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Colombo University MBA Alumni Association President Sarma Mahalingam, Daily FT Editor Nisthar Cassim, Finance Minister Ravi Karunanayake, Standard Chartered Bank Sri Lanka CEO Jim McCabe and PwC Tax Services Director Charmaine Tillekeratne at the Budget seminar - Pix by Daminda Harsha Perera and Upul Abayasekara
Colombo Stock Brokers Association Ravi Abeysuriya: The last Budget had a very good proposal on the use of cash but a lot of people were against it. However, my personal view is that it was a progressive proposal in the long term. We need to move into a more digital economy and use less cash. I think there are a lot of stock revenue leakages happening at the moment. It should be done in a way where smaller investors are encouraged and not through institutional investors who park billions of money without paying taxes. I would like to draw your attention here.
Ravi Karunanayake: On the areas of the transaction cost, this is something we have been looking at. Rs. 1 million and above are not subject to it but we want digital payment methods to be more broad-based and accessible.
Exporters Association of Sri Lanka, Fazal Mushin: We realise that there is a policy issue and a fiscal issue. You can fix the fiscal but you cannot fix the policy but we face both. Last year we were encouraged with the Budget that you read first, and we wholeheartedly supported it. We want consistency. We want a flat environment where we can do business, project everything as we need to be competitive. We need to understand that the environment we are in is highly competitive.
As you have mentioned, exporters have been complaisant, we wholeheartedly supported the Prime Minister’s policy framework. What we would like is for you to be consistent. We appreciate the open door policy that you have but we cannot wait for the once a month Ease of Doing Business Forum, we want immediate action taken for the exporters’ challenges, if we are to be driven on an export-led economy, I would like to see your Budget this time to be more exporter friendly. We are not asking for any handouts but we want an environment of consistency and stability to do business. Consult us before taking any action.
Ravi Karunanayake: I don’t think there has been any Government which was more business friendly and had a stronger open door policy. I would like you to be certain of the inconsistencies. This is something we want to bring in, consistency and coherence. I only find that the trade facilitation that we have given in the areas of Single Window, none of them is being used by the exporters. The input cost makes us uncompetitive — our labour is high and may not be as productive as it should be. Our electricity and water is high, but there is nothing we can do at this moment. Devaluation is not the answer. We are a 70% import-based economy.
Exporters Association of Sri Lanka, Fazal Mushin: The Single Window facility is there but it is not fully connected. We are not using it. For us to do so all the agencies must be connected. You have driven it but certain departments of yours have not connected to it. We also heard about the repatriation of funds. We are happy that you have gone back on that, to increase the number of days. Now that is the kind of consistency we are asking for. You’ve been an investor friendly Minister but we want you to be consistent in whatever you do.
Ravi Karunanayake: We cannot let exporters bring that as and when they want because the average days is 200 that is why we now brought it down to 120. Banks catered to it immediately; there is no giving away here. Countries like Malaysia and bigger countries are operating on 30 to 60 days. I know that there are problems but that’s your own problem with the bank as to how you finance it. The Government is not there to step in, when we are short of foreign exchange in order to give it to the exporters free. So, I guess there has to be some halfway measure. We gave you all an opportunity to survive a month more, but ensure that it comes in within that.
Sri Lanka Gem and Jewelry Association Rizwan Nayeem: The economic growth under the previous regime was rebased. Can we have a clear undertaking that there is no such approach as far as economic growth numbers are concerned in this regime?
Ravi Karunanayake: When we took office you were hearing 6.5%-7% growth but in real terms the Central Bank’s census department has this calculation and rebased it to the real situation. They brought it to an even clearer basis. Certainly, no such things will happen during our tenure. And if you want to see that consistency, keep voting for us. I’m a professional but also a politician.
