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Policy consistency
wins praise: taxes cause pain
Economists and market analysts said the government's focus on putting its finances in order was welcome but warned that some of the new revenue raising measures could hit company profitability and fuel inflation. "There'll be short term pain but it is certainly a step in the right direction," said Dushyanth Wijayasingha, head of research at Asia Securities. "It is a budget that has continued with the broad economic reform measures introduced in the last budget. The government has focused on strengthening the fiscal situation." Dr. Dushni Weerakoon, economist at the Institute of Policy Studies (IPS), said the budget was an "investor-friendly" one with cuts in corporate and personal income tax. But, she said, she was concerned about the cuts in capital expenditure. "The government expects private investors to come in with infrastructure investment but the government also has to complement private investment. If the priority is to revive growth and sustain the growth momentum then capital spending should be given more prominence." Banks were not happy with the budget. Rienzie Wijetilleke Managing Director of Hatton National Bank said. "The government is using banks as revenue collectors rather than promoting the banking sector." The Ceylon Chamber of Commerce said the "steady and consistent" progress achieved during the last 10 months in many areas such as economic growth, interest rates, inflation and the stock market, together with an increased level of stability, have led to an improvement in overall business confidence. Tax holidays provided in the context of the current difficult environment to encourage new investments were welcome, it said in a statement. But the chamber said it was concerned about the proposal preventing the setting off of losses between activities within a company, saying it was contradictory to global practice and chamber proposals on group taxation. "There is concern that this may lead to the closure of activities which otherwise may have been restructured into profitability," it said. The chamber welcomed the reduction in the Port and Airport levy of 0.75 percent to 0.5 percent but complained it was "grossly inadequate" to revive the export sector. It wants the levy withdrawn. It also warned that the possibility of quoted public companies being levied an additional 2.5 percent tax to the existing rate of 30 percent corporate tax, after the withdrawal of the five percent rebate applicable since 1998, will discourage the listing of companies. "The proposed
expansion of the debit tax to cover all accounts is a further retrograde
step," the chamber said. "The debit tax discourages the
use of the banking sector and contradicts the government's intent
of formalising the informal sector," it said. While the government's focus on fiscal discipline was welcome, they were disappointed that the exports sector had not received enough attention, he said. Lal de Mel, former president of the Federation of Chambers of Commerce and Industry of Sri Lanka, said the forum to be formed under a private-public partnership would be good for the development of the apparel sector. It would create transparency in business dealings. Wijayasingha of Asia Securities said the cut in corporate tax would help the private sector while measures to improve transparency and corporate governance by making it compulsory for all deposit taking institutions to get credit ratings would boost confidence. The extension of VAT to the wholesale and retail sectors would impact on prices and "certainly have a knock-on impact on inflation". Its administration is going to be very cumbersome, he said. Anura Perera, Director/General Manager of Finance of Caltex Lubricants Lanka Ltd, said that with the introduction of VAT, wholesale and retail sectors may increase the prices of goods. In Sri Lanka, such businesses are usually carried out on an informal level, with most businessmen not even maintaining proper accounts. "Under such circumstances, the tax officers will have nightmares in trying to assess the taxable income," Perera said. The 10 percent VAT on banks was "more a direct tax on profits and not VAT because tax credits can't be claimed nor can it be passed on to clients. But banks would find some way of passing it on to clients," Wijayasingha said. "Given that the banking sector has been making fairly reasonable profits, it will have to bear the burden," said Weerakoon of the Institute of Policy Studies. Weerakoon said the extension of VAT to the wholesale and retail sector and taxes on hitherto exempt imports would have "cost of living implications". The tax on imports will have certain cost-push price effects on the industrial sector as it would mainly be on capital goods and intermediate raw materials, she said. "So the
cost of raw material could go up and have an impact on exports,"
she said. "All hotels which were paying 15 percent corporate tax on account of tax holidays, and were paying an effective rate of 10 percent because of the five-percent tax credit, would now have to pay 15 percent," one industry source said.
Yatawara said marginal incentives such as the reduction of corporate tax from 35 percent to 30 percent were welcome, but he was doubtful whether it would create a significant impact on the conglomerate's overall performance. * Sumithra Gunasekara, Director of the John Keells, said that, judging from the conglomerate's current successful performance, it was unlikely that the budget would affect JKH's overall performance. But he expressed concern over the decision to maintain excise tax on the soft drink industry. "In the previous budget they removed the excise tax on liquor and planted it on the soft drink industry, which is the poor man's drink. We protested and assumed that we would be given relief in this budget, but there has been no change." Gunasekera said that the soft drink industry, which is being taxed at Rs. 4 per litre has not grown because of this tax. * Anura Perera, Director/General Manager, Finance of Caltex Lubricants Lanka Ltd, welcomed the government's initiative to reduce corporate tax by five percentage points, which he said shows there is consistency in the government's economic policy. However, he expressed concern over the fact that half of the company's savings from the corporate tax cut would be directed to a Human Resource Endowment Fund. It is not clear whether this would be a separate fund like the EPF and ETF. "If it is so, then we would be incurring an additional expenditure, which would not benefit the company, because we already spend a lot of money in training our staff and providing them with so many facilities. It's not practical." Perera said the benefit the company would receive through the reduction in corporate tax would be nullified due to the government's decision to remove the five percent tax credit on all quoted companies in excess of 300 shareholders. Caltex dealers would be affected with the continuation of the debit tax. "I think it's a controversial tax which should have been repealed." Most dealers had worked around the debit tax by withdrawing money from a savings account rather than a current account. However, the government's new policy to charge all accounts with debit tax has sealed this loophole. "I hope that the special bank accounts which companies set up to pay the government, continue