A capital idea? Taxing gains or not

A reminder, if one were needed, at the end of last week of the sometime complexities of investing in an emerging market like Sri Lanka.

Having announced a re-introduction of capital gains tax (not seen since 1987) in March, the Government quickly rode back on Friday, postponing the tax for six months. That move was almost certainly a response to the significant withdrawal of international funds from Sri Lankan equity markets. Reuters (here) reports net capital outflows of just under $9 million since the original announcement; not vast by the standards of global markets but enough to cause sweaty palms in high office.

Quite what they decide in six months’ time, we shall have to see.

Of course, a tax on gains will have considerable potential implications for those buying property here – even more so for those looking to do so with a commercial angle. We’ve not yet seen specific details on proposed rate of taxation, what properties would be liable or, indeed, on how retrospective any tax might be.

Those who, say, bought property for $500,000, spent that sum again on renovation, and are looking to sell now may find themselves struggling to account accurately for the taxable gains if they were assuming a policy of 0% on capital appreciation. Having to pay tax – possibly of around 30% – purely on the difference between buying and selling price would be a pretty shocking outcome.

Whatever the policy at the end of the year, buyers and investors shouldn’t recoil at the idea of tax on capital gains. The market is strong enough to ensure property remains a sound investment, profits taxed or not. What’s more, Sri Lanka undeniably needs to reform its tax structures and those doing well here should have a positive impact on the country’s development.

The lesson, rather, is to make few firm assumptions when it comes to public policy. Rest too heavily on the latest announcement and you may be in for a shock.