CT CLSA Securities (Pvt) Ltd expects the stock market to react positively from today (28) following the slew of tax exemptions announced by the new government.

"The proposals are positive for sectors across the board with reduced taxes likely to drive the overall economic activity and the broader consumer sentiment. Whilst the proposals are yet to be gazetted, we expect the stock market to react positively from 28 Nov 2019," CT CLSA said.

Sri Lanka’s government headed by newly elected president Gotabaya Rajapaksa announced the tax cuts after the first meeting of its cabinet of ministers.

Accordingly, it was announced that the administration would do away with National building tax (NBT) on household goods, Withholding tax (WHT) on interest and debt tax, PAYE tax, government taxes imposed on religious places, with immediate effect.

The cabinet also decided to reduce Value Added Tax (VAT) from 15% to 8% and to increase the tax-free threshold for VAT from LKR 1 Mn per month to LKR 25 Mn per month.

The Cabinet further decided to reduce the telecommunications levy by 25% and the income tax on the construction industry has been reduced from 28% to 14%. Tourism business will be treated as export for zero rate provided that 60% turnover is sourced from local supplies.

While CT CLSA expects the above proposals to result in an increase in the budget deficit (especially for 2020E), they assume that increase in consumption given the anticipated increase in disposable income would partially offset the negative impact on the fiscal deficit.

Potential impact on companies under CT CLSA coverage from the changes in Taxes and Levies is as follow: