The Sunday TimesBusiness

7th July 1996




Fag tax reaches limit

by C.P. Karunanayake

The policy of continously raising the taxes imposed on cigarettes, which had been adopted by successive Sri Lankan governments irrespective of their political complexion, has resulted in cigarettes becoming somewhat of a luxury item for the hoi polloi.

The people who have generally considered taxes on tobacco as sin taxes have accepted the status quo without much protest. This has enabled the government to increase the revenue coming it's way from the tobacco industry ceaselessly, without incurring the wrath of the public. Yet at a time when a cigarette in Sri Lanka costs two to three times more than in the neighbouring India and Pakistan one is tempted to question the wisdom of this policy.

Is, as some smokers are claiming, the government trying to kill the goose that lays the golden eggs by taxing the industry excessively? Furthermore have the relatively high prices of cigarettes in Sri Lanka contributed to an increase in the smuggling of cigarettes to the country?.

An Excise Commissioner in charge of revenue, stated that the illegal manufacture of cigarettes locally is at best a cottage industry. It's effect on the legitimate industry can only be negligible as it is not widespread, he said. He also poohpooed that claims made by some interested parties that even the so-called legitimate manufacturers are evading the payment of taxes by resorting to various ruses. He maintained that although such a thing might have occurred in the past, it cannot happen now as the way cigarettes are taxed has undergone a drastic change.

Earlier it was only the tobacco leaf used in the manufacture of cigarettes that was taxed and it was done by weighing them. However at present in addition to levying a flat rate of Rs. 10 per 1kg of tobacco leaves, the final product, i.e., the cigarette iteslf is taxed according to it's weight.

A visit to the factory of the Ceylon Tobacco Company (CTC) by the writer himself proved beyond doubt that these allegations of tax action are totally baseless. One of the alleged means by which taxes are being evaded by the manufacturers was by drying the tobacco leaves before they are weighed and remoisturising them to manufacture the cigarette. However as the writer found out for himself this is not possible for two reasons. One is that officials from the Excise Department whose task it is to weigh the leaves have immediate access to the leaf even inside the factory premises. The other reason is that the manufacturer stands to loose by drying the leaf as it leads to the formation of tobacco dust, which cannot be used in cigarettes.

The elasticity or inelasticity of the demand for cigarettes is an issue that is of relevance to the pricing policy on cigarettes. Michael Fenn, Chairman and Managing Director of CTC, the sole manufacturer of cigarettes in Sri Lanka, says that prices cannot be raised indefinitely without causing a reduction in the total revenue coming from the industry to the government. Mr. Fenn opined that cigarette prices have reached the threshold level. Yet some point out that the gross turnover of CTC had continued to increase even after repeated price increases. Mr. Fenn countered this by stating that the net turnover which is what the company actually gets, has increased only at a marginal rate of 6% which when adjusted for inflation is a reduction. He maintained that the volume sold had remained static over the years.

Mr. Fenn was emphatic in saying that the rising prices of cigarettes in Sri Lanka have led to an increase in smuggling of cigarettes into the country. In fact for some time the CTC has been claiming that the government loses around one billion rupees in revenue due to smuggling of cigarettes.

The non-availability of reliable data about smuggled goods from customs make any estimation of the quantum of revenue lost quite tedious. When asked as to how the company had arrived at the figure of one billion Mr. Fenn stated that it was done by making use of the sales statistics available to the company. He said that the CTC as the sole cigarette manufacturer has a lot of experience in marketing the product. It is by making use of this accumulated experience and expertise that the company estimates the quantum of cigarettes smuggled into the country, he said.

It is time that policy makers did a thorough re-evaluation of government policy towards cigarettes in view of it's effect on government revenue and the cost of living.

Labour can make or mar economy

In recent discussions on impediments to Sri Lanka's eco nomic growth, labour unrest has been often highlighted as one of the factors. But surplus labour in many areas of employment could also be reckoned as an impediment. Excess labour could adversely affect productivity and inhibit profit generation.

"Downsizing" could be a solution to an overfull work force situation. What is "downsizing"? It can be taken as a euphemism for the retrenchment of labour, the shrinking of the workforce. In an article on "downsizing" published in the Guardian Weekly, Alex Brummer says, "in changing global economy of the last decade, the immediate refuge of any corporation failing to deliver to shareholders has been to downsize. He adds that the word "downsize" has become the mantra which many Wall Street experts argue has driven the extraordinary bull markets of the decade.

