Sri Lanka’s new practice of giving capital allowance in place of tax holidays is good, with regional incentives, but there is too much unertainty for investors to make use of, a top businessman has said.
“The package is good. There is no problem with the package but what happens to the investor if it is taken off in the next budget?,” Dhammika Perera, the Chairman and founder of Sri Lanka’s Vallibel group said, which has interests in manufacturing, finance, power and leisure.
Under the earlier tax holidays, where contracts were signed with the Board of Investment, there was certainty that the concessions already granted would remain for the promised duration even if new incentives were intended.
Under so-called ‘capital allowances’ a business will get accelerated depreciation, and in areas like Jaffna, double deductions, for investments, reducing the tax burden up front.
“But what happens if the capital allowances are taken off in the next budget, or in two years?” he asked.
“What happens to the investors who had bit the bullet and started a project? There is no agreement to protect him.”
He said an investor will typically invest in a project over several years, but there was no guarantee that he will be able to complete the project and get the benefit because no one knew about the project and as soon as the tax law was changed, he would not have any recourse.
“If you start a project now, an investor may be able to invest only about 25 percent in the first year. So what about the balance 75 percent?”.
He said Sri Lanka needed some strategies to boost activity in remote areas and it was a good idea to have given double capital allowances for the North and the East which had been shattered in a 30-year war.
But in practice the uncetainty was too high to be useful.
There was a big issue at the moment about what Vijayakala Maheswaran had said, but the people in Jaffna also needed jobs, he said.
The legislator had said a Pirabharakhan, a feared separatist who waged a 30-year war, was needed to stop criminal activities in Jaffna, after a little girl was found to have been raped and killed.
“But for the root cause we have also helped. If they do not have jobs what do those people do?”
He believed that in a few years Colombo would reach a per capita income of 12,500 dollars, which would make it a high income region.
But only 95 percnet of the country would be outside Colombo and needed some strategies, he said.
Colombo grows and adds more value because it is exposed to the world, and is a dense urban area, where a higher degree of spcialization and competition takes place.
Sri Lanka has recently removed some export taxes imposed by the Export Development Board, especially on some agricultural produce, which had prevented some farmers ‘closer’ to the world by getting them better prices.
However Sri Lanka still has many protectionist duties which allow producers of all kinds to exploit ordinary folk with higher than world prices.
Rule of Law
Sri Lanka’s problem with uncertainty relates to lack of rule of law, where people are subjected to ad hoc action, making it difficutl to make long term decisions. The state has coercive powers, through fines, jails and and armed police to enforce such laws on unarmed citizens.
Sri Lanka also has a deadly procedures, where taxes are secretly hatched and hit at slapped at midnight, while citizens are sleeping, with no prior warning. Like Hitler’s enabling law, the parliament is by-passed, made a mockety of and informed only after the fact, critics have said.
“Nothing distinguishes more clearly conditions in a free country from those in a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law,” explained economist and philospher Friedrich von Hayek.
“Stripped of all technicalities this means that government in all its actions is bound by rules fixed and announced beforehand-rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s individual affairs on the basis ofthis knowledge.
“While every law restricts individual freedom to some extent by altering the means which people may use in the pursuit of their aims, under the Rule of Law the government is prevented from stultifying individual efforts by ad hoc action.
“Within the known rules of the game the individual is free to pursue his personal ends and desires, certain that the powers of government will not be used deliberately to frustrate his efforts.”
Analysts sya tax holidays, regional incentives and any kind of ‘affirmative action’ also undermine just law and equal treatment, which is a problem with state intervention.