Starting a business: Singapore versus Sri Lanka

7 minute read

Sri Lanka’s economy grew at an average rate of 4.2% between 2013 and 2017. The forecast for 2018 and 2019 are 3.8% and 4.5% respectively. With increased focus on an export-oriented economy, business zones, and knowledge-based industry, the country is vying for the attention of foreign investors. Does this make Sri Lanka a better place for doing business when compared with Singapore?

While Singapore’s extraordinarily business-friendly environment is marked by zero tolerance to corruption, high-tech infrastructure, and exemplary support to startups, the Lankan system is struggling to face challenges in social inclusion, economic reform, governance, and investment sustainability.

Compared to political and economic stability in Singapore, Sri Lanka suffers from political unpredictability and lack of economic policy consensus. Here is a comparison of the benefits of doing business in Singapore and Sri Lanka.

Overview:

• Global ranking 
• Company registration 
• Directors and requirements 
• Shares and foreign ownership
• Taxation
• Transparency and corruption
• Grants, tax benefits for startups
• Workforce
• Infrastructure

Global ranking

Company registration

In Sri Lanka, it takes at least 9 days and 7 procedures to register a company. Except for the name selection and approval of the Registrar of Companies, no other procedure is online. Many have cumbersome subprocedures. Fees are not fixed, as you have to spend on different fronts, including about $110-$120 plus 15% VAT, $100 for registration advertisement, and $150-$250 quarterly to hire a company secretary. Lengthy and complex procedures result in paying several times more than the actual fees.

In comparison, the incorporation of a company in Singapore is reasonably swift, with a company typically being incorporated in 5 – 7 business days by using a filing agent to submit your application with ACRA (the Accounting and Corporate Regulatory Authority) that governs company incorporation and regulatory matters.

Directors and requirements

Shares and foreign ownership

Singapore’s economy offers unrestricted 100% foreign ownership. In Sri Lanka, most businesses have 49% foreign ownership though 100% holding is allowed. Foreign ownership is not allowed in money lending, brokerage, coastal fisheries, retail operations below $1 million, and security services.

It restricts foreign ownership to 40% in mining, timber, deep-sea fishing, education, shipping, travel, freight forwarding, and many food processing sectors, including tea, rubber, rice, spices, and coconut.

Taxation

• The Ease of Doing Business Index ranks Singapore at 8th and Sri Lanka at 141 for taxation regime. A company has to pay 20.6% of its profit as various taxes in Singapore. In Sri Lanka, it may end up paying 55.2% of the profit.
• Compared to Singapore’s 17% corporate tax while Sri Lanka levies a standard 28% tax.
• Lankan businesses supplying goods have to pay 1% turnover tax in addition to 3% Nation Building Tax on firms earning more than LKR100,000 (US$550).
• Singapore has a single 7% GST. Sri Lanka has a 12% VAT plus to excise duties. Even the healthcare sector is subject to VAT.
• The income tax in Singapore varies from 2% to 22%. In Sri Lanka, it is between 4% and 24% and an extra 5% tax is on bank deposits and foreign earnings, which is exempt in Singapore. No withholding tax is on dividends in the city-state but in Sri Lanka, one has to pay 14% dividend tax.
• Sri Lanka collects 14% tax on remittances payable compared to zero-tax on branch remittances in Singapore.

Transparency and corruption

The Global Competitiveness Report has all praise for transparent and corruption-free business environment in Singapore. The city-state is ranked sixth out of 180 countries on Corruption Perceptions Index prepared by the Transparency International. It has a zero-tolerance policy to corruption backed by technology-assisted approval procedure, clear decision-making process, single-window business facilitation, transparent procedures, no red tape, and the highest regard for law enforcement.

Sri Lanka occupies the 91st position on the corruption index.  The country is plagued by lingering opaque practices, high-level corruption, red tape, cronyism, risks of approval repudiation, highly fragmented decision-making system, and age-old procedures. A weak legal system fails to uphold law enforcement while facilitation payments are common to clear obstacles in doing business.

The Global Enabling Trade Report highlights the demand for bribery, irregular payments and corruption by border officials as factors inhibiting trading across borders there.

Grants, tax benefits for startups

The Information and Communication Technology Agency of Sri Lanka provides $5,000 seed funding to each of 10 startups under the Spiralation program. In July 2018, it announced to create LKR 10-billion Development Bank for easier loans to entrepreneurs while increasing the capital expenditure tax relief from 200% to 300%. The government has started the LKR 60 billion Enterprising Sri Lanka project offering concessional loans and interest subsidy up to 75%.

However, the grants and exemptions in Sri Lanka, where the government struggles for funds, fail to match that of Singapore, which offers funding up to 70% of startup costs in addition to a S$10 million tech startup fund. Corporate tax exemptions from 50% up to 100% are offered within certain income brackets for the first three years of incorporation – although this regulation is in a phase of change (see our article on tax in Singapore to learn more).

Workforce

Lankan businesses often complain about the starved labor market, small national talent pool, more public holidays, no workforce mobility, refusal for night shifts, and lack of women workforce. Despite efforts to improve the workforce, the country is ranked 131 for labor market efficiency in the Global Competitive Index. For higher education and training, it is on the 78th spot.

The World Bank’s Sri Lanka Development Update 2018 highlights the dearth of skilled labor for the private sector. Poor English language is a cause of concern in the country, especially in the services sector.

On the other hand, Singapore is the global leader in higher education and training while ranking second in labor market efficiency. With a highly-skilled labor market, the city-state boasts a workforce that is competent, efficient, and productive to reflect the present and future needs of the private sector.

Infrastructure

Singapore’s transport and logistics network is among the top in the world. Airports and seaports continue to be examples for others. The ICT infrastructure has a mark of excellence everywhere. The city-state is among the top two in the world for the quality of its infrastructure.

However, Sri Lanka is at 85th place in the Global Competitive Index for its less-developed infrastructure. Being a part of China’s Belt and Road Initiative, it is getting foreign funds for infrastructure upgrade. However, political differences, the lack of national funding, and high debt to GDP ratio impede infrastructure redevelopment in Sri Lanka.

The bottom line

The Global Enabling Trade Index puts Singapore as number one compared to the 134th position in the table of 136 countries.  According to the Global Competitiveness Report, the Lankan intuitional support is a distant 77th and the technological readiness is at a dismal 106th spot. Singapore ranks second and 14 respectively.

In Singapore, the environment is more foreign investor-friendly compared to too many restrictions and a non-English speaking population in the island nation.  The city-state has a robust regulatory and intellectual right protection framework, which is yet to take shape in Sri Lanka. Trade regulations favor businesses in Singapore while corruption beset it in Sri Lanka.

Unpredictable political and economic environment is eroding the business confidence in Sri Lanka. With efficiency in government, high transaction costs, limit on foreign ownership, restricted private sector, business scalability issues, burdensome import procedures, and problem in land acquisition, the country is still a challenging place to do business.  In Singapore, all these problems are put to rest with strong and proactive government initiatives.

Next steps

For companies wanting to create a company in Southeast Asia should look no further than Singapore as a stable, transparent, and business-friendly jurisdiction.  Want to learn more about how to get set up? Our incorporation experts can typically get you up and running in 5 – 7 business days if you have all your documents ready. Sign up for a complimentary 30-minute company consultation to find out more.