Monday, 21 July 2014 00:00
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Time ticking for tax incentives for BOI projects
Inland Revenue Amendment places blanket deadline of April 2015 for all undertakings
Latest move puts already-approved projects but pending investment at risk, likely to deter new investors
Experts insist Sri Lanka situation still precarious as several in Asia woo FDIs with attractive schemes
Germany has launched cash incentives in the form of grants for new investments in fresh initiative to woo FDIs
Sri Lanka runs the risk of losing much needed Foreign Direct Investments (FDIs) unless the Government corrects or clarifies a recent amendment to the Inland Revenue Act, concerned experts warned yesterday.
The concern and confusion follows the Government putting a timeline of April 2015 for investments to be made if such projects want to enjoy existing tax concessions.
This applies to several projects approved by the Board of Investments since April 2011 but had not got off the ground or are in the process due to the need for obtaining various clearances and other formalities.
The latest amendment to the Inland Revenue Act No. 8 of 2014 has added a new dimension, raising concerns from prospective and signed-up investors.
The apparent blanket deadline of April 2015 is despite some sectors having an open-ended timeframe. However, prior to the latest Inland Revenue change, some tax concessions were time-bound.
The specific amendment (No. 8) states: Section 16D of the principal enactment as last amended by Act No. 18 of 2013 is hereby further amended by the substitution for the words and figures “any new undertaking established on or after April 1, 2012 and”, of the words and figures “any new undertaking established on or after April 1, 2012, but prior to April 1, 2015 and”.
Experts stated that this reference actually means all approved undertakings must establish their ventures or make their investments by April 2015.
“This also means anyone going to the BOI today takes an undertaking to bring/make the investment before April 2015. This leaves prospective new investors as well as those who have signed up recently only a few months. In this outlook no serious foreign investor will come to Sri Lanka,” a disappointed investor complained.
Experts said not only foreign but the blanket deadline would also deter new local investors and those forging joint ventures with overseas partners. They warned that a large number of already-signed and approved projects were likely to be abandoned by investors given the deadline.
It was emphasised that Sri Lanka wasn’t the only country in Asia scouting for FDIs and all competing countries have a range of tax incentives for FDIs. Recently even Germany, which is a developed economy, unveiled a national scheme to offer cash incentives for new investors.
Others noted that as of now the BOI doesn’t have a scheme of its own but all tax concessions were linked to the Inland Revenue regime. Despite the blanket deadline, investments coming under the Strategic Development Act and their tax concessions are not affected since they come under purview of Parliament.
Sri Lanka under President Mahinda Rajapaksa has been for a rationalisation of tax incentives via the BOI whilst the International Monetary Fund (IMF) has been a key campaigner.
For example, in its report following the Article 4 consultation in 2013, the IMF stated: “Tax holidays and concessions have not delivered the expected increase in FDI inflows.” The IMF said tax revenues as a share of GDP have been falling almost continuously since the mid-1980s, leaving Sri Lanka with one of the lowest revenue-to-GDP ratios in the region.
However, post-war the Government has trumpeted record FDI inflows. Incidentally, as per the Central Bank 2011 Annual Report, that year FDI inflows amounted to a record $ 1 billion. Last year FDIs were $ 916 million, compared to $ 941 million in 2012. FDI including foreign loans to BOI companies grew by
3% to $ 1.4 billion in 2013. The Government is targeting $ 2 billion or more in FDI this year.
The BOI website states a new incentive regime has been introduced particularly with the Budgets of 2012 and 2013 to promote private investments, both domestic and foreign, into desired sectors of the economy. These tax incentives mainly include exemption on Corporate Income Tax, Customs Duty, Value Added Tax, and Ports & Airports Development Levy.
Of late the thinking of the Ministry of Finance, a portfolio held by President Rajapaksa himself, appears to be that instead of tax incentives, more FDIs could be drawn via improved infrastructure, productivity and ease of doing business apart from the advantage of Sri Lanka’s strategic location and other natural benefits. Via recent Budgets, corporate income tax has been brought to an all-time low as well.
However, the latest German initiative reflects the nature of competition to draw FDIs. Regions in Germany with the highest incentive rates offer grants of up to 35% of eligible expenditures for small enterprises. Small enterprises situated in the border regions to Poland may receive up to 40% funding. These higher incentive rate regions are mainly situated in Eastern Germany. Several regions within the western parts of Germany are also designated incentive regions. In these regions, small enterprises can receive subsidy rates of between 20 to 30% of eligible project costs.
Specific details of the German offer are available online via http://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/Incentive-programs/cash-incentives-for-investments.html.
Asian countries such as Vietnam and Cambodia have been aggressive in FDI promotion whilst far more developed East Asian economies too offer various tax concessions.
Given this competitive scenario, experts have warned that unless the Government considers a revisit to recent regulations, the overall target to draw much-needed FDIs will be at stake, as will the vision of making Sri Lanka a hub for sectors such as maritime, aviation, energy, knowledge and commerce as well as tourism.
