Thursday, November 25, 2010

Sri Lanka unveils tax reforms to boost post-war economy

COLOMBO, Nov 23, 2010 (AFP) - Sri Lankan President Mahinda Rajapakse on Monday announced a major tax reform package aimed at boosting the economy of the island as it recovers from the civil war that ended last year.

Rajapakse, who is also finance minister, unveiled the new measures as he presented the annual budget for 2011 with the deficit predicted to fall to 6.8 percent of gross domestic product from 8.0 percent this year.

He slashed import taxes on many capital goods, including on vehicles and industrial machinery by 25 percent, and also simplified taxes charged on imports and retail trade.

"Having ended the war, and with vital infrastructure in place, we are now in a better position to engage in an accelerated development process within the next six years," Rajapakse said.

As part of foreign exchange liberalisation, he said foreigners in future would be able to buy into companies through local investment funds.

He also announced plans to lower value added tax for banks from 20 percent to 12 percent, ease taxes on construction companies to 12 percent and offer breaks on commodity exports like tea, rubber and spices.

Tax breaks for the fisheries, agriculture and construction sectors were among the schemes to boost economic activity in the island after the bloody conflict between government troops and Tamil separatists ended in May 2009.

"One of the main objectives of my government is to double per capita income to 4,000 dollars by 2016," Rajapakse said. "But, that is not the only objective, I want real incomes to go up."

"A high per capita economy will help us to regain many opportunities we have lost during the war years."

Rajapakse, who has a strong grip on power in Sri Lanka after overseeing the defeat of Tamil Tiger rebels, raised taxes on casinos, alcohol and international phone calls.

Charges for overseas calls have fallen to historic lows due to stiff competition among phone companies.

The president said he would cut income tax for tourism-related businesses, but added tax breaks would favour more expensive hotels in Sri Lanka in an attempt to push the island towards the luxury holiday market.

Tourism has been one sector of the economy to benefit from the end of the war with some 600,000 tourists expected this year, up from 450,000 last year.

Parliament is expected to vote the budget through during the second week of December. Rajapakse has a more than two thirds majority in the 225-member house.

Monday's budget will see a six percent rise in defence spending to 215 billion rupees (1.9 billion dollars) for calendar year 2011, about a fifth of the national budget, according to figures already tabled in parliament.

The defence bill remains high to repay hefty instalments on military hardware bought to fight the Tamil Tigers.

Sri Lanka's tiny stock exchange has been one of the world's best performers since the end of fighting.

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