Legal reforms in Sri Lanka tackle debt management, investment and preservation of local industry

Significant developments in the legal framework were observed in 2018, following on from a number of important legislative reforms in 2017. However, it is the view of John Wilson Partners that a concerted effort must be made to finalise the reform of the archaic Customs Ordinance. Details of some of the problems arising from this legislation are dealt with in the view point article in this chapter.

Active Liability Management Act No. 8 of 2018

This act was enacted by the Sri Lankan Parliament on March 23, 2018 and, as set out in its long title, the purpose of the act is to authorise the raising of loans in or outside Sri Lanka for the purpose of active liability management, as well as to enhance public debt management in the country and make provision connected therewith and for incidental matters. By managing public debt over the medium to long term, consistent with a prudent degree of risk, the act seeks to manage public debt to ensure that the financing needs and payment obligations of the government are met at the lowest possible cost. Speaking to local media in February 2018, Indrajit Coomaraswamy, the governor of the Central Bank of Sri Lanka (CBSL), stated that the Active Liability Management Act encourages the government to institutionalise fiscal consolidation by “giving teeth” to the Fiscal Responsibility Management Act.

It also addresses the budget deficit, which many stakeholders consider to be Sri Lanka’s most significant source of economic instability.

In a statement released in October 2018, the CBSL said, “The Active Liability Management framework of the government of Sri Lanka is focused on acting in advance, to refinance and/or pre-finance debt repayable beyond the financial year covered under the Annual Appropriation Act.”

The Liability Management Strategy being adopted is meant to ease debt repayments in the future and to aggressively address refinancing requirements in the coming years, as well as to ensure it is done at the lowest possible cost – in line with government cash flows and loan maturities.

The act also provides the government with an essential legal framework to adopt borrowing strategies depending on market opportunities.

In response to a question from the media as to whether the new act would further burden Sri Lanka with more borrowing, Coomaraswamy said that it specifies the reasons for borrowing and sets limits. According to local media, the CBSL and government have already initiated action in accordance with an active liability management strategy formulated under the legal framework set out under the Active Liability Management Act to diversify market-based foreign funding sources to the Chinese Panda bond market, the Japanese bond market and the highly liquid sukuk (Islamic bonds) market.

The Land (Restrictions on Alienation) Act No. 21 of 2018

This act amends certain provisions of the Land (Restrictions on Alienation) Act No. 38 of 2014, which prohibits the transfer of title of any land situated in Sri Lanka if it is:

• To a foreigner;

• To a company incorporated in Sri Lanka under the Companies Act, where any foreign shareholding in such a company, either direct or indirect, is 50% or above; or

• To a foreign company. The amending act of 2018 liberalises these provisions to a certain extent by removing the restriction of 50% ownership for foreign shareholders in the case of listed companies at the time of acquisition of freehold land. This amending act came into effect retrospectively from April 1, 2018.

This is significant for the Colombo Stock Exchange (CSE), as it is hoped that the move will increase the market capitalisation and liquidity of the companies listed on the bourse.

The restriction on foreigners, foreign companies and companies with foreign shareholdings from purchasing condominium parcels situated on or below the fourth floor of a building – specified under the Apartment Ownership Law – has also been eased.

Sector stakeholders have also expressed hope that the amendment of 2018 will boost foreign direct investment inflows into Sri Lanka – especially the $15bn envisaged through the Port City Colombo development – and help the state secure foreign institutional investors for the planned divestiture of non-strategic commercial entities via the CSE.

However, even though this restriction has been removed, and the acquisition of condominium property on any floor is now possible, the condition that full payment for the relevant apartment/ condominium be made in advance via an inward foreign remittance remains unchanged. This is hardly conducive to encouraging foreign investment in condominiums.

Nation Building Tax (Amendment) Act No. 20 of 2018

The Nation Building Tax, also known by its acronym NBT, is imposed in terms of the Nation Building Tax Act No. 9 of 2009, which came into force from February 1, 2009. The most recent amendment – the Nation Building Tax (Amendment) Act No. 20 of 2018 – was approved by the honourable speaker of Parliament on July 30, 2018.

The legal change revised the existing criteria relating to exemptions from the tax for locally manufactured coconut products, such as coconut milk, coconut oil, poonac (a coconut residue mainly used as animal fodder), coconut shells and coconut water.

In addition, the amendment limits the period of exemption granted for certain products and on the supply of electricity. Furthermore, it extends exemption to the importation of certain new products and services, as follows:

• Non-motorised equipment and accessories for water sports;

• Non-powered equipment and accessories for aero sports;

• Gem stones for the purpose of re-export upon being cut and polished; and

• Equipment for greenhouses and polytunnels, and materials for the construction of greenhouses by any grower of agricultural products or plants.