Leasing Association of Sri Lanka, Ananda Seneviratne: Two issues. One is Parate Rights. We have been discussing this for a long time. We are involved in rural areas and develop the economy in those areas but unfortunately the security given to us as Leasing and Finance is not adequate. We would like you to consider giving Parate Rights to the Leasing and Finance Companies. Also, if you could bring it down from Rs. 5 million to Rs. 1 million because our customers are not that big.
Secondly, the Commercial High Court. We cannot take our cases to the Commercial High Court as they only hear cases above Rs. 5 million hence we would like you to consider bringing that to Rs. 1 million. Third one is a clarification. Last year we discussed introducing a Rs. 5 million threshold for bankers for motor vehicle leasing. Our members would like to know what the current status of this threshold is.
Ravi Karunanayake: In terms of the Parate Execution, I don’t think it is fair to bring it down here. It is bad enough as it is with the banks. We find that this is sometimes used as an easy way out. However, we will make it more effective so your collection processes as well as liability will be a minimum.
The Commercial Court matter from Rs. 5 million to Rs. 1 million will certainly be looked at. It is a good idea. I was not aware of it and let’s see what we can do. As for the leasing of motor vehicles, banks were the ones that were very touchy in this area. Bank licenses are given for banking activities and not for leasing activities. So we want them to get out of that. We have raised the threshold to Rs. 15 million. If you are lending to a group the banks can lend but anything less than Rs. 15 million has to stop, giving you all the opportunity. In the same way finance companies must also be able to be more responsible. You must also understand that the public monies that had been borrowed also has to go through a rigorous system of protecting, rather than just borrowing at various crazy rates and then running their deposits into big problems.
Chamber of Construction Industry, Dr.Surath Wickramasinghe: Three issues. High-end housing is well looked after, compared to the low and upper middle income sectors, where there is huge demand. Unfortunately the land prices are so high. Even Government land is very expensive. If there is a subsidy, if you could consider it particularly for the low and upper middle income sectors, then the private sector I’m sure will be interested in helping out.
Secondly, the energy sector. The big consumers like the industries, hotels and commercial establishments and also residences would like to convert to alternative energy sources but the pricing is quite heavy. If there is some incentive that you can suggest I’m sure they will all convert to alternative energy and reduce the demand on the CEB.
My final point is on skills. The construction industry is short of skills. At least a large proportion of young people are engaged in three-wheel driving and security jobs. If there is a wage cut-off point, there will be more people entering our industry because we provide much better salaries and security of employment.
Ravi Karunanayake: As for the low cost housing, we are certainly aggressively going into this area because the need is about 500,000 houses. You will see that in the 2017 Budget we have put great emphasis on such areas. We are looking at key operations where the private sector or any investor who would like to come — we provide the land and you build and at end of the project we buy the houses.
At the moment there are 22 projects that have gone to a tender and will be awarded in the next month. Most of the slum dwellers are living on Government land, which is priced at almost Rs. 5 to Rs. 6 million a perch. So, we are involved in the regeneration of urban housing. We provide them with houses and take the lands. We are certainly looking at subsidising. The initial start of the cost of the construction will be taken on the second stage.
On the electricity, more emphasis will be shown in the upcoming Budget. The skills are definitely a problem that’s there. But the construction industry was given a challenge. You all wanted to train, you all wanted to pay an ‘x’ amount, we gave that but nothing happened. What you all wanted we gave, but you all were unable to build PPPs. We are ready to even give you further allocations because you all have promised Rs. 1,500 per day but I guess giving them more employment guarantee rather than a daily pay would certainly be more effective to keep those skills in a more meaningful manner. We will make it more difficult for them to be in those jobs as well.
Sri Lanka Association of Manufacturers and Exporters of Rubber Products, Ananda Caldera: It is the third-largest industry in Sri Lanka, one of the highest value added industries. We have two issues. Our main problem is the availability of raw material. As you know, in the past a lot of rubber was in the raw form but today value addition has improved and we have touched $ 1 billion in exports.
