Sri Lanka’s tax hike likely to discourage small time investors into stocks – analysts
ECONOMYNEXT – Crisis-hit Sri Lanka’s proposed tax hikes could hit investments into stock markets from small timers as the new levies could wipe out a significant portion of disposable income, analysts say.
However, they say stocks will be the only lucrative investment assets for small timers as it does not have capital gains tax.
The proposed tax hikes published on Tuesday show tax free income threshold being reduced to 1.2 million rupees from 3 million rupees while the corporate tax being raised to 30 percent from 24 percent.
The move will see a person who receives a monthly income of 400,000 rupees will have to pay a tax of 70,500, if endorsed by the parliament, instead of current 9,000 rupees.
“The stock market seems to be very attractive as it is the only investment component that is not taxed,”
Dimantha Mathew, Head of Research at First Capital told EconomyNext.
“On the other side, there’s going to be a massive hit because consumer demand itself is going to get hit.”
Sri Lanka’s stock market is dominated by small-timers. Most small-timers have been reversing their savings and investments in the face of the high cost of living after the rupee collapse and sharp depreciation of the local currency.
The corporate tax is expected to hit the earnings of the listed companies and that also could become a “disincentive”, analysts said.
“There’s going to be less money into stocks. This will be a setback,” Mathew said.
Returns taxed
The key investment components are taxed,” he said referring to a 10 percent Advance Income Tax on rent income exceeding 100,000 rupees, 5 percent on interest income or discount, a 15 percent on dividend payments, and 14 percent for any other payments, the gazette showed.
“Equity could be the only investment option that Sri Lankans have since even interest rates are taxed at
5 percent,” another analyst said asking not to be named.
“At these levels of taxes, there will be a big slowdown in consumer spending. So demand wise we will see
a drastic drop which means corporate performance will come down significantly, because of the
corporate tax increase and the slowdown in consumption.”
In Sri Lanka, the share market is one of the most popular investments mainly among middle-income earners.
The recent central bank’s policy rate hike has made fixed deposits a favourite investment among pensioners.
However, analysts expect the proposed high taxes to bring interest rates down as it eases the borrowing pressure on the government.
Sri Lanka’s stock market had 80 percent return in 2021 when the central bank artificially maintained interest rates lower with trillions of rupees printed by the central bank.
When interest rates fall, the equity market becomes a profitable investment option.
Analyst expect the interest rates will start adjusting by mid-2023.
Sri Lankans experience negative returns currently because of inflation running above 70 percent.
Though the tax is expected to help boost government revenue, analysts do not see a sustainable measure to curb the country’s state expenditure issue which is largely caused by a bloated state sector after successive governments dumped their party supporters into state-owned enterprises.
The tax cuts by former president Gotabaya Rajapaksa accelerated the unprecedented economic crisis the country is facing now.
“Revenue cut was a problem. But the long-term problem is the size of the government,” Mathew said. (Colombo/Oct13/2022)
