Strategy Note /
Sri Lanka

Sri Lanka: Latest tax breaks a positive for corporate earnings

    Contributors
    Isuri Munasinghe
    Naveed Majeed
    Mangalee Goonetilleke
    Lakshini Fernando
    Asia Securities
    22 January 2020
    Published byAsia Securities

    The Ministry of Finance, Economic and Policy Development yesterday announced a full range of amendments to the inland revenue act, which will be put forward for parliamentary approval. The cabinet has already approved the proposals. The latest update has introduced several new amendments compared to the ones announced in November 2019 (see our full report on the prior announcement) which we assess in this report. 

    On personal income, the primary positive is the defining of several allowable expenses for income tax calculations post 1st April. However, with the revised tax slabs the benefits will accrue to individuals whose income exceeds LKR250,000. 

    We view the lower corporate taxes as a positive for corporate earnings and expect the more demand elastic sectors like FMCG to pass on the benefit to the consumers to some extent. We also expect corporates which have been challenged with volume growth such as alcohol and tobacco sectors will pass on the benefit to consumers. In addition, lower taxes on banks and NBFIs would act as an incentive to maintain low interest rates during the year. 

    Overall, we believe equities should see positive momentum from the tax cuts, driven by stronger fundamentals. On the macro side, we maintain our view that the proposals are positive for growth, but caution on the fiscal implications.