Increased Taxation Counterproductive to Increased Exports and Competitiveness – JAAF – The Island

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“Rebuilding Sri Lanka is a national priority and the Sri Lankan government has rightly stated that the path to rebuilding the nation is through enhanced export-led growth. Sri Lanka’s merchandise exports currently stand at around $12 billion a year, although the country really needs to get closer to $20 billion a year to leapfrog ahead and become a developed nation.

“This will be particularly difficult given the contraction of Sri Lanka’s export markets. While apparel posted commendable growth in the first eight months of 2022, the industry is now seeing a significant drop in orders due to a range of global factors, a trend that could continue indefinitely. Therefore, in view of the paradigms unfolding globally, it is imperative that Sri Lanka remains competitive and provides potential and existing investors with a competitive investment environment, the Joint Apparel Association Forum (JAAF) said in A press release.

Excerpts from the press release: “The JAAF is deeply concerned by recent discussions to remove the preferential rate granted to exporters and replace it with a single corporate tax rate. This would mean that the corporate tax rate would double for exporters. The industry contributed 52% of export earnings throughout the crisis, a contribution that is essential to keep the economy afloat, despite difficult internal and external factors. An additional tax rate will make the garment industry very uncompetitive with its regional counterparts.

“Until September 2022, garment exporters were required to pay a reduced corporate tax rate of 15% (previously 14%). However, in line with the IMF staff agreement, the government tabled proposals in the 2022 Interim Budget to increase the standard rate of corporation tax from 24% to 30%, effective October 1, 2022. The JAAF is troubled by this proposed increase as the industry clothing is already facing a 25% drop in its order books for the fourth quarter of 2022 due to the easing of global markets.

“The IMF, in its Article IV consultation in March, identified the corporate and personal income tax (CIT and PIT) exemptions as having eroded the effectiveness of the income law. (IRA) of 2017, paving the way for significant revenue losses.This is what prompted the current proposal to increase the corporate income tax rate.As Sri Lanka has only levied than 7.7% of its GDP in the form of taxes in 20211, the IMF’s objective is to increase revenue collection to finance social services, essential infrastructure and public goods.

“The JAAF fully understands and supports the need for the proposed tax reforms as the government is challenged to find options to generate much needed revenue. However, although the policy is well intentioned, the resulting consequences are disastrous and can have disastrous results for an industry striving to increase export earnings, local value addition, foreign direct investment, maintaining employee safety and economic growth.

“However, it is crucial that the government takes note of the following concerns before implementing the increase in corporation tax for exporters to 30%.

“First, export industries do not operate in isolation and are in constant fierce competition with regional competitors. This means investors and buyers are actively aware of the cost of doing business. Therefore, companies rationalize the pros and cons and assert deals that would favor their operations. This can lead to moving to countries with lower operating costs. Sri Lanka is already at a disadvantage compared to its regional counterparts who have better trade agreements and more liberal trade policies. Tightening the bottom lines further so that exporters pay a higher corporate tax rate than Bangladesh, Vietnam, Thailand and Indonesia, for example, will hurt the country’s ability to remain competitive in this region.

“Furthermore, it should be noted that geographically smaller countries like Hong Kong, Singapore and Dubai are modeled on low taxes in the early stages of economic growth. Even today, Singapore corporate income tax is imposed at a flat rate of 17% with partial tax exemptions and a three-year start-up exemption extended to qualifying start-ups. Only large economies like India with a large domestic market are able to impose higher tax rates than their regional counterparts.

“Higher corporate taxes can also discourage value addition from existing export businesses. For example, companies will have less incentive to further reinvest their reduced profits in research and innovation and in other possible avenues of product diversification and product quality improvement. In the medium to long term, this could erode Sri Lanka’s hard-won position as a manufacturing hub for sophisticated, innovative and ethical clothing. With this, Sri Lanka also runs the risk of gaining a reputation for a cost center model that does not necessarily contribute to the process of profitability of a company, but still incurs costs for the creation of low cost products. value.

“A growing number of studies have established that higher taxes and higher compliance costs systematically push more of the economy underground and out of reach of the tax collector. The National Bureau of Economic Research confirms this by reporting that as tax rates rise above the median level of 34%, the scale of fraud increases dramatically. This research also found that on average, a 1% increase in the tax rate leads to a 3% increase in tax evasion. Tax non-compliance and tax evasion have always been major sources of revenue loss for the Sri Lankan government. The Parliamentary Committee on Public Accounts (COPA) has revealed that the Inland Revenue Department was deprived of around LKR 144 billion last year alone due to tax evasion. In this context, the JAAF is deeply concerned about the doubling of corporate tax rates in times of extreme economic distress, which could incentivize companies to evade tax compliance, which will judge the very intentions of this policy of increase in public revenues, counter-productive and redundant.

“The apparel industry is already heading into uncertainty over the coming months due to rising inflation in the largest export markets, disruptions to global supply chains and geopolitical tensions. whether the industry is convinced that this is a temporary difficult situation and that it has the ability to emerge resilient, the timing is not necessarily prudent and will create a more difficult environment for exporters in terms of policy .

“The garment industry is determined to steer Sri Lanka towards prosperity through the creation of a competitive export-oriented market economy. Therefore, the JAAF urges the government to reconsider the policy of increasing the corporate tax rate by 100% (from the prime rate of 15% to 30%) allowing the garment industry and all exporters to remain competitive and to engage in commercial and commercial activities. investments in the region.

“In conclusion, JAAF General Secretary Yohan Lawrence said: “The garment industry, which is the largest exporter of goods, reaffirms its commitment to continuously support the government in its efforts to reduce the budget deficit. The JAAF fully supports mechanisms and processes to improve tax administration, collection and broadening of the tax base, which will lead Sri Lanka to redirect the path of recovery and growth.

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