Mixed feelings over budget

Like any other budget, there were mixed reviews for the 2007 budget, the second time President Mahinda Rajapaksa – as finance minister - has presented the government’s spending and revenue collection process for next year.

The budget focuses on a 10-year plan of development and is aimed at supporting small and medium industries and raising the level of local production which is an admirable exercise and part of the Mahinda Chintanaya policy.

Rajapaksa’s budget also confirmed our exclusive report last week that changes for the VAT were coming in with some inputs not being considered in the computation for VAT exemptions which has dismayed the business community.

Tax specialist N.R. Gajendran said this proposal was compromising VAT principles. “They are going to disallow the input tax and restrict input tax on capital or intermediate goods which is not good,” he said.

Other concerns to the industry in the budget are the imposition of a dividend payment to shareholders with industry sources saying that it’s unhealthy to do this because it should be left to the directors to decide the dividend or its amount. As our budget series suggests, was this targeted to business tycoon Harry Jayawardene’s group of companies?

The garment industry got some concessions but if one is to interpret the wording in that section which says … “release of garments to the domestic market will be encouraged” … it raises many questions. For example does this mean garment factories producing solely for export can flood the domestic market? Or would there be limitations?

Most in the industry our reporters spoke to were unclear as to how to interpret this provision in the budget. If it is a free market exercise – unlimited access to the domestic market for FTZ garment manufacturers – then it would affect the local industry which pays usual duties for raw material imports unlike FTZ companies.

National budgets are important for the development process and the promotion of foreign investment. But as our story on Page 1 says security is a major concern for foreign investments and incentives, tax breaks, lack of accountability and corruption will not draw investors here if foreigners feel it is unsafe to walk the streets.

Our story says the Malaysian investor was almost pulling out but decided to stay on because he still believes that this country has potential. That’s an admirable quality in a foreign investor and shows that we have a breed of investors who are here for the long term and not for the quick bucks.

However if the government doesn’t seriously tackle the law and order situation, cost of living (which affects some investors like E-Gas) or rising costs of production then we have a problem and the so-called ‘business-friendly’ environment for investment that is repeatedly touted as an attraction for investment would mean nothing.

The rising crime rate in the country – apart from the northeast conflict -- where murders are taking place at random and the police don’t seem to be getting anywhere in curbing crime, is another issue that confronts investors.

Thus apart from development and business issues, national budgets may in the future have to take into serious consideration – with special financial allocations – on dealing with (localised) law and order and anti-corruption issues.