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Personal income tax shock dims economic activities

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ECONOMYNEXTSri Lanka’s personal income tax hikes have hit economic activity in the first quarter though despite currency stability helped businesses cut prices, Hemas Holdings, a top consumer goods group has said.As the currency stabilized, as central bank ended contradictory money and exchange policy conflicts, businesses had cut prices. Mainstream economists generally claim that price falls lead to delayed transactions and try to generate positive inflation through money printing, though businesses believe otherwise.

“The market witnessed price reductions and promotional trade schemes to stimulate consumption,” Hemas Holding told shareholders in the March quarterly statement.

“However, changes made to the personal income tax structure severely impacted modern trade sales volumes as consumers rationalised their purchases under reduced disposable income levels.”

Sri Lanka hiked personal income tax rates in 2023. Value added taxes were raised to 15 percent from 8 percent last year. Another 2.5 percent cascading tax was imposed on top of VAT, the effect of which was estimated to be around 4.5 or more through the cascading effect.

While value added tax allows the government to get tax revenues after citizens make transactions and getting the economy to work, based on best decisions needed to drive the economy to satisfy real needs, income tax kills economic decisions and transfers money to state actors, analysts say.

Net gains on income tax therefore comes at a cost of lost value added tax as well as killed real economic activities which would otherwise have been based on decisions of those who earned the money.

UK also almost doubled VAT in 1979, also to 15 percent, cut the base income tax rate and widened thresholds above inflation to give choice to individuals, amid criticism from Keynesian style or mainstream economists to recover the economy, after two back-to-back IMF programs failed to deliver concrete results, analysts point out.At Hemas Holdings, group revenues went up 52.6 percent to 32 billion rupees in the March 2023 quarter from year earlier amid price inflation as the rupee fell, and cost of sales went up 45.1 percent to 22.2 billion rupees, allowing the group to boost gross profits 72 percent to 9.8 billion rupees, interim accounts showed.

However, administration costs went up 54 percent, selling and distribution costs went up 36 percent, and finance costs went up to 1.3 billion rupees. Profit after tax was flat at 1.06 billion rupees.Sri Lanka’s central bank stabilized the rupee in the second half of 2022 after the rupee collapsed from 200 to 360 to from two years of money printing and also removed a surrender rule in March allowing the exchange rate appreciate.

The US Fed also tightened policy from March 2022 helping bring down global commodity prices after triggering inflation not seen for 40 years through Coronavirus linked money printing or accommodating a real shock through monetary expansion.

“While the modern trade channels witnessed a slow down due to the adverse impact of the tax reforms and high cost of credit on the middle-class urban population, the general trade channels experienced significant growth and increased foot fall,” Hemas told shareholders.

“The decline in global commodity prices in the second half of the year, enabled the business to make price reductions across the portfolio.

“However, the benefit of appreciation of the Sri Lankan Rupee in March 2023 was not seen during the quarter due to the lag effect but is expected to realise in the quarters to come, provided the current economic conditions prevail.”

Hemas is also has operations in Bangladesh where the central bank is also buying up government securities with tenors as long at 20 years to mis-target the interest rate, triggering forex shortages and depreciating the Taka, according to analysts who study the country.

Inflation had hit 9.3 percent in Bangladesh by March.

“In the face of numerous challenges including slowdown in the global economy, depreciation in Taka, heightened inflation and depleting foreign currency reserves, the country entered an IMF programme in January 2023,” the firm said.

“The value-added hair oil market witnessed a degrowth, as consumers curbed consumption in many non-essential items and switched to value-for-money alternatives.”

Mainstream economists mis-target rates to boost growth known as either monetary stimulus or bridging an output gap, though the effort result in instability and economic contractions.



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Sri Lanka’s foreign reserves up by USD 2billion over the past year – Acting Finance Minister

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Acting Finance Minister Ranjith Siyambalapitiya during a press conference held today (21) at the Presidential Media Center, focusing on the theme of ‘Collective Path to a Stable Country’ said that over the past year, the government successfully increased the country’s foreign reserves from 1.8 billion dollars to 3.8 billion dollars.

He added that in August 2022, the exchange rate stood at Rs. 361 per dollar, but by August 2023, one dollar could be acquired for Rs. 321. This shift is not the result of artificial control but rather a reflection of the rupee’s value adjusting in response to supply and demand for the dollar, which holds significant economic importance.

The interest rate for deposits, previously at 14% in 2022, has been lowered to 11%, while the loan interest rate, previously at 15.5%, has been reduced to 12% this year. Notably, last year, the primary account deficit was Rs. -247 billion, but this year it has turned into a surplus of Rs. 27 billion. This marks the first surplus in the primary account balance in over 40 years.

Tourist arrivals, which numbered 496,430 in 2022, have surged to 904,318 during the first two quarters of this year. Equally impressive is the growth in tourism earnings, which rose from 832.6 million US dollars in 2022 to 1,304.5 million US dollars in the first two quarters of this year, reflecting a remarkable 56.7% increase compared to the previous year.

In the past year, the amount of money remitted by Sri Lankans living abroad to Sri Lanka has surged from 2,214.8 million US dollars to 3,862.7 million US dollars this year, marking a remarkable 74.4% increase according to data from the Ministry of Finance.

On August 1, 2022, the QR code system was introduced as a measure to manage petroleum demand due to foreign exchange shortages. This led to a significant disparity between normal demand and supply, resulting in a notable increase in diesel consumption by 28% and petrol consumption by 83% in June 2023, when the QR system was partially relaxed. However, as of September 1, the QR code system, which directly impacts economic growth, has been completely lifted.

Upon assuming office, President Ranil Wickremesinghe faced a daunting challenge of addressing a 14-hour power outage, which had a direct impact on the economy. Presently, the government ensures a continuous and stable electricity supply to the population.

As of August 23, 2023, there were 1467 imported goods banned due to foreign exchange shortages. Currently, the ban applies to only 279 items. Furthermore, the import of vehicles, which had been halted in 2020, now includes buses and trucks for public transport.

In April 2022, the country faced difficulties in meeting its debt obligations. However, the government has since secured the first installment under the International Monetary Fund’s Extended Credit Scheme, contributing to stabilizing the country’s economy compared to the previous year.

(PMC)

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President Wickremesinghe meets US President Joe Biden in New York

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President Joe Biden and first lady Jill Biden hosted President Ranil Wickremesinghe and first lady Maithri Wickremesinghe for dinner on Thursday

President Joe Biden of the United States and President Ranil Wickremesinghe engaged in a cordial meeting  in New York on Thursday (20).

The high-profile meeting took place amidst a lavish dinner hosted by President Biden, for all the heads of state who had participated in the 78th session of the United Nations General Assembly.

 

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Ministerial Consultative Committee unanimously consent to canceling the nominations submitted for the Local Government Elections

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The Ministerial Consultative Committee on Public Administration, Home Affairs, Provincial Councils & Local Government chaired by  Prime Minister Dinesh Gunawardena as well as the Minister of Public Administration, Home Affairs, Provincial Councils and Local Government  unanimously consented to cancel the nominations submitted for the Local Government Elections given that those who have submitted nominations have faced great difficulties due to the postponement of the elections.

 

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