Fiscal consolidation, exports, investments key in budget 2017 Sri Lanka is moving towards greater fiscal consolidation with the budget deficit set to be reduced to 4.6 per cent this year. Finance Minister Ravi Karunanayake speaking at the post budget discussion by KPMG held on Friday at the Cinnamon Grand said that they were looking at [...]

The Sunday Times Sri Lanka

Budget 2017 Analysis


Fiscal consolidation, exports, investments key in budget 2017

Sri Lanka is moving towards greater fiscal consolidation with the budget deficit set to be reduced to 4.6 per cent this year.

Finance Minister Ravi Karunanayake speaking at the post budget discussion by KPMG held on Friday at the Cinnamon Grand said that they were looking at fiscal consolidation and that the budget deficit reduction would be at 4.6 per cent.

He noted that they had received 2700 proposals and pointed out that “everybody must pay their due share” towards nation building.

However, he explained that those earning less than Rs.100,000 were not subject to taxes by the government.

Following a response to the comment on the ability of the Central Bank to carry out the necessary checks on the provision of housing loans through the National Savings Bank (NSB) and the new Housing Bank, he explained that the regulator was in place to implement the policy handed down by the government.

The Central Bank, he said in the past was highly politicized adding that they were previously not engaged in carrying out the work they were tasked with.

The use of NSB for this purpose would be to ensure that “idle capital would be put to good use,” he explained.

Minister Karunanayake said that limiting the Regional Plantation Companies (RPCs) to 5000 acres was intended to “break up into smaller units” and become “specific standalone companies.”

KPMG Tax and Regulatory Principal Suresh Perera called for the establishment of a Tax Council and a Tax Ombudsman with the former able to avert the creation of ad hoc tax policies and the latter capable of providing solutions to tax related problems by the public.

Inland Revenue Commissioner General Kalyani Dahanayake addressing the forum said that next year the department expects to increase revenue collection upto Rs.700 billion with the suggested revenue proposals.

She pointed out that in 2015 the department’s revenue had increased by 125 per cent and a further rise was expected this year as well.

Ms. Dahanayake said that the establishment of the RAMIS system is expected to be concluded within three months.

She pointed out that they have the specific duty of revenue collection for social inclusion adding that the budget was “development oriented.”

Central Bank Deputy Governor Dr. Nandalal Weerasinghe said that the budget was mainly focused on investment and exports.

Further, he explained that the government was looking at directing the economy towards engaging the private sector in the new business opportunities through privatization of state ventures.

In addition, Dr. Weerasinghe said that last year there was a fiscal slippage but that this year’s proposal for increased fiscal consolidation could amount to higher revenues, stable interest and exchange rates.

In tackling the issue of reducing budget deficit targeted at 4.6 per cent, Ceylon Chamber of Commerce Chairman Samantha Ranatunga said that “some of the biggest challenges have been well covered”.

He believed that SMEs were given necessary capital incentives for investments.

Further through the public private partnership (PPP) it was noted that government was aiming to address issues in the agricultural sector like lack of technology, adequate storage space and capital among other issues.

2017 budget better than 2016 budget, BT poll reveals
Mixed response

For the first time, perhaps, in the history of Business Times (BT) post-budget polls, there were mixed feelings over Budget 2017, the BT’s latest budget poll showed. 

Five statements were posed on email and asked to for example provide a – Agree (A), Disagree (D), No comment (C).
However most people felt this was a better budget than Budget 2016 as the poll revealed. To the statement – Budget 2017 is an improvement over Budget 2016 – 62.6 per cent agreed,  24 per cent disagreed while the balance didn’t comment.

There was no widespread ‘thrashing’ of the budget, as the poll with ‘for’ or ‘against the Government’s 2017 budget presented on Thursday being in near equal proportions.

To the first statement – Budget 2017 is an incentive for growth in the corporate sector, 48.2 per cent agreed while 31.3 per cent disagreed and the balance didn’t comment.

The second statement – Budget proposals will help reduce cost of living and inflation – also drew a similar response with 32.5 per cent agreeing, 47 per cent disagreeing and the balance taking the ‘no comment’ route.

Similarly, mixed responses were received for statement 3 and 4.


Crystalising SL’s innovation potential

Next year’s budget has tried to support institutions managing Science, Technology and Innovation (STI) the people engaged in STI and the processes leading to outcomes of scientific research and technology development and innovations, many industry experts say.

