Financial Times

Budget focuses on development
Plethora of subsidies and taxes; implementation the key
The JVP-backed government's 2005 budget provided a lot of unexpected surprises, dispelling a lot of the gloom and doom predictions in the markets as it focused on the rural economy, marginalised groups and left the corporate sector largely comfortable.

But questions abound as to how Finance Minister Sarath Amunugama could finance the plethora of giveaways in the form of subsidies and manage a complicated tax system. Subsidies for small industry and transportation like three-wheel operators are also added concerns amongst economists as to whether it would impact on the deficit.

International lenders, kept away from the pre-budget planning process, raised doubts over the taxes and the effectiveness of its implementation. Alessandro Pio, Country Director, ADB, noted that shifting to a multiple rate from a single VAT rate would complicate the administration system. "The many VAT exemptions will also complicate the management of the VAT system," he said.

Pio said the large number of subsidies to promote small and medium-scale enterprises, housing, etc could cause distortions in the allocation of resources. He however praised the government's handling of the private sector with not too many burdens placed on it.

Jeremy Carter, Resident Representative, IMF said there were no major changes or surprises in the budget. The new VAT rates were very complicated and a more simplified rate would have been better in terms of efficient monitoring. "Can the revenue performance pick up as much as the budget hopes? The tax collections are ambitious but by no means an unachievable goal. Capital revenue collection target is Rs. 7.5 billion and divestiture of government holdings is going to contribute to this. The deficit numbers are as I expected. For 2005, one percent reduction in fiscal deficit is a laudable goal," he added.

The Sunday Times economic analyst felt the minister would fall short of revenue expectations due to a too large tax net which is impractical to administer. Dr Amunugama proposed a number of ways by which tax evaders would be traced -- high bills for telephone and electricity rates, travelling overseas, purchasing new cars etc.

"The point is that these techniques were available prior to the budget proposals and yet hardly adopted by the revenue authorities. That is precisely why the country has only around 200,000 taxpayers. What is there to suggest that the Inland Revenue authorities would now be able to bring in these errant cases into the tax net?" he asked.

The thrust of the development initiatives in the budget comes from proposals made by sectoral clusters of the National Council for Economic Development (NCED), which were exclusively reported in The Sunday Times FT last week.

The proposals dealt with a range of issues relating to trade and tariff levels to create a level playing field for local producers, tackling high COL and production costs through strategies like high incomes, profit margins and product competitiveness. The clusters were driven by top private sector CEOs.

The apparel industry, preparing for a trouble-filled 2005 when textile quotas end, were provided some welcome relief prompting Tuly Cooray, Secretary General of the Joint Apparel Association Forum (JAAF), to say that all their proposals had been accepted by the government. The budget also brought some benefits for the tourism industry, the fastest growing sector in recent years.

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