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sector must accept burdens These were the cornerstones of the economic development achieved during 2003 and will provide the macro economic conditions for the country to achieve economic growth in a sustainable manner, a statement said. The net domestic borrowing estimated at Rs.65 billion for 2004 compares favourably with Rs.87 billion estimated for 2003 (now revised downwards to Rs.80 billion) and Rs.1,260 billion for 2002. "This will result in further market liquidity and the availability of more funds for private sector growth and development. The CCC predicts further downward pressure on interest rates, which the private sector would welcome." The CCC also said that certain revenue enhancement proposals may impose burdens on the private sector, but they will have to be accepted because of the benefits of sound macro economic management and in particular, the reduction in interest and inflation rates would more than offset such burdens. The CCC said the non-inclusion of the development of railways was a major omission. It said it was pleased that its proposals on granting tax concessions to employees receiving terminal benefits and to pensioners have been incorporated in the budget. It described Economic Service Charge (ESC) as an "innovative, novel approach" to raising revenue. But it added that the government may consider granting business organizations at least three years to start making profits before imposing the levy. "Whilst it may be argued that small companies and those with low profitability may not have the capacity to pay the ESC, it is expected to release idle or unproductive resources to more productive economic activity." The limitation for past losses available to set off against statutory income to 35 percent in any one year is balanced by the proposal to remove the restrictions on the period available for losses carried forward, the CCC said. It said it accepts that the tax of 10 percent on partnership income as "fair" because the proportionate share can be set off against taxable profit of individual partners. The CCC said it appreciates the increase in tax free allowance for individuals to Rs. 300,000 and that it should be indexed to inflation annually. However, the CCC also said that if the single VAT band of 15 percent is not likely to adversely affect the cost of living, the additional revenue estimate of Rs. two billion appears to be optimistic. The CCC also said that the reduction of tax allowances on capital expenditure could be a disincentive to new investment. "Since the CCC has advocated a taxing system where all expenses and all outgoings should be deductible in ascertaining taxable profits, aligning the tax allowances with economic depreciation rates cannot be objected to." The
National Chamber of Commerce The minister has also provided relief to pensioners by increasing the withholding tax threshold to Rs. 25,000 per month from Rs. 9,000 per month. The significant reduction in taxation on income and terminal benefits, the increase in the limit for qualifying payments and widening the tax bands are all welcome developments from the perspective of the private sector. The plan to create a safety net for employees is also welcome. The minister has announced several steps aimed at reducing tax evasion and the broadening of the tax net. The Chamber welcomes these initiatives as broadening the tax net and increased compliance will, in the medium term, have a beneficial effect by giving the government the ability to reduce overall tax rates. The Chamber supports in principle the move to rationalize the tax exemptions and simplify the tax administration although care will need to be taken to ensure that industry sectors which are in a development phase receive the required support to grow and become stronger . The Chamber also supports the flat rate of VAT that is proposed as this will simplify the administration and reduce leakage. We believe overall, this will not have an inflationary effect. This Chamber especially welcomes the proposal to make available Rs. 11 billion for lending to the SME sector at an affordable interest rate. It is hoped that ways will be found to distribute these funds efficiently to this sector. The Chamber has concerns on two proposals contained in the budget:
Views
of the business chambers, brokers, economists The direct impact on the market was negative because of the 15 percent tax on profits from the sale of shares. We hope it will be reduced or eliminated as we feel this is not the right time to impose such a tax, especially because the stock market is just picking up. Investors in the last couple of weeks got enough shocks and so could do without more shocks. We feel there should be more time for the market to consolidate, especially for foreign investors to get into the market. Yes, people have made money on the stock market but they have also taken a big risk because the political situation has not stabilised - so the risk premium is high. Also, we must bear in mind we're an emerging market trying to attract foreign investors and some regional markets do not have this kind of tax. Commercial banks could be affected because offshore profits are to be taxed at 20 percent and interest spreads come come under more pressure. The construction and housing sectors should see growth and the decision to defer the 10 percent room charge should help the hotels sector. The plantations and agriculture sector should benefit through the increased fertiliser subsidy. In the food and beverage sector, companies like Distilleries should benefit because of the increase in import tariff on some spirits which are used by the illicit liquor manufacturers. Higher excise duties could affect beer producers but this was expected as this is how governments raise revenue. he reduction in import duty surcharge could have a positive impact in terms of lower prices of imported items but could have an adverse impact as well as local manufacturing firms might be affected by cheaper imports.” Economist The government appears to still have some concerns whether VAT will generate the anticipated revenue so it has introduced direct tax measures such as the one percent Economic Service Charge. The government has very limited options given that tax collection as a percentage of GDP has been declining over the years. Capital spending is still not high enough. This year it is five percent of GDP and is projected to increase to 5.3 percent of GDP next year. Capital spending is sstill not enough to maintain a sustained, high growth rate. The inflationary impact of the changes in VAT are still not clear. Even if there is upward pressure on prices this could be offset by the stable rupee and reduction in import duty surcharge. While the VAT on diesel has gone up to 15 percent from 10 percent, this could be offset by the anticipated decline in oil prices. Employers
Federation of Ceylon In this context,
many private sector employers have in place their own wage determining
mechanisms, which provide for periodical wage reviews and revisions.
