Flash Report /
Sri Lanka

Sri Lanka: Tax Proposals – October 2022

  • Revenue base expanded; expenditure proposals remain a key priority

  • Personal income tax changes further widen tax net and burden on higher income earners

  • Corporate tax revisions and affected counters; export counters to see least impact

Asia Securities
12 October 2022
Published byAsia Securities

Key takeaways from latest tax proposals - macro

  • Overall, the tax proposals are a positive indication to the Government’s efforts to reduce the fiscal deficit to 9.8% of GDP in 2022

  • While the higher personal income tax and lower tax-free allowance will support revenue collections, we note that this will have a negative impact on real per capita expenditure

  • We also factor in an elevated inflationary environment in 2023, compared with pre-2022 levels

  • On corporate taxes;

    1) the removal of concessionary tax rates on key industries like Exports, SMEs, Education, Healthcare and Tourism (now at 30.0% from 14.0% earlier) will negatively impact economic activity

    2) We factor in higher price levels in key food and non-food categories

  • The move into Advance Personal Income Tax  (APIT) is a positive

  • According to officials, the number of taxpayers reduced 81.8% to 209,800, from 1.15mn taxpayers in 2019. We expect this to support Government revenue materially from October 2022 onwards

  • On the medium term, we expect the SoE restructuring plans to support in easing the Government’s debt levels

  • We expect the economy to contract approx. 9.0% YoY in 2022 and 1.0% - 2.5% in 2023

Impact on equities – key takeaways

  • Further to the interim proposals made on 31st May, and the interim budget presented on 30th August, the Inland Revenue (Amendment) Bill – Gazette Supplementary has been issued on the 11th of October 2022. The changes from this Bill are subject to committee stage amendments and will be effective upon the Bill being signed into law.

  • With the latest tax proposals, we see the impact on corporate bottom line performance coming from 1) Direct impact of increased corporate taxes, and 2) second-order impact of a sharp slowdown in consumer spending

  • As for the direct impact on corporate performance, the largest impact comes from the removal of concessionary rates available for certain sectors such as exports, tourism, healthcare, education, construction, agriculture and renewable energy sectors, pushing them into the Standard Corporate Income Tax (CIT) rate of 30.0%

  • While the proposals will negatively impact equities, equity investments remaining exempt from capital gains remains a positive to the asset class, and will remain a tax-free investment option.

  • With a withholding tax of 15.0% (proposed 14.0% in the interim proposals of May ‘22) being made mandatory on dividend (effective 01 October ’22), this provides even less incentive for investors to look for dividend plays in an already high interest rate environment

  • Corporates exposed to the domestic consumer will continue to see a demand side slowdown stemming from a further pullback in consumer expenditure

  • Technical Analysis Note – ASPI currently on a bearish momentum below its trend support after testing its key resistance region 10,100. Overall, the index has dropped by 14.07% from its Swing Low/resistance region and approaching pivotal support zones amidst the current bearish momentum. Currently the index is within its immediate support zone 8900 – 8600, however considering the current Tax hike developments the index can test lower support zones (8240-7800) if momentum breaks below without strong consolidation signs.