The Government of Sri Lanka (GoSL) reduced variety of taxes substantially in an attempt to revive the economy, which could possibly cost over RS 500 billioon according to government’s own estimates.
Whilst acknowledging the potential boost to the aggregate demand and corporate profitability from the fiscal stimulus in the short-run, ICRA Lanka believes Sri Lanka should broaden the tax base and continue fiscal consolidation to avoid macroeconomic instability to benefit from the tax buoyancy effect.
Vietnam is a case in point where the country’s low tax environment has not translated to increasing tax revenue compared to the size of the economy.
In the span of four years from 2012, Vietnam’s tax incentives for businesses accounted for 7% of the total State budget revenue.
However, revenue from corporate income tax fell sharply from 6.9% of the GDP in 2010 to 4.3% in 2016.
Sri Lanka is not the only country struggling with sluggish growth in South Asia. India, as of end June, has seen its GDP growth rate fall for six straight quarters.
To spur the growth, India introduced the biggest corporate tax reduction in 28 years in September 2019 which could cost 1.45 Tn Indian rupees.
ICRA Lanka’s interviews with a cross section of top business leaders in the country just before the fiscal stimulus revealed the heightened effective tax rates are one of the main factors impeding the profitability and growth of the corporate and finance sectors.
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