will be less competitive and they will move out.” 

“It is not only the taxes, but many other factors as well. We will talk to the export industry separately. As our wages go up, they may move out. Singapore and Taiwan also faced the same situation in the post-low wage scenario. We shouldn’t lose these firms, and see how we can adjust to this situation,” the President added.

Central Bank Governor Dr. Nandalal Weerasinghe who figured in the expert panel at the forum said only the export sectors are making profits given the favourable foreign exchange rate. 

“This is at the cost of other industries such as local transport and construction industries. What is the rationale for exporters to use different tax rates when they exploit the same resources? They move out because it is easier to do business in those countries,” Weerasinghe argued. He questioned that even after a low of 14-15% preferential taxes in the past, have these export companies expanded? 

“Are we satisfied with the growth in export industries compared to Bangladesh and Vietnam? Have we seen the results of these tax concessions funded by every taxpayer? I think we have not seen a sizable growth. In my view, taxes have to be fair, and equal to all and these are a tax on profits,” the CBSL Chief stressed.

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