Thursday, February 07, 2013

Land sales to Chinese and land taxes: rewriting Economics

Last year the Government imposed new taxes on the sale or lease of land to foreigners. The tax on the sale of land has been around for a while but what was new was the extension of the tax to cover leases and companies owned by foreigners.

Companies incorporated in Sri Lanka are, in every other aspect, treated as resident. However in the case of land, local companies will be treated as non-resident, if a foreigner owns more than 25% of the equity.

Ostensibly, the policy seems to be aimed at discouraging foreigners from owning or leasing land. Yet property development by foreigners seems to be a central plank in Government economic policy.

Can these two apparently contradictory stands be reconciled?

The only way in which these can be reconciled is if the Government is prepared to waive the taxes for chosen developers, which has transpired in the purchase of some prime land by the Chinese. In other words, citizens will encounter great difficulty in selling land to foreigners but not the Government.

In effect, the Government is securing for itself a monopoly on land sales and, as with all monopolies, enables it to earn what are termed "super profits". Thus if a citizen owns a piece of land that a foreigner wants to buy, the cheapest way sell it would be for the Government to buy the land and then sell it to the foreigner, after waiving the tax. This means that profits that should legitimately go to the citizen are being appropriated by the state.

The Chinese deal however looks even stranger because apart from the tax being waived, the property is also being sold below the value specified by the Chief Valuer. Instead of a super profit being earned we have the the opposite: less than normal profit being earned. How can this be?

The normal laws of economics do not seem to apply or, if they are to apply, will do so only if the assumption is made that the super profit was indeed earned, but did not accrue to the state.

This assumption however is clearly absurd, therefore we may conclude that the laws of economics need to be rewritten. A good subject for your PhD, Mr Cabraal?

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