Sri Lanka Economy CT CLSA

Government co-media spokesperson Dr. Bandula Gunawardena stated that certain changes have been made to taxes during the first Cabinet meeting today. Changes as below

 Reduce VAT from current 15% to 8% w.e.f 01 Dec 2019 – VAT on Financial services will remain at 15%

 2% NBT removed w.e.f 01 Dec 2019– including for Financial Services businesses

 Telecommunications Levy reduced by 25% (current voice levy of 15% to likely to be reduced to 11.25%)

 Foreign Currency earnings exempted from income tax

 Construction Industry to be placed on 14% income tax instead of 28%

 IT & enabling services to be made tax free from all taxes

 Tax free threshold for turnover for Vat to be raised from Rs.1mn per month to Rs.25mn per month

 Farm income from agriculture, fishing & livestock to be made income tax free

 Capital gains tax on stocks, debit tax on financial institutions and debt service tax to be removed

 Tourism business will be treated as export for zero rate provided that 60% turnover is sourced from local supplies.

 Withholding Tax on interest income to be removed for those with monthly interest income less than Rs 250,000.

 PAYE tax free threshold to be increased to Rs.250,000 from current Rs.125,000 per month for all public & private sector employees w.e.f 1 Jan 2020

AS per news reports all the other proposals, except for VAT, NBT reduction and changes to PAYE tax threshold will be implanted with immediate effect

The proposals are positive for sectors across the board with reduced taxes likely to drive the overall economic activity and the broader consumer sentiment.

Whilst the proposals are yet to be gazetted, we expect the stock market to react positively from 28 Nov 2019

While we expect above proposals to result in an increase in the budget deficit (especially for 2020E), increase in consumption given the anticipated increase in disposable income, would partially offset the negative impact on the fiscal deficit.