Leading chambers of commerce and industry in Sri Lanka are expressing serious concerns about the impending increase in the Nation Building Levy (NBL) to 3% from 1% and its effect on businesses. The chambers feel that the tax increase, due to come into effect on May 1, 2009 is a direct result of decreasing government revenue but fear it will adversely affect businesses both large and small which continue to struggle under difficult conditions. Some chambers said they are planning on lobbying the government to rethink the tax increase by providing alternative options for the government to increase its revenue.
The NBL, according to the Inland Revenue Department (IRD) is payable by importers, manufacturers and provider of services. The base of the levy is the turnover and is payable for any quarter, if the turnover for that quarter exceeds Rs.100,000. President of the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) Kosala Wickremanayake told The Sunday Times FT that at the moment, business is very low and the increase in the NBL to 3% from 1% will just be another tax for everybody to pay. “This will be a problem,” he said.
“When it was introduced at 1%, most of our members were complaining so this is a negative. We are lobbying against it and we will seek a meeting with the officials concerned and report the outcome.” Mr. Wickremanayake added that the government needs money from the increased taxes for expenses so the FCCISL has to give an alternate proposal on how the government can recover the money. Mr. Wickremanayake said they were even lobbying against increases in VAT which was subsequently reduced to 12% from 15%.
However, he suggested that perhaps it would be better if the government increased VAT back to 15% instead of increasing the NBL. Vice Chairman of the Ceylon Chamber of Commerce (CCC) Anura Ekanayake said businesses have some options on how to handle the increase in the NBL. Depending on whether they can absorb the increase which will result in lower profits, Dr. Ekanayake said one option is to reduce profits and absorb that amount rather than passing it onto the consumer. The other option is to pass the whole amount to the consumer by increasing prices. Chances are that different businesses will work somewhere in between depending on their ability to absorb the additional costs, he said. Dr. Ekanayake added some businesses will find it hard to absorb the costs because profit margins have been falling very rapidly in the recent months. He said a study done by stock brokers on quarterly results for the period ended.
December 31, 2008 found that profits had dropped by 60% compared to the same period the previous year. “By end of March 2009, the situation could be even worse,” he said.
Dr. Ekanayake added that it is also not clear at this stage how much of a cascading effect the new tax will have. To the extent it has a cascading effect, the increase in the prices required might be more than 2% if there is a pass through via the input prices.
Dr. Ekanayake said the CCC including other chambers are concerned, not only about the tax increase but if this is a precedent that is going to get worse if government revenue continues to decline.
Chairman of the Ceylon National Chamber of Industries (CNCI) Newton Wickremasuriya said his chamber is not asking the government to reduce taxes because he understands they need revenue but instead, is asking the government to simplify the tax system. “We have indicated that we are willing to pay the tax but we need one tax,” he told The Sunday Times FT. Mr. Wickremasuriya added that the NBL will increase prices by 2% straightaway and will also require additional staff to deal with its complexities. He said it will not be a problem for big businesses but small and medium enterprises will find it difficult to retain large staff.
A former president of a local chamber said the increase in the NBL is most likely to balance the budget deficit. He also said it has not been announced yet if the increase is a permanent or temporary measure in order for the government to bridge the deficit. He said VAT has already been brought down to 12% from 15% and with current commodity prices decreasing in the international market, government revenue which is used for various things such as free education, free healthcare and financing the war, has started dropping.
He added the chambers are lobbying on behalf of the SME sector which is already in trouble, not for a bailout package, but to get relief from banks such as bringing down interest rates. He added that interest rates have come down.