COLOMBO – Sri Lanka’s personal income tax hikes have hit economic activity in the first quarter though currency stability helped businesses cut prices, Hemas Holdings, a top consumer goods group said.
“The market witnessed price reductions and promotional trade schemes to stimulate consumption,” Hemas Holding told shareholders in the March quarterly statement, but noted that changes made to the personal income tax structure had severely impacted modern trade sales volumes as consumers rationalized their purchases under reduced disposable income levels.
Sri Lanka hiked personal income tax rates in 2023, while value added taxes were raised to 15% from 8% in 2022. Another 2.5% 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 point out.
Net gains on income tax therefore comes at a cost of lost value added tax as well as killed real economic activities based on economic decisions of those who earn the money.
UK also almost doubled VAT in 1979 to 15%, cut the base income tax rate and widened thresholds above inflation amid criticism from Keynesian style or mainstream economists to recover the economy, after back-to-back IMF programs failed to deliver concrete results, analysts point out.
At Hemas Holdings, group revenues went up 52.6% to 32 billion rupees in the March 2023 quarter from a year earlier amid price inflation as the rupee fell, and cost of sales went up 45.1% to 22.2 billion rupees, allowing the group to boost gross profits by 72% to 9.8 billion rupees, interim accounts showed.
However, administration costs went up 54%, selling and distribution costs went up 36%, 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 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 realize in the quarters to come, provided the current economic conditions prevail.”
Hemas 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% 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.