In a report by Martin Walker, also published in the Guardian Weekly, it is said that US President Bill Clinton had gathered more than 100 chief executives for a round table conference on corporate responsibility. At the meeting he had avoided challenging them on redundancies and downsizing in a period of "soaring corporate profits and ballooning executive pay." But, according to the report, Mr. Clinton had acknowledged that some of the big companies have got to downsize and had boasted of his own success at slashing the federal payroll by 11 percent. Mr. Walker observes that in the first three years of Clinton's presidency, AT & T and IBM each laid off 120,000 people, General Motors axed 100,000, Boeing shed 60,000 and Sears lost 50,000 "as giant corporations hauled themselves out of recession and back into profit."

President Clinton, says Brummer, ordered a group headed by Dr. Joseph Stiglitz, Chairman of the President's Council of Economic Advisers, to undertake a formal study in "downsizing". Brummer says that "the long-held assumption that downsizing must be a good thing for industries by sweeping away inefficiencies and improving productivity - is now being challenged."

In February and March, this year, he says, the New York Times published a seven part series "The Downsizing of America." The report suggested that since the early 1970's some 43 million jobs have been lost in the United States through downsizing. Brummer reports that Robert Studer, the Chairman of the Union Bank of Switzerland is of the view that firms that concentrate solely on the short term interests of shareholders could endanger their ability to compete and even survive, but, says Brummer, although companies need to deal with their workforces sensitively, the experience of the 1990's suggest that those economies (as in Britain and the United States) where companies have ruthlessly pursued downsizing have increased their competitiveness vis-a-vis their rivals. Moreover, Brummer observes, despite putting thousands of people temporarily on the dole queues, they have been successful in bringing down overall unemployment.

Mr. Brummer says that the Stiglitz study has reached the conclusion that the downsizing of corporate America, far from being a disaster, may have been positive for the economy. He points out that people who have lost their jobs in the 1990's have been more quickly absorbed into the workforce than those who lost their jobs a decade earlier. Downsizing has affected almost all the corporations in the upper echelons of the Dow Jones index, which have become more efficient and profitable, delivering not just job losses, but new opportunities.

What would be the position in Sri Lanka as regards downsizing? We are aware that the plantation sector and some enterprises both in the private and public sectors are faced with excess labour. The new Chairman of the Ceylon Electricity Board, Arjun Deraniyagala has in an interview with a Sunday newspaper (not The Sunday Times), observed that "anybody with responsibility will realise that we are over-staffed. We must find a solution to it". Would downsizing be the answer? Would enterprises which have surplus labour be able to downsize in the context of Sri Lanka's stringent labour laws and the government's aversion to retrenchment? Or would enlightenment dawn on the powers-that-be so much so that the labour laws would be eased and the authorities adopt a "hands off" policy in the interests of sweeping away inefficiencies and improving productivity in our plantation and industrial sectors?

Chamber briefs World Bank director

Mieko Nishimizu, Director of the World Bank overseeing Sri Lanka met the Federation of Chambers of Commerce and Industry of Sri Lanka President Patrick Amarasinghe and its affiliated member trade chambers and association, this week.

The meeting was used by the FCCISL members to provide a first hand assessment of the current macro-economic situation in the country to Ms. Nishimizu, who is Director, Country Department I, South Asia region covering Afghanistan, Bangladesh, Maldives and Pakistan in addition to Sri Lanka.

Many of the FCCISL members present at the meeting expressed the view that Government and several Ministers were quite sympathetic over the concerns expressed by the private sector on the current unfavourable macro-economic situation but there had been no positive action taken to address the burning issues.

The FCCISL was represented by member associations and chambers covering sectors such as exports, manufacturing, industry, garments, tourism, packaging, construction, trading, shipping etc., and the relevant representatives expressed their opinion about how the current macro-economic situation affected growth of their respective sectors.

The World Bank officials were detailed about some of the overall issues affecting private sector led socio-economic growth. Among the issues detailed were the current power cuts and power crisis, labour laws, debt recovery laws, dumping and under invoicing, lower tariff rates for imports, high interest rates, uncompetitive exchange rate and human resource and skills development, a fat bureaucracy and unemployment. In the context of the current macro-economic situation, the FCCISL members querried from the World Bank officials as to how they expect the Sri Lanka's private sector to perform and produce economic growth.

Many of the private sector personnel expressed the view that being a socially responsible group, they were concerned about rising unemployment while at present several enterprises were retrenching staff. The World Bank officials also were told about delayed new investment and expansion plans which in turn slows economic growth. It was disclosed that several key economic sectors were in the verge of collapse owing to increasing macro-economic constraints and setbacks.

Mind Your Business

By Business Bug
Replant for son of the soil

The removal of the son of the soil who tried to be enterprising has sent shockwaves among the banking community.

