Reductions in financial Value Added Tax (VAT) to 12% as well as a drop in taxes on financial sector profitability to 28%, both of which were outlined in Sri Lanka's national budget for 2011, would likely result in a lower bank lending rates, particularly for small and medium enterprises (SMEs); according to veteran banker and Executive Vice President of DFCC Bank, H.A. Ariyaratne, who heads the Committee on Banking, Finance and Insurance of the National Chamber of Commerce of Sri Lanka (NCCSL).
This is because bank pricing of loans took into account long-standing high tax rates and SMEs were most affected since they did not have the power that corporates had to negotiate.
He added that, at the same time, banks were increasingly becoming open to lending because for the last four years portfolios had been shrinking. While banks hands were tied due to taxes, VAT and dividends, but with the easing of two of these factors there was excess cash. So, 25% growth in private sector lending should not be a problem.
This was revealed at a NCCSL press conference, which was held on Tuesday to respond to the country's national budget for 2011 presented the previous day. A budget that "removed many irritants" for the private sector by offering incentives for research and development and new products, foreign travel and training, etc.; according to top business leader and NCCSL Deputy President Sunil Wijesinha, who added that it was also a budget which encouraged value additions on exports as evidenced by a 65% tax reduction on value added exports and zero income tax on garments, footwear, textiles and leather, with a further cess to be imposed on non value added raw material exports.
However, Mr. Wijesinha did note that there were some concerns with the budget, such as the new employee pension scheme requiring a further 2% contribution. A measure that he agreed to in principle, but which he considered vague in terms of its mechanics. He also noted tripartite stakeholder input was needed for it to be effective.
Also outlined for further consideration by the NCCSL was the proposed 8% surcharge on electricity and changes to the VAT refund process. In addition, the removal of tax-free status for agriculture was also highlighted because two thirds of land mass was suited for agriculture, a sector well geared for SMEs and thus needing encouragement. |
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