Sri Lanka is discussing with a visiting International Monetary Fund about exempting destination management companies (DMCs) from value added tax to stop cancellation of already agreed bookings due to the tax hike, Tourism Minister Harin Fernando said.
Hotels in Colombo and outstations are booked up to 80 to 85 percent capacity up to April and there are booking going up to October, officials said.
“Especially from zero to 18 you cannot do right way we have already made bookings up front till October 2024,” Fernando told reporters Thursday.
There was also the possibility to doing transactions externally, to avoid the tax.
“The biggest danger is if they start opening off-shore accounts,” Minister Fernando said.
“If the DMC companies do not bring the money in to Sri Lanka and put them elsewhere and make the payments elsewhere then this whole concept will fall apart in relation taxes.”
DMC firms were exempt from the tax in the past.
“We have to make sure that the remittances come into the country,” Sri Lanka Tourism Promotions Bureau Managing Director Nalin Fernando said.
“By introducing this VAT system coming into the DMCs there is a possibility that they can do their transactions in another country. So that the issue we have, we are lobbying with the IMF.”
If the tax hike can be pushed back, Sri Lanka can avoid cancellation of already made bookings at pre-arranged prices, officials said.
Sri Lanka is trying to raise taxes after the country defaulted in peacetime after inflationist macro-economists printed money to target a ‘potential output’ and running into serial currency crises by narrowly targeting a policy rate with excess liquidity, under a so-called flexible inflation targeting regime taking cover under a high inflation target of 5 percent or more.
As a result of anchor-conflicts under a so-called the flexible exchange rate – which is neither a clean float nor a hard peg – the rupee collapsed from 113 in 2011 to 330 in 2022 in peacetime through three currency crisis.
Sri Lanka has both exchange and trade controls as well as import substitution exploitation due to bad money.
Sri Lanka and Pakistan have the worst bad-money central banks in South Asia operating anchor conflicting operational frameworks (a reserve collecting central bank that narrowly targets a policy rate), leading to frequent crises, political instability, social unrest and IMF programs.
At the moment taxes are being hiked to boost state incomes after steep cuts were made in 2020 by macro-economists to boost potential output.