Universities and research institutions engage in STI and in terms of processes, it mentions for the first time about incubation for technology innovations, Dr. Chandra Embuldeniya, former Vice Chancellor at Uva Wellassa University told the Business Times. “Also in Human Resources, it includes assistance to students in several different ways to promote knowledge and technology. I consider these as positive developments at a time when I expected a much narrow budget with the usual fiscal remedies and structural changes.”

According to him, introducing the mixed cultivation system in the agricultural sector is an excellent opportunity to use agricultural technology and food science technology to connect with the out-grower networks to supply the value chain feeding the consumer markets. “The need for more value added exports was stated. Value addition requires technology, which comes with STI. Small machines used for mechanisation and drip irrigation systems would be much in demand and will be supported. Home gardening for a variety of fruits and vegetables were mentioned and I can think of many systems that home gardens can use to produce very healthy foods.”

The budget spoke of 50 per cent interest concessions on value addition projects and productivity enhancement, he said, happy that Wayamba University will receive financial support for Food Technology Research. “This is a very timely intervention.”

For the first time a budget has spoken about increasing income from tea to US$ 5 billion from value addition by 2020. “In fact, this was mentioned when we set up the Tea Technology and Value Addition Degree Programme at Uva Wellassa. The only way this can happen in the present tea ecosystem is through technology and innovation in value addition. A couple of branded product lines for cosmetics, health food, odor prevention, etc developed using the tea base, could bring this income, which could hardly be derived by exporting pure tea during this time frame however branded. However, it has also promised USD loans for international brand promotions and would be a boost,” Dr. Embuldeniya said.

Prasath Nanayakkara, Chairman and CEO Auxenta Inc noted that the renewed focus on the significance of innovation is having a major impact on the trajectory of policy formulation in many countries. “Developing nations are taking the lead in adopting innovative practices to boost economic growth, income generation and prosperity. Over the years, the Global Innovation Index (GII) published jointly by World Intellectual Property Organisation (WIPO), Cornell University (USA) and INSEAD Business School (France), has measured the innovation capacity of nations across the world and presented a comparative analysis to help understand the variation in national competencies.”

Sri Lanka received the ranking of 91 in the Global Innovation Index report of 2016. This is 6 points below the 85th ranking the country received in 2015 and 25 points below the ranking 66 India received in 2016, Mr. Nanayakkara added concerned that this decline in ranking demonstrates the critical need that the government faces in order provide incentives to the industry to promote innovation driven economic growth.


2016 Budget Proposals not implemented
The following are 22 yet-to-be implemented proposals from Budget 2016. According to budget analysts, while in normal circumstances it is not unusual for a percentage of the budget proposals not to be implemented, in this particular case many major proposals that have not been implemented.

  •     1. Gem, Jewellery and Diamond auctions is to be held in April and October every year. A Gem Emporium to be established by the private sector in Ratnapura,
  • 2. Introduction of a ‘land bank’ as an electronic database of state-owned lands. Rs. 500 million was allocated for this purpose.
  • 3. Export Import Bank (EXIM Bank) with an initial capital of Rs. 25 billion  to be set up by April 2016. Rs. 50 million was to be allocated as seed capital.
  • 4. Official reserves of the country to be increased to US$10 billion by end June 2016.  
  • 5. Training to youth in the hospitality industry in collaboration with the private sector to be provided financial assistance for a 3-month standard training course – 50 per cent of the course fee subject to a maximum of Rs. 15,000.  
  • 6. Expand the 15 per cent interest rate benefit to citizens above 55 years of age and the 15 per cent interest rate to be applicable to deposits up to Rs.1.5 million. This facility was to be granted through Licensed Finance Companies where an interest subsidy of 1.5 per cent will be granted by the Government. A sum of Rs. 1.5 billion was to be allocated for this purpose.
  • 8. Setting up of a Bond Clearing House at the Central Bank primarily for transactions in government securities.  
  • 9. Providing rural and regional schools with teacher quarters, rest rooms, etc with an allocation of Rs.2 billion. By end 2016 all schools to be provided with proper sanitary and water facilities with an allocation of Rs. 4 billion.  
  • 10. Allocation of Rs.10 billion to upgrade 3,577 primary schools.  
  • 11. Affix a foolproof sticker on every tax-paid liquor bottle to provide a visual identification for the excise officers in identifying the tax paid liquor bottles.
  • 12. Amending Excise Ordinance as proposed in the budget to provide for collecting minimum Excise Duty of Rs.250 million per month from liquor manufacturers who are having distilleries and Rs.50 million per month from persons engaged only in liquor manufacturing.  
  • 13. Mandatory inclusion of the Taxpayer Identification Number (TIN) or the Business Registration Number (BRN) in all transactions in capturing all business transactions, leading to increased tax collection.  
  • 14. Granting special privileges such as VIP counter at the airport, priority treatment at government institutions and hospitals, special invitations for state functions, once a year felicitation meeting with the President and Prime Minister for personal taxpayers who pay more than Rs. 25 million per year.  
  • 15. Land lease tax
  • 16. Increase PAL from 5 per cent to 7.5 per cent,
  • 17. Create Agro Livestock and Fish Processing Park connecting the districts of Anuradhapura, Vavuniya and Kilinochchi and allocate Rs. 100 million for this purpose.  
  • 18. Liberalise tea imports to the country within a regulatory framework  
  • 19. Liberalise foreign currency changing business, subject to license fees and guidelines issued by the Central Bank.  
  • 20. Appropriate legislation to regulate Medical/healthcare tourism  
  • 21.  Build and equip 10 district-based stroke centres attached to tertiary care hospitals.
  • 22. Amend the law applicable to the PAYE tax to ensure equal treatment to all employees in order to provide concessions to employees.