Just like how the government, subject to its capacity and requirements determines wage increases for government sector employees from time to time, the private sector has to make their own decisions within their own budgets in respect of their employees. In fact, for about 20 years since 1980, governments did not intervene in private sector wages. There was an exception in 2000 which led to much difficulties including an adverse impact on collective bargaining. We are happy that this government has followed the practice that existed earlier. It is also important to note that a vast majority of private sector employees and trade unions are aware of the realities of wage fixation in the private sector. Bartleet
Mallory Stockbrokers The budget takes into consideration economic as well as social factors such as the cost of living which is a major issue. The wage hike to public servants and essential items being exempt from VAT are some of the direct and indirect benefits to the masses, while pensioners get access to higher deposit rates and an increase in pensions. The one percent Economic Service Charge could impact negatively on small and medium scale businesses. The proposed 15 percent tax on profits on sale of shares psychologically affected investors. But when you look at the government policy of keeping interest rates low, risk free treasury bills only yield seven percent and investors have to pay a withholding tax of 10 percent. So their net return is less. Returns on the stock market have been very attractive - 30 percent or so. With the economy growing and companies performing well investors can expect share prices to improve and be guaranteed a fairly substantial return if political stability is there. Given this, the 15 percent tax may not be material compared to risk free investments. Taxing those who can afford to pay is reasonable. However, the timing of the tax may not be right since investors lost money in the recent downturn.” Chamber
of Construction Industry Highways, expressways, maintenance and rehabilitation of existing roads, power and energy, north/east rehabilitation and reconstruction, southern development, housing and water supply. The proposal to set up a Road Fund for maintenance of public roads is also welcome. The high priority given for home ownership with land and concessionary loans to build a variety of housing complexes for different income groups is a major breakthrough in this sector. The "Self
Aid Program" for the lowest wage earner with materials provided
to construct 125,000 households within one year is also commendable.
However, we noticed that the following matters have not been given
due recognition in the budget: Mention has
been made regarding the development of the Charmers Granary site,
but no mention has been made about the other project like the Panchikawatte
Triangle Re-Development Project which is the pioneering project
in the Urban Regeneration Sector and a project which has received
priority status by the Cabinet. Tax
consultant Therefore the private sector has received a considerable amount of benefits. In a sense the benefits for the private sector have already been accrued, therefore further relief cannot be given as the budget proposals are mainly concentrated on revenue generation. The economic service charge is a form of a presumptive tax, which means a company has to pay tax regardless of its profitability. Even if a company is making genuine losses, this service charge must be paid. This goes against the fundamentals of taxation, which is the capacity to pay. This charge may affect the small entities, which are liable for this charge. After the payment of this service charge these companies may find it difficult to stay in business. However, they can set it off against income tax. The tax on profits made on the share market is good as this is taxing people who have the capacity to pay. The introduction of a single rate of VAT should be reconsidered. Prices of essential and basic goods which are now at 10 percent will go up to 15 percent. It is true that prices may come down on goods now at 20 percent, but the rise in prices of the essential items will have adverse effects on the poorer and the larger segment of the country. The government intends to earn additional revenue of Rs 2 billion by this single rate of tax but if a luxury rate of tax was introduced at 30 or 40 percent on luxury items this additional revenue could be raised without inconveniencing the less privileged.” Asia
Securities With the adjustment in VAT to those firms that sell products which carried VAT at 20 percent - mainly luxury items - would benefit because their cost of goods will fall, driving demand up. The reduction in import duty surcharge could favourably impact those firms that sell high value items which carried a substantial duty surcharge. The additional excise duty of Rs. 5 per litre on beer would have an impact on beer producers but I believe the entirety of it may be passed on to consumers. Construction firms will certainly benefit from the increased allocation for capital spending.” DFCC
Stock Brokers The only negative factor, from the capital markets view point, is the 15 percent tax proposed on profits on the sale of shares. It is a bit vague, particularly how it will be implemented and there is lobbying to remove it. The reduction in depreciation allowances, from an investment point of view, is a bit of a negative thing. But from the government's point of view they can't give relief to everybody because they must generate revenue. The increase in infrastructure spending will definitely help the construction and engineering firms but there are not many quoted firms to represent the construction industry. However, there'll be a spillover benefit on the overall economy.” |
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