Lanka moots Rs 100 cr fund for better ties

Sri Lanka has mooted a proposal for setting up  a Rs 100 crore bilateral Economic Cooperation Fund under the proposed Economic Cooperation Partnership Agreement being worked out with India.

The proposal was raised by Sri Lanka during the recent meeting on CEPA held in the capital.

Senior officials told Business Standard that New Delhi had asked Colombo to submit a detailed proposal on the fund in the next meeting slated to be held in August explaining the objectives of the fund.

Both countries are holding negotiations in areas like investment, services and goods for the proposed CEPA.

Officials said that Sri Lanka had also suggested the setting up of a clearing house with Indian technical and financial assistance to address the problem of illegal bypass of international telecommunication traffic being faced by its telecom authorities.

The existing Double Taxation Avoidance Agreement is also being re-worked under the proposed CEPA. India has proposed inclusion of the 'Limitation of Benefit' clause in the DTAA to prevent treaty shopping.

Officials said that India had proposed limiting the benefit of the agreement to entities with atleast 51 per cent ownership being held by residents of either of the two countries. Sri Lanka has in principle accepted this provision.

Both countries are however, yet to come to a final view on continuing tax sparing provisions which exists under the present DTAA treaty. While India is keen to discontinue tax sparing provisions, Sri Lanka wants it to be retained. The tax sparing provisions allows deemed tax credit in case of economic activities which are exempted from tax in a particular country.

For instance, if a Sri Lankan company sets up a unit in a software technology park and repatriates its dividend to its home country, the sparing provision would allow deemed tax credit on the dividend and the company would have to pay tax in Sri Lanka on the amount of the dividend less the deemed tax paid in India.

Officials said that New Delhi was not in favour of continuing tax sparing provisions as there was a view that such provisions lead to double non-taxation. Tax experts however contend that the provision should be continued.

"Just as we demand this from developed countries we should give this benefit to Indian companies investing in Sri Lanka as the tax spared in Sri Lanka is also spared in India," said Vivek Mehra, executive director PricewaterhouseCoopers.