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ASPI breaks record despite retrospective tax 

16 Nov 2021

  • S&P SL20, comprised of tax affected companies, down 0.21%
  • Budget proposed 25% tax surcharge on earnings of over Rs. 2 b
  • CSE Chair says fiscal consolidation measures positive for foreigners
  • Tax revenue measures unreasonable: Nimal Perera
Despite predictions by many of a bloodbath at Colombo Stock Exchange (CSE) yesterday (15) as a consequence of the 25% tax surcharge imposed by Budget 2022, the All Share Price Index (ASPI) managed to reach another all-time high yesterday as it closed the day at 10,752.8 points (up 0.81%) from the previous close of 10,670.30. This marks the first the ASPI has ever closed above the 10,700 mark. Initially, when the market opened the ASPI fell within the first few minutes to an intra-day low of 10,372.63 point before surging back up and reached an intra-day high of 10,791.78 before finally settling at 10,752.8 points. However, the S&P SL20 which is largely composed of companies affected by the tax surcharge was down 0.21%, closing at 3,608.31 points from the previous close of 3,621.25 points. Leading up to the market open, many traders had on social media shared their expectation of a bloody Monday following the imposition of a 25% tax surcharge on companies which earned more than Rs. 2 billion in taxable income during 2020/21 tax year which is expected to adversely affect cash flow of such companies in the near term. The private sector has complained that the Government could have raised the income targeted under the 25% tax surcharge by imposing a tax across the board at significantly lower rates. They further claimed that such ad hoc retrospective taxes have serious repercussions on cash flows of companies and on investor confidence. This one-time 25% tax surcharge applies retrospectively with respect to the 2020/21 tax year which has already ended and will apply in addition to the usual taxes charged. CSE Chairman Dumith Fernando, speaking to The Morning Business, stated that considering the effects of Covid-19 it was expected that the Government would have to make some hard choices to boost tax revenue and described the 2022 Budget as a market neutral budget. Commenting on the adverse effect of such retrospective taxes on foreign investor sentiment, he claimed that currently the market is being driven by domestic investors and High Net Worth Individuals (HNWIs) and thus he doesn’t expect the near-term effect on foreign investor sentiment to have any effect on the market and further claimed that the fiscal consolidation measures of the Government will actually be viewed positively by foreign investors. Speaking to The Morning Business, NP Capital Group Chairman and businessman Nimal Perera, claimed that while he supports the efforts by the Government to increase its tax revenue he believes the manner in which they have gone about doing so isn’t reasonable. He argued that imposing the 25% surcharge on certain companies such as Royal Ceramics PLC, Lanka Wall Tiles PLC, Dipped Products PLC, Haycarb PLC, and Expolanka Holdings PLC who benefited from the import restrictions is justifiable. However, imposing the same tax at the same rate on companies such as Nestlé Lanka PLC, Distilleries Company of Sri Lanka PLC, and Ceylon Tobacco Company PLC who have struggled over the past year due to Covid-19-related restrictions and decreased consumer demand is not justifiable. “The fact that cement and steel manufacturers who enjoyed super profits due to the import restrictions are not subject to this tax surcharge merely due to the fact that their taxable income is below Rs. 2 billion while companies that suffered during the period are taxed is not appropriate,” claimed Perera. Explaining further, Perera claimed that considering the expenses borne by the Government in relation to combating the Covid-19 pandemic, the Government is totally justified in increasing its tax revenue. However, it must be done in a fair and justifiable manner and this tax system is extremely unreasonable. Because it merely imposes an additional tax burden on parties who are already paying taxes while export oriented companies such as MAS, Akbar Brothers, and Brandix are not taxed despite making record profits. He further claimed companies are subject to varying levels of corporate tax based on the sector they belong to with companies involved in the alcohol industry paying 40%, while financial service companies pay 28%, and manufacturing companies pay 14%. However, all of them are equally charged the 25% tax surcharge which isn’t reasonable and consequently banking and financial service companies are being taxed around 70%. Accordingly, Perera proposes that a 5% tax on all taxpayers would have been more reasonable and would have allowed the Government to raise the requisite tax income without adversely affecting the taxpayer. During the post-budget forum, “Dissecting the Budget 2022” organised by the Centre for Banking Studies and the Central Bank of Sri Lanka (CBSL) held on 13 November, HNB Bank PLC CEO Jonathan Alles commenting on the 25% tax surcharge stated that as a result of the new tax proposals companies involved in financial services will lose around 70% of their cash flows when this 25% surcharge kicks-in, along with the 24% corporate income and 18% financial services value-added tax (VAT). He further provided that while the expected revenue gain for the Government through this surcharge amounts to Rs. 100 billion, “in the hands of the financial sector it would be worth Rs. 1 trillion due to the capacity of banks to augment their capital by 10 times over”. There are 45 companies listed in the CSE who would fall under the Rs. 2 billion taxable income threshold as per the CSE. A similar retrospective tax was imposed by the previous Yahapalana Government in its 2015 interim budget which imposed a 25% Super Gains Tax on individuals and companies, including subsidiaries and holding company in a group of companies earning a net profit of over Rs. 2 billion during the 2013/14 tax year which tax is believed to have raised Rs. 50 billion in additional government revenue. Following the announcement of the Super Gains Tax on 29 January 2015, the CSE fell by over 300 points over the next two market days.


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