The removal proposed in the government’s 2017 budget of tax exemptions on investments in listed securities and dividends by Unit Trusts, from which the corporate sector has been making big gains, could affect volumes on the Colombo Stock Exchange, according to President of the Colombo Stock Brokers' Association (CSBA), Ravi Abeysuriya.
“The corporate sector has been enjoying tax free income by investing in listed securities and unit trusts,” he said.
“Corporates will be liable for income tax at applicable corporate tax rates for investment income, such as, capital gains and dividends, on all listed securities, both equity and debt.
“The tax exemption granted on dividends paid by any Unit Trusts to a unit holder will be excluded for corporate sector investors. This could have a significant impact on the transaction volumes of the stock market due to the fact that over 60% of the transactions are currently institutional,” he said.
Commenting on the budget proposals, Abeysuriya said, however, there were other measures to encourage more market activity.
“Listing of non-strategic State Owned Enterprises, a separate board for listing of Small and Medium Enterprises and listing of at least 25 companies in the CSE has been proposed by providing companies 25% reduction in F/Y 2016/2017 tax liability if listed in 2017/2018 to encourage more capital market activity.”
A Capital Market Strategy with an advisory board consisting key stakeholders has been proposed with the introduction of the long overdue Securities and Exchange Act and Securitization Act during the first quarter of 2017 along with the demutualization of the CSE, Abeysuriya said.
He also noted the 10% Capital Gains Tax (CGT) imposed on gains realized from disposal of immovable properties held for less than 10 years proposed in the budget. “The stock market investors can now rest assured that the existing Share Transaction Levy will continue with no CGT applicable to all listed securities,” he said.
“One of the key focus areas of the 2017 budget is to generate growth and social inclusion by offering incentives such as interest subsidies to encourage more entrepreneurial activity, skills development and employment generation,” he said. “Encouraging new ventures such as, Telecom Tower Operators and Electric Car Fleet Operators is a unique feature of the budget.”
Abeysuriya also commented on other significant policy reforms concerning the financial and capital markets:
1. Pension Reforms – Key reforms imperative to address the demographic time bomb due to the fast ageing population of Sri Lanka, such as, the need for an alternative for the unfunded defined benefit scheme for government employees, legislation for a Central Pensions Fund to regulate the EPF, ETF and private pension funds and inclusion of contributory pension schemes to sectors hitherto not entitled to any pension scheme, has been proposed.
2. Debt Office – The establishment of an independent debt office at the General Treasury has been proposed to be directly responsible for debt issuance and professional management of over Rs.9 trillion of local and foreign government debt stock.
3. A dedicated authority - Consumer Financial Protection Authority (CFPA) - has been proposed to promote financial literacy, fairness and transparency for consumer financial products and services, and thereby enhance the integrity of the financial system of the country as a whole. How CFPA will operate with the Central Bank and SEC is not clear.
4. Consolidation of banks – In order to make a regulatory push for banks to consolidate and increase their capacity to take risk and meet growing credit needs of the country, the minimum capital of Licensed Commercial Banks, Licensed Specialized Banks and Primary Dealers have been increased to Rs.20 billion, Rs.7.5 billion and Rs.1.5 billion, respectively.
5. Increased tax on Pension Funds – The present 10% tax on all funds - EPF, ETF, Unit Trusts and Charitable Institutions etc. has been increased to 14%.
6. New Bankruptcy Laws will be introduced in line with other countries to provide for reorganization of businesses (whether a corporation, sole proprietorship, or partnership) that have got into difficulty due to non payment of liabilities to keep the business alive and pay creditors over time.
7. With Holding Tax (WHT) on Interest – The current WHT on interest income (which serve as a final tax) has been increased from 2.5% to 5% and exemption granted to senior citizens has been removed.
8. Discouraging cash Transactions to move the country towards digital transactions – A 2% fee has been imposed on cash transactions over Rs.5 million (the 2% levy does not apply for non-cash transactions through cheques, TTs, Bank drafts).
“It should be noted that the implementing of proposed reforms expeditiously is paramount to achieve the objectives envisaged in the budget,” said Abeysuriya, who is also Group Director, Candor, and President of the Association of Alternate Financial Institutions (AAFI).