But then, old bankers don't even fade away - they just set up another bank!

So, no sooner the dust settles on the enterprising episode than he may want to float another venture, we hear. Wan't to put up some capital, anyone?

Big banks not for sale

More on banks: Despite all the denials, it seems that the worldly bank still wants - our major banks sold off.

But Satellite, who must take the final decision, is unmoved.

Privatisation has brought enough woes, she feels, so whatever other banks might say, OUR BANKS WON"T be sold and that decision appears final.

The ban on domestic commercial flights continues - despite allowing flight for training purposes.

Going to pieces

For at least one commercial flight operator, this is the last straw.

They will now shift operations to another location - and Madras, the Maldives and Malaysia ARE ALL destinations being considered.


Asian Cotton Mills - Rs. 15 m. Loss

The year ended March 31, 1996 was not favourable for the Asian Cotton Mills Ltd.

According to the company's provisional financial statement its turnover decreased by 27% from Rs. 257.9 million to Rs. 187.5 million. However, the company incurred a loss of Rs. 15.9mn for the period under review as against Rs. 8.8 profit for the previous year. The loss was Rs. 18.3. As a result, shareholders funds were reduced from Rs. 125.5 to Rs. 107.2.

Sathosa Motors -profit up

Sathosa Motors Ltd., has shown favourable financial results for the year ended March 31, 1996 according to the unaudited accounts.

The company's turnover was up by 31% from Rs. 516.7 million to Rs. 678.4 million. The profit before and after taxation increased by 28.7% and 26.9%. This led to an increase of shareholders funds from Rs. 145 million to Rs. 189 million.

Commercial Bank - profit and turnover up

The Commercial Bank has reported a turnover of Rs. 699.2 million for the three months ended March 31, 1996, according to their interim accounts statement. This is an increase of 18.7% over the previous year's figure for the same period.

The profit before taxation was up by 6.5 from Rs. 118.7 million to Rs. 126.4 million. However, the post tax was increased by 8%.

The Balance Sheet as at this date shows a Rs. 633.3 million increase of shareholders funds.

Overseas Realty - Rs. 26.2 m. net loss

The provisional accounts of the Overseas Realty (Ceylon) Ltd., reported a net loss of Rs. 26.2 million for the 9 months ended March 31, 1996. As a result the company's retained profit dropped from Rs. 194.9 million to Rs. 168.7. Correspondingly the shareholders' funds also reduced from Rs. 762 million to Rs. 735.8 million.

Hayleys Photo Print - disappointing performance

Despite the disappointing performance, Hayleys Photo Print Ltd., has recommended 15% dividend to its shareholders for the year ended March 31, 1996.

The Company's turnover decreased by 2% from Rs. 188 mn. in the previous year to Rs. 184 mn. Profit before tax decreased by 53% from Rs. 15.3 mn. to Rs. 7.3 mn. Profit after tax decreased by 57% from Rs. 9 mn. to Rs. 3.8 mn. EPS (after extra ordinary item) dropped from Rs. 6.01 to Rs. 2.29.

Union Assurance - moderate Results

Union Assurance Ltd., has reported Rs. 282 million gross premium written for the 3 months ended March 31, 1996, according to their provisional accounts. This is an increase of 15.3% over the previous year's figure for the same period.

The profit before taxation dropped by 2.7 while profit after taxation increased by 1% as there were no provisions for taxation for the period under review.

CT Land Development - profit up by 125%

The provisional results of CT Land Development Ltd., for the year ended March 31, 1996, shows favourable performance over the previous year.

The company's turnover was up by 97.7% from Rs. 51 million to Rs. 101 million. Pre and post tax profits increased from Rs. 20.6 million to Rs. 45 million, registering an increase of 125% as the company's profit from property development has been exempted from income tax.

The profit before tax as a percentage of share capital was 13.8% as against 6.3% in 1995.

Siedles TV - trading loss

Siedles TV Industry Ltd., has reported 57% decrease of turnover from Rs. 48.7 million to Rs. 20.7 million. As a result the company incurred a trading loss of Rs. 199, 569 as against Rs. 5.16 mn profit in 1995.

However the company was able to earn a pre tax profit of Rs. 385,417 because of other income. Post tax profit dropped by 95%.

Lanka Orix - profit up

The interim report of Lanka Orix Leasing Company Ltd., for the quarter ended March 31, 1996, shows 8.5% increase of turnover from Rs. 434.8 m to Rs. 471.8 m. Increase of pre-tax and post-tax profit was 6.6% and 3.7% respectively.

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