SMEs: Some good, some bad ‘proposals’
SMEs are not pleased with the incentives offered since they would be compelled to pay taxes inspite of the fact that some of their enterprises would be loss-making entities unable to keep up with these demands.

D Samson Industries Managing Director Kulatunga Rajapaksa told the Business Times that except for the 10 per cent compulsory bank allocation from its loans portfolio for SMEs, the taxes imposed on the sector has increased from the existing 12 per cent to 14 per cent under the new budget proposals.

He pointed out that the SME sector would be compelled to pay an Economic Service Charge (ESC) of 0.5 per cent resulting in even loss making enterprises caught up in this bracket of Rs.12.5 million turnover per quarter. Previously the turnover required was Rs.50 million per quarter to pay these taxes. However, the carry forward period of three years extended up to five years has been welcomed by the industry.

Mr. Rajapakse pointed out that with introduction of the Revenue Administration Management Information System (RAMIS) there was no need for the ESC, the latter is considered an advanced income tax collection system.

‘The worst thing’ in the budget proposals, Mr. Rajapakse pointed out was that all payments above Rs. 50,000 would be subjected to a withholding tax considered a ‘serious disincentive’ to the SME

SMEs, on the other hand, were awaiting a simplification of the existing tax system since they did not have the necessary infrastructure to handle these, it was pointed out.

National Chamber of Commerce of Sri Lanka President Tilak Godamanna in his observations said that the proposals were “quite promising” taking into consideration the macroeconomic perspective.

The establishment of an Import Export Bank was a welcome move that would be able to provide special incentives and loans for exporters for their working capital and a tax reduction was proposed for export sector performance, he explained.

However, Mr. Godamanna noted that the reduction of certain food items was unlikely to trickle down to the consumer directly and in this respect, it was pointed out that had the authorities not imposed a telecommunication tax it would have been better.

A number of incentives have been offered in working towards generating more Foreign Direct Investments (FDIs), he said adding that reducing gas and kerosene was welcome as he believes the government seems interested in improving the

However, he asserted that new taxes were definitely a negative factor adding that there should be some consistency in policy in this respect.


Boon to capital markets
The 2017 budget has several significant policy reforms as far as financial and capital markets are concerned, industry analysts say.

They welcomed reforms imperative to address the need for an alternative for the pension scheme for government employees, legislation for a Central Pensions Fund to regulate the EPF, ETF and private pension funds and inclusion of contributory pension schemes to sectors hitherto not entitled to any pension scheme.

Ravi Abeysuriya, Group Director, Candor, President, Colombo Stock Brokers Association (CSBA) and President, Association of Alternate Financial Institutions, said that setting up an independent debt office at the General Treasury to be directly responsible for debt issuances and professional management of over Rs. 9 trillion of local and foreign government debt stock is a major positive.

Capital Market Strategy with an advisory board consisting key stakeholders has been proposed with the introduction of the long, overdue Securities and Exchange Act and Securitisation Act during the 1st quarter 2017. “The demutualisation of the Colombo Stock Exchange (CSE), listing of non-strategic SOEs, a separate board for listing of SMEs and listing of at least 25 companies in CSE has been proposed by providing companies 25per cent reduction in F/Y 2016/2017 tax liability if listed in 2017/2018 to encourage more capital market activity,” Mr. Abeysuriya said.


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