Value-Added Tax (Amendment) Act No. 25 of 2018

The Value-Added Tax (VAT) Act no. 14 of 2002 was amended by the VAT (Amendment) Act no. 25 of 2018, which was certified by the honourable Speaker of Parliament on August 16, 2018. The amendments were effective from that date. The significant changes brought about by the amendment act included a scheme to refund tourists VAT paid in certain circumstances during their time in Sri Lanka.

The new provisions provide that the Commissioner General of Inland Revenue or another authorised person may – on being satisfied that a tourist has purchased the specified goods from an authorised retailer, and that the value of such goods was in excess of the minimum value as prescribed, and that the tourist has paid VAT on the purchase – refund or make arrangements to refund the amount of tax paid. It has been reported by local press that the scheme is in operation.

As per instructions from the Ministry of Finance, a policy decision was taken to continue the VAT exemption on the supply of residential accommodation until March 31, 2019.

The amendment also provided for certain new exemptions from VAT on the importation and supply of the following goods and services:

• Infant milk (to be continued as set out prior to November 1, 2016);

• Electrical goods;

• Magazines, journals or periodicals;

• Plants, machinery or accessories for renewable energy generation;

• Medical machinery or medical equipment;

• Energy-saving light bulbs;

• Hot air balloons;

• Locally manufactured jewellery;

• All health care services provided by medical institutions or professionally qualified persons other than hospital room charges;

• Geriatric services or child care services; and

• International telecommunications operators.

Anti-Dumping & Countervailing Duties Act No.2 of 2018

On March 19, 2018, the Anti-Dumping and Countervailing Duties Act No. 2 of 2018 and the Safeguard Measures Act No. 3 of 2018 were enacted by Parliament.

The purpose of the new legislation is stated in Act No. 2 as being “To provide for the investigation and imposition of anti-dumping and countervailing duties with regard to the products imported into Sri Lanka and for matters connected therewith and incidental thereto”.

The purpose of Act No. 3 is set out in its long title, and it provides for the conduct of investigations and the application of safeguard measures for products imported into Sri Lanka. The legal provisions are complex and a detailed exposition of them is not necessary for the purposes of this overview.

Dumping is defined as an “introduction to the commerce of Sri Lanka [of] a product at a price which is less than is normal”.

In section 14 (1) of, which is titled “Initiation of Investigation”, there is the provision (subject to certain exceptions) that an investigation must be initiated upon a written application in the prescribed form being made by or on the behalf of a Sri Lankan industry. This may also be accompanied by a prescribe fee.

Any such application can be withdrawn in one of two situations, both of which are referred to in section 17 of Act No. 2, as follows:

• At any time prior to the initiation of an investigation, where the case would be considered as having not been made; and

• At any time after an investigation has been initiated, where the director-general of commerce shall terminate the investigation without measures unless he or she determines that it should be continued in the economic interest of Sri Lanka. Section 18 outlines the fact that the director-general of commerce can decide whether or not to initiate an investigation within 40 days of receipt of the application.

As stated in section 23, the investigation has to be conducted over a 12-month period from its initiation, and in no case over more than 18 months.

The procedure applicable to investigations is that the matter can be disposed of through written arguments as provided for in section 34, or by hearing, as provided for in section 35.

Section 36 empowers the director-general of commerce to provide opportunities for industrial users of the investigated products in Sri Lanka and for representatives of consumer organisations to provide information and submit written arguments concerning matters relevant to the investigation, including the economic interest of Sri Lanka in imposing measures.

Part II of the Anti-Dumping and Countervailing Duties Act No. 2 of 2018 deals with countervailing duties.

Section 64 sets out the circumstances in which a countervailing duty may be imposed, as follows:

• When a prohibited subsidy or an actionable subsidy within the meaning of this act is being provided with respect to the investigated product;

• When there is damage to Sri Lankan industry; and

• When there exists a causal link between the subsidised imports and the damage caused. It is anticipated that the legislation will enable any dumping or unfair trade measures to be dealt with, and the need for legislation was viewed by many as acute in the context of the prevailing policy to finalise free-trade negotiations with major trading partners. It is too early to comment on the use of the provisions in practice.

Regarding trade, an EU-funded project has overseen several consultations on the National Single Window of Sri Lanka, the implementation of which is considered by many to be crucial for easing difficulties and hindrances to international trade.

Many also consider that it is imperative that a new draft of the Customs law be adopted. The present Customs Ordinance is considered by many, particularly those involved in the business of importation, to be unfair and contain overly draconian provisions. A proposal for a draft new bill is ready, and details of the problematic areas and proposed reforms are contained in the viewpoint article of this chapter.

OBG would like to thank John Wilson Partners for its contribution to THE REPORT Sri Lanka 2019