to be free from debit tax, otherwise we would be taxed for paying the government!" Under the new budget proposals, though all dealers of Caltex products would be subject to a 20 percent VAT levy, Perera was confident that there would not be a significant impact on the company's overall performance. * Rienzie Wijetilleke, Managing Director of Hatton National Bank said that from a banker's point of view, the budget is disappointing. "Some of the proposals like debit tax and the 15 percent tax on inward remittances will compel people to get away from the banking habit. The withholding tax on the banks' net profit and employee remuneration appears grossly unreasonable. At a time when everything should be done to promote and encourage stock market activities, the imposition of tax on dividends seems a step in the wrong direction. My view is that those who have brought about these proposals are distinctly away from the ground reality," Wijetilleke said. * Ranjith Samaranayake, Director General of Finance at Commercial Bank, said the imposition of VAT on the banking sector will cause a significant impact on the profitability of the banking sector which he said was the best performing sector in the economy. "Although corporate tax has been cut by five percentage points, the companies will enjoy only half of that benefit. The way in which VAT is to be calculated needs to be clarified." * Chandra Mohotti, General Manager of Galadari Hotel said that with the tourist industry going through a prolonged slump, even the one percent levy on all Tourist Board licensed institutions from next April would still adversely affect the sector. However, he acknowledged that such a tax is important too as the revenue raised through the levy would go to help the industry, although they were not yet sure how it would be charged. Tax evaders
beware! "Make use of this chance and declare your assets now, otherwise expect the worst," he said. The tax amnesty has been granted to provide a lasting solution to the tax problem, which has subjected only a few citizens to bear the burden, he told a Central Bank seminar on the economy. Even though public servants, including all politicians, are not directly taxable, they have been asked to surrender their assets, he said. Once the amnesty ends, income tax officers will be given strict orders to act on the law and bring all tax evaders to book. "We won't spare anyone who breaks the law. Declare all your assets, be it jewellery or CDs in bank vaults," Gunawardana said. Such an amnesty, under which no questions on how such wealth was acquired would be asked, has never been granted anywhere in the world. He said that about 10-15 percent of the money circulated within the economy consists of black money. Asked about what incentives the government was offering to those who declare their assets, the minister said that they could reduce the amount of bribes they may be paying income tax officers to hide from the law. "We can cut down on corruption once and for all, otherwise the perpetrators will have to keep bribing officers in order to refrain from being taxed." The government expects 17 percent of its income through income tax in comparison to last year's 14 percent. Govt withdraws
tax on remittances Susantha Fernando, chairman of the Sri Lanka Foreign Employment Bureau, said the government withdrew the proposal after they raised the issue with Finance Minister K.N. Choksy. "It would have badly affected remittances," he said. The minister
announced the withdrawal of the proposal in parliament on Friday. These remittances are largely from migrant workers, mainly housemaids in the Middle East. To avoid paying the tax, migrant workers could have refrained from transferring money through banks or used the informal 'hawala' network to transfer foreign exchange across borders without using the banking system. Fiscal Responsibility
Act ensures economic stability The common practice by the ruling party to provide jobs to supporters ahead of an election would be restricted under the new law, he said. Decisions such as salary increments would have to be considered on the treasury's ability to afford such expenditure, he told a Central Bank workshop on current economic issues a few days before the budget. The government had to adopt such stringent measures such as halting all government recruits and cutting subsidies to reduce the government's heavy debt burden. "The treasury's overdraft had risen to Rs. 37.5 billion in January from zero in 1994. We (the government) had succeeded in reducing it to Rs. 5.3 billion by October," the minister said. Central Bank deputy governor W. A. Wijewardena said the new Act would not be able to oust a government from power if they violated the law, but makes it compulsory for the finance minister to provide the public with adequate information about the economy and its future course. In case there is a diversion of economic policy by a government, which could endanger the country's economic stability, world economic watchdogs would be alerted and pressure exerted on the government to make the necessary fiscal alterations, he said. This new law also specifies that political parties must submit a proposed budget for the economy before a general election. It will create more transparency in handling public finance and if there is a trace of mismanagement, the finance minister is bound to inform parliament on the reasons for the non-implementation of proper economic policies, and to propose solutions on how the economy can be set back on track. What Choksy
said *A spectacular and over-night recovery of the economy cannot be expected in the backdrop of the past. *Unless we reduce this mountain of public debt, there will be no resources for development activities. *We either take bold decisions and prosper; or settle for soft options and continue our downward spiral. *The tax collection base is still not as wide as it should be, resulting in loss of revenue. *Starting in the third quarter of 2003, those government departments which do not submit their accounts and performance reports in due time will have their funding curtailed. *Experience
has proved that mere handouts for subsistence and state subsidies
are not the answer. *At present, there is an unfunded pension liability
of Rs. 550 billion. *There are significant risks associated with the world economy. Recovery in the major economies, US, Europe and Japan continues to be fragile. Any setback would be damaging to our export markets. The Sri Lankan economy is also vulnerable to any sharp increase in oil prices. Post-budget
seminars These presentations
will be followed by a panel discussion where eminent personnel from
key government institution i.e. Inland Revenue Department, Treasury
and the Exchange Control Department of the Central Bank would lead
the discussion. The import section of the Ceylon Chamber of Commerce is organising a post-budget seminar on November 15 at the auditorium of the Ceylon Chamber of Commerce. P. Guruge, Economic Advisor, Department of Fiscal Policy, Ministry of Finance will speak on "An overview of the budget proposals, with special reference to fiscal issues," followed by Ms. Lakmali Nanayakkara, Partner, Ernst and Young on "The Budget Proposals - Opportunities for and Impact on the Private Sector." (Contributions by Suren Gnanaraj, Thushara Matthias and Rajika Chelvaratnam.) |
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