Financial Times

Budget Series
Chambers welcome proposals, point out gaps, problems
The government’s budget for 2006 has increased spending to Rs 672 billion from Rs 554 billion rupees this year while total revenue is expected to rise to Rs 477 billion, leaving a deficit of Rs 195 billion, up from Rs 168 billion this year. The government estimates the deficit to rise to nine percent of GDP in 2006 from 8.5 percent this year. The Central Bank in a report released Wednesday said economic growth for this year was expected to be 5.3 percent, down from 5.4 percent last year and 6.0 percent in 2003. The following are key budget highlights of importance to the corporate sector and reactions from the business chambers.

Relocating business in outstations needs better infrastructure – CCC
The Ceylon Chamber of Commerce said that despite measures to stimulate certain sectors of the economy, the budget lacks the “vitality” required to energise the economy and eradicate poverty.

“Strategies to promote savings and investment, in particular foreign direct investment and development of infrastructure, such as roads, railways and power, have not been adequately addressed,” it said in a statement.

It said that fears that a pre-election budget could be used as a political contrivance appear to no longer be the case, its original concern remains that the budget should not have been presented immediately prior to a presidential election. The rationale was that the shortly to be elected president should be afforded the manoeuvrability to implement the vision for which he had received a mandate.

Proposals encouraging the relocation of businesses and new investments in underdeveloped areas are steps in the right direction since this will generate employment in such areas and contribute to the reduction of poverty.
“However, rural sector development will not materialize unless the requisite infrastructure, such as good road networks to access the markets and sea ports and airports, the augmentation of power supply and high speed data transmission services, is provided,” the CCC said.

It said that despite consistently proposing the widening of the tax base as a means of increasing revenue, the budget has increased corporate tax rates instead.

It proposed that, at the point of legislating, the tax increase be introduced as a surcharge on income tax, for a limited period, until the tax base can be expanded to yield the required revenue.

It also said public sector salaries should be market based to attract the best available talent, particularly at managerial level.

“However, merely increasing public sector salaries, as proposed, without addressing the need to improve efficiency and rationalize the cadre of the agencies that are overstaffed and incompetent, will prove to be ineffectual.”
Until this is addressed, much of the tax revenue will be expended on non-productive remuneration, rather than on meaningful investment in economic infrastructure, the CCC said.

It also described as a positive step limiting the fuel subsidy to Rs.3, 000 million per annum, through the reintroduction of the fuel pricing formula.
“All indications are that fuel prices will remain at present levels or increase further.”

It also described as praiseworthy the decision to treat the export of services as an equal priority as the export of goods through the national initiative to promote the export of professional services by affording tax exemptions and lower tax rates for income earned through services provided to foreign persons for payment in foreign currency.

The proposals made to further develop the apparel sector, agriculture, including value addition, and the small and medium enterprises are some of the other commendable features of the budget.

No allocation to combat avian flu – NCE
The National Chamber of Exporters of Sri Lanka (NCE) noted that only a few proposals made by the chambers in relation to exports were included in the budget and that there was no allocation to fight the threat of avian flu.
“The Chamber is surprised to note that a budgetary allocation has not been made to implement measures to combat the threat of Avian Flu,” it said in a statement.

”This will have very adverse effects on the local poultry industry, which is a substantial revenue source for government as well as for income and employment generation in the rural sector, in the event the industry is affected by Avian Flu.” The NCE said it appreciates the fact that the proposals in the current budget are a continuation of the government’s development policies which were focused on during the previous budget despite the current political scenario.

It welcomed the move to reduce the Economic Service Charge on tea factories to 0.25% but noted that all the other industries have been ignored, although the Chamber proposed that the ESC should be removed for all export industries.

“The proposal to refund VAT dues within 15 days to exporters would bring some relief to the export sector,” the NCE said. “The proposed VAT relief for imports of timber will help to prevent illegal felling of forest timber.”
The grant of VAT relief for raw materials and dyes used in the handloom industry will boost the local industry.

The NCE welcomed the proposal to remove the Port and Airport Levy (PAL) as a further incentive to the exports economy. But it said it was not clear whether the proposal that the current levy of 1.5% on items other than exports (i.e. imports) will be raised to 2.5% will apply also to imported items / raw materials used in export industries in which case the additional cost for the export industry would exceed the benefit.

“In any event, the proposal to increase the current levy from 1.5% to 2.5% will increase the cost of imports, which will have an adverse impact on the price of goods.” The NCE said some of the negative aspects of the budget proposals included the introduction of stamp duty and the cut in duty on three wheeler tyres from 28% to 15% which will have an adverse impact on the local industry as there are three factories which manufacture such tyres.
“It would have been more desirable to give some VAT relief to the local industry than encouraging imports.”

The NCE said all relief in respect of tax, investment, depreciation, VAT and duty have been given only to a few industries such as health, printing, gems, packaging and processed agriculture while other important value adding industries including rubber have been neglected.

Construction industry happy with infrastructure investment projects
The Chamber of Construction Industry said it was pleased that the budget has increased the capital of the Construction Guarantee Fund and provided concessionary financing terms to import modern machinery and equipment.
This will be a tremendous boost for the construction industry, a CCI statement said. The budget proposal incorporated the chamber’s persistent promotion of infrastructure development with investments in development projects.

“A wide range of construction activity related to infrastructure is reflected in the budget, which includes port and airport development, irrigation and water supply, expressways and road construction and power generation.”
The CCI said it fully supports the proposal for regional development to optimize the economic potential of the different regions in agriculture, fisheries, livestock, tourism, and industries.

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