The non-availability of natural rubber is a big problem. In spite of that recently reduce the CESS on the exporter’s raw rubber — I really don’t know what the policy behind it. The main objective of the Government should be to allow the natural rubber available here for exporters to add value. We as product manufacturers still pay a CESS of Rs. 4 per kg, where as the Government reduced the export of raw rubber from Rs. 15 to Rs. 4, which is a great disadvantage to us.
Not only that, if we are to import natural rubber we have to pay Rs. 40 per kg as import duty. As per the Rubber Master Plan, we are expected to increase our $ 1 billion to $ 3 billion by 2020. Hence we have to maintain our plan and these are our main constraints. Without natural rubber it is not possible for us to develop this industry.
The Government must take every possible action to make natural rubber produced in Sri Lanka available for the product manufacturers to use and in that context I request you to withdraw this Rs. 4 per kilo as CESS. We had a differential on the CESS paid by the product manufacturer and exporter. Now there is no differentiation. BOI companies are allowed to import natural rubber as and when required on a duty free basis but for local production it is not so. As product manufacturers when we pay Rs.4 we cannot be competitive in the export market.
Secondly, to develop this industry we need more companies and we have to invest and import machinery which is highly expensive. We have to pay 7.5% PAL and 2% NBT at the time of importing them, which is a disadvantage. The people are reluctant to think of investing because the payback is much longer.
Ravi Karunanayake: Cess reduction of Rs. 15 to Rs. 4 was an industry driven exercise by the Plantation Ministry. One of the major issues was that the rubber prices crashed in the past two to three years in the global market while production has dropped from 122,000 tonnes to 90,000 tonnes. We are trying to grapple with those and you as a local manufacturer you face this problem as opposed to other foreign-based manufacturers. You all are pure value adding exporters and we will certainly encourage it.
Colombo University MBA Alumni Member, Lasitha Ferdinando: As you know the Basel capital adequacy requirement is 4% worldwide but the Central bank has set it at 5%. In Sri Lankan banks, the overall industry is having 12.4% Tier I capital, which is an inefficiency in the entire financial sector, which means when you’re producing a return on equity of shareholder value 15% at 3% net interest margin, your cost of capital on lending is far greater than what it should be purely because of the inefficiency in the banking sector. If you see the risk asset weighted lending portfolio, you can multiply this kind of Tier I capital, bring it to Rs. 6 trillion and make it Rs. 18 trillion. But is there demand in the local market? No there is not, unless there is PPP. Are you planning anything to increase the efficiency in the entire financial sector? Because the capital that we are holding, if it is paid out as dividends or share buyback, I think the entrepreneurs or the investors on their own will put to good use. What’s your take on it?
Ravi Karunanayake: Your knowledge is far greater on this subject. If you’re free today at 2.00 p.m. please come to the Ministry as we have a discussion on the banking sector. I appreciate your input into that.
International Schools Association, Harsha Alles: At present we have 24 schools, where we cater to over 40,000 students and over 95% are Sri Lankan students. I would like to see more engagement by the Government with the private education sector. Both at the school and higher education level because we have a lot of constraints in terms of space. These students from the playgroup right up to the Advanced Level, they are not a burden to the State as they pay for their education. But when they begin their higher education, Sri Lankan universities are able to set aside 5% of their places for foreign students and charge a fee. I would like to see some consideration made towards these private sector students as well, for Sri Lankan students who study in Sri Lanka. After all, even if they go abroad we want them to come back and serve the country. If we can have even a small percentage of students accommodated in the universities I am sure they would make a huge contribution to the success of the country.
Ravi Karunanayake: Certainly Harsha. If you look at this Budget, it will be a revolutionary one for Education. Certainly it will lay a foundation for what you’re saying will be incorporated. I’m sure you will be happier than what you thought would be.
National Chamber of Exporters, Shiham Marikar: Triple tax reduction on expenses occurred in relation to R&D. The qualifying clause says a firm that’s conducting a R&D prove that there is a technological advancement or yield. As a chamber we encourage our members on R&D, but all may not be successful. When you put in a clause like this it will discourage them. We hope you will look at this proposal in a positive manner.
