Socialists Do The Darndest Things!

I have been looking at property in Sri Lanka lately (I was even, before the tsunami; I just had to delay my trip). I was consulting on the phone with someone about it, discussing legal ways to avoid paying the 100% sales tax. You read that right: 100%. Sri Lanka is much more liberal than countries such as Thailand or Indonesia, in that foreigners may legally purchase property. However, there's this little matter of the tax...This was a tax of long standing, reduced to 4% for two precious years of would-be economic restructuring, and returned to 100% by the current socialist government. Clearly nobody has ever drawn them the Laffer curve on a napkin. I'm quite sure they'd make more money with a 30% tax than they do now, and they might even make more with a 15%, on the grounds that so many more people would be paying it. (People really do start to become very creative when taxes this high are involved.) They are so hard up for income, and have their heads screwed on so badly, that they are holding up containers of tsunami relief aid until the hefty import taxes are paid(!). Too-rigid applications of IMF consensus economic liberalization can be a bad thing, but so can completely counter-productive tax schemes. It seems so...old-school. Like those Maoists in Nepal; what are they thinking? Nobody is Maoist anymore, not even Chinese people (or, perhaps, especially not Chinese people). The plus side for Sri Lanka from my point of view is that their tourism development has been greatly hindered, mainly by the conflict with the Tamil Tigers, but also by stultifying economic regulation. The downside, from the Sri Lankans' point of view...much the same, really.

Comments

[Gandhi McGee]

Are you sure it's socialism and not xenophobia that's at fault?

[Ray]

I could see the tax making sense if property there is really, really cheap. Or if it was part of some zoning scheme, intended to make sure that towns don't become completely tourist-owned (making them ghost towns in the off-season). But it probably isn't...

[Ben Ho]

http://www.economist.com/countries/SriLanka/profile.cfm?folder=Profile-FactSheet
http://www.boi.lk/InvestorSite/content.asp?content=settingup3_3&SubMenuID=10
http://www.unclefed.com/Tax-Bulls/2004/ann04-81.pdf

I dunno, doesn't sound so crazy to me. Well first of all, I couldn't find any evidence for the 100% tax rate on property income. But clearly, they seem to have official tax rates on par with the US for oter kinds of income.

As a proto-economist, I could understand restrictions on property ownership. China has done quite well with capital controls that restrict the flow of capital.

I do agree that it's probably a stupid idea, but similar sentiment was heard even the US when Japan was buying up large chunks of America. And chances are that given the large current acount deficit, a backlash to foreign ownership of US capital may happen again soon.

[Mitch Mills]

Yeah I would guess that the primary purpose of the law isn't to generate revenue but to encourage domestic ownership of land (actually I'm assuming that the 100% only applies to real estate, although I'm unclear from your post if that's the case). So they probably don't really care about the Laffer curve.

And like you said many countries, and not just socialist ones, prohibit foreign ownership altogether, so in a way Sri Lanka's is a liberal policy. Even in the EU an important negotiating point with newly joining countries has been the extent to which they can prevent or slow their new and richer EU brethren from buying up all their land.

Of course whether merely the fact that the person owning land is a national has any benefit for the majority of a country's nationals is a completely different question.

[Doug Muir]

Romania used to have a 30% tax on all leases. This caused everyone to avoid signing leases and pay money under the table.

So for a couple of years, they lowered it to 10%. Everyone signed leases, since they gave clear rights and protections.

Then they raised the tax back to 25%. Only now they knew just who had leasable property...

Doug M.

[Matt]

I'd agree w/ those who say this is clearly not about raising revenue- it's about not wanting foreigners to own all the land. There are similar restrictions in Russia, for example, and these are backed by nearly all segments of the political spectrum. (not the librals, mind you, but they don't care about foreigners owning land.) And, in poor countries like Sri Lanka, this might not even be stupid- if it were very attractive for foreigners to own land, and they have much more money, then much of the best land would be bought by foreigners. That might not be good for a nubmer of reasons, not all of which need be thought of as xenophobic.

[Chris]

I´m also looking for property in Sri Lanka - I was there with a tsunami-relief team and fell in love with this country and its landacapes and its people, it´s so very different from other countries in the region...
But the tax is quite an obstacle for someone like me who isn´t really the typical wealthy capitalist :-)
Can you give me any information how to avoid it in a legal way?

[THILINA]

Well, I'm a sri lankan citizen in the UK and I,m looking for a buyer to sell a property that I own in sri lanka, there r legal ways of avoiding such stupid taxes introduced by the current sl gov (u can bend the rules) s dont worry. If u r interested then pls get in touch.

Regards
Thilina

[Ann]

My understanding is that Sri Lankans were getting a bit concerned about the influx of foreigners buying up property, hence the tax. In other words, it was introduced, not to earn more money, but to curb so much of their property being foreign owned. There do seem to be ways around it if you're determined however. I'm not entirely sure that post tsunami, it's even still in force. There seems to be varying information about it online, which just confuses the issue.

As for being pleased that it's inhibiting tourism, it's very difficult for me to understand how, as a lover of Sri Lanka, you can blithely consign so many of its people to desperate financial straits. Tourism is one of the 3 major industries there and the economy is heavily dependant upon it. Many very hard working families are having an extremely tough time of it because tourists are still giving the country a wide berth.

[Mike Varney]

I'm about to start working in Sri Lanka (Victoria near Kandy) and I'm interested in the views here - they seem pretty wide spread - my family and I are "survivors" of South Africa before and after Apartheid, Dubai and Thailand and it seems to me Sri Lanka offers everything and the Government are trying their BEST to get "it" right for everybody - the Tax is about keeping some ownership on the Island and will, I'm sure be reduced, tactically when it should be...for now Bounce Back Sri Lanka and get your friends and family their as soon as you can....avoid the crazy "set up your own business angle in Thailand, watch out for the South African Rand dropping through the floor as the government takes away land from the farmers (Black and white) and watch as Abu Dhabi follows Dubai along the property route – no legislation for Foreigners to own land, no licenses for Brokers and an infrastructure that was made for 1/3 of the people living there now!

Everywhere has it's downsides – we are all free to choose…but make it Sri Lanka!