Ravi Karunanayake: R&D in Sri Lanka is 0.6% as opposed to the general range of 2%. Some of the company’s conduct research in areas where there’s no need of it and they use that for triple reduction. That’s why we have enclosed them as clauses.
Spices and Allied Products Producers & Traders Association, Vernon Abeyratne: I want to draw your attention to the Temporary Importation for Export Processing (TIEP) Scheme and Entrepot trade. You need to have more studies on these areas because this TIEP scheme is good but it is not efficient. There are practical issues. Under the TIEP scheme we import raw materials and that is in order to reduce our export cost. On the other hand through entrepot trade Singapore, Dubai and Hong Kong are making billions of dollars. Although there are clear guidelines from the Ministry, Customs officers who are handling these things are not supportive.
Ravi Karunanayake: Today’s legislation does not provide for this. I did look at what those delays have been. You will see a correction in the November 10 Budget. We are certainly going facilitate entrepot trade. On the TIEP scheme please be specific and tell me after the meeting.
Federation of the Information Technology Industry Sri Lanka, Wasantha Weerakoon: We are looking at a $ 5 billion economic contribution by 2020. One of the things we could forget in this is that improving the local ICT industry. We have put forward some proposals to you. One is to improve transparency and efficiency as well as engage more with SLINTEC. Today electronic transactions are very expensive. If you can bring that down with ICT, you will be able to have an inclusive society where you can monitor and understand what’s going on.
Ravi Karunanayake: I hope your ideas have reached us. Please be in touch with Dimuthu.
Insurance Association of Sri Lanka, Dirk Pereira: We have three proposals. The first is to open state business to private insurance. Second one, in the last Budget there was a proposal to have a basis of allocation on charging taxes on the life insurance segment. We had so many discussions with IRD and Ministry officials. Our concern is that it could be an arbitrary basis of taxation rather than a standard profit-based taxation.
The third one is with regards to general insurance. We find that there will be some cash flow implications especially when handled on a large scale if we are to follow the standard VAT rules. If you could see if there are any solutions to it.
Ravi Karunanayake: Your first proposal is being looked at. Second and third points are matters that are being looked at but not convincing enough as to how we got to get to that point.
Condominium Developers Association, Pravir Samarasinghe: Two areas I would like to bring up. One is there is a lot of development taking place in the condominium industry. One of our concerns is whether the supply will be in excess and there is no adequate demand.
In that area, to stimulate a market in that area could we encourage foreigners to buy apartments in Sri Lanka. Lots of our local developers have gone overseas to promote it to foreigners and success rates have been reasonably low. I’m not talking about the Sri Lankan Diaspora; foreigners buying our assets. Whether there is preferential residential status or whether the local banking system also insists in providing funding up to a certain limit. It may open out to be a totally different market segment to look at the property market in Sri Lanka. We encourage the VAT law which creates an even playing field for all property developers, so there will be no distortions in pricing the product. This also gives us a saving in the VAT as far as the value addition component is concerned. On average this gives us the ability to reduce the prices to consumers by 3% to 3.75%. Getting more demand there without new taxes being imposed would be appreciated.
Ravi Karunanayake: On the areas of foreigners buying all restrictions are taken off. They can send 50% and borrow 50% here but the debt servicing needs to be in foreign currency.
Confectioners Manufactures Association, Shanasz Hakeem: The passing of anti-dumping laws before we sign any FTAs. Second is to reduce high import taxes and Cess on raw materials that our industry consumes. Whey powder which is at the moment on 240% at the CIF and confectionary fats. Thirdly to make exports more convenient to the export sector, the current TIEP scheme is not practical.
Ravi Karunanayake: Please bring your proposals on the TIEP scheme. We will certainly look at it. In terms of getting the low import duty, we once again put it back to you. You all didn’t come up to us on a rebate scheme, that’s the only method to overcome it. The anti-dumping law will be taken in the first session of January 2017.
