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2017 Budget proposals and issues under spotlight at KPMG forum


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By Charumini de Silva

KPMG hosted a post-Budget presentation and discussion unraveling key highlights of the tax and fiscal proposals of the 2017 Budget, which saw the attendance of a plethora of industry heads and entrepreneurs last Friday at the Cinnamon Grand Hotel.

The salient features of the tax and fiscal proposals of the 2017 Budget were presented by KPMG in Sri Lanka Partner - Head of Tax, Shamila Jayasekara, and KPMG in Sri Lanka Principal - Deal Advisory, Shiluka Goonewardene. 

The presentation on the key Budget highlights was followed by an interactive panel discussion moderated by KPMG in Sri Lanka Managing Partner Reyaz Mihular. The panel consisted Finance Minister Ravi Karunanayake, Central Bank Deputy Governor Dr. Nandalal Weerasinghe, Inland Revenue Department (IRD) Commissioner General Kalyani Dahanayake, National Development Bank Plc (NDB) Director and CEO Rajendra Theagarajah,  Ceylon Chamber of Commerce Chairman Samantha Ranatunga and KPMG in Sri Lanka Principal Suresh Perera.

14-01From Left: KPMG Principal - Deal Advisory Shiluka Goonewardene, KPMG Head of Tax - Partner Shamila Jayasekara, Inland Revenue General Commissioner Kalyani Dahanayake, Moderator Reyaz Mihular, Finance Minister Ravi Karunanayake, Central Bank Deputy Governor Dr. Nandalal Weerasinghe, Ceylon Chamber of Commerce Chairman Samantha Ranatunga, Ceylon Chamber of Commerce Vice Chairman Rajendra Theagarajah and KPMG Principal - Tax and Regulatory Suresh R. I. Perera



Delivering the opening remarks KPMG in Sri Lanka Managing Partner Reyaz Mihular said that the policy measures that were introduced during a Budget had a significant impact on businesses and often kept the business community waiting to see what the Government proposed in the annual budget, adding that it was an important instrument used by governments around the world to fashion economic policy. 

Noting that KPMG had been holding the Budget highlights forum for the past several decades on the day after the Budget’s delivery, Mihular added: “We had the program where we analyse the Budget. There is a whole team that works overnight producing our analysis and comments on the Budget proposals.”

Delivering the keynote address, the event’s Chief Guest, Finance Minister Ravi Karunanayake, promised consistency and coherence in dealing with the implementation of the proposals of the 2017 Budget presented last week (10).

He pointed out that the 2017 Budget was not a document for a particular day but an ongoing process with a medium-term outlook. 

Admitting that there were “distortions” during last year’s Budget, the Minister stressed that this time the entire Budget was based on President Maithripala Sirisena‘s intended results for the country and Prime Minister Ranil Wickremesinghe’s recent economic policy statement. 

“We will certainly welcome any good new ideas based on what was presented in the 2017 Budget but the essence of consistency and coherency will be adhered to in our policies going forward,” the Finance Minister emphasised.

Karunanayake acknowledged that the entire Budget-making process was a prudent one, involving professionals and Government officials. 

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Karunanayake also said that fiscal consolidation had taken a pivotal position in the unity Government’s strategy. “We are targeting a Budget deficit of 4.6% of GDP even though the IMF wanted it to be 4.7%.”

“Everybody must pay their due share in nation building and I am sure all of you will be contributing and happy in the success story that we want to bring for Sri Lanka,” he added.

Central Bank Deputy Governor Dr. Nandalal Weerasinghe said this Budget was fairly consistent with the overall policy direction that was announced by the Prime Minister including in areas such as direct taxes to be 60:40, an export-oriented growth trajectory where exports and FDIs are promoted, proper incentives, a reduction of exemptions and loopholes, adding that it had also explained its economic rationale for every proposal very clearly, giving due consideration to all important economic sectors.

He said the Budget had further tightened and improved the budget deficit target to 3% by 2020 from the previous target of 3.5% by 2020. “This will bring out favourable debt dynamics, bring down the cost of borrowing not only for the Government but also for the private sector which intends to bring in capital, enhance foreign investments, improve sovereign ratings and support the overall economny,”he added.

“If the Government can maintain and deliver the overall objective of the Budget, it will have a good impact on the trade deficit, and the current account deficit. It will also enable a lot more resources available for local savings, which means there is less pressure on domestic resources and less pressure on domestic interest rates. If we can maintain a stable interest and exchange rate it will be easy for us to steer the economy,” he noted.

The Government’s decision to move away from some of the businesses,  providing opportunity for the private sector with private-public partnerships (PPPs), was commmended. 

“The bottomline is that if the Government can maintain a stable exchange and interest rate, we can break this vicious cycle that the economy is in and move forward,” Dr. Weerasinghe explained.

Terming Budget 2017 “development-oriented’, IRD Commissioner General Kalyani Dahanayake said as the main revenue collector for the Government, it was challenging and they are giving new thought and planning to broaden the tax base with new sectors mentioned such as capital gains and the financial transaction levy.

She said establishing RAMIS was long overdue, which is crucial for tax collection in the country, adding that they hoped to complete the process internally by January 2017.

“Last year there was a 125% increase in revenue and with the implementation of RAMIS by January we expect to collect a revenue target of Rs. 700 billion next year. The decision taken to revise direct and indirect taxes to 60:40 will boost the economy to generate more revenue for the Government,” Dahanayake stressed.

Noting that a 75% rebate has been given to export companies, she said bringing in foreign exchange was crucial for the country in terms of financial stability, interest rate stability, financial sector stability and maintaining money circulation. She also lauded the removal of tax exemptions, stating that it was done for the betterment of the economy.

 

 

Ceylon Chamber of Commerce Chairman Samantha Ranatunga said Budget 2017 was holistic, making it as inclusive as possible, while it considered all of the country’s expectations and guided it in a clear direction. He stated that the Chamber hoped the Government would successfully proceed with the implementation of the Budget’s proposals.

He went on to laud the Government’s decision to replace the defensive attitude of tax holidays with the more progressive strategy of providing capital allowances to encourage investment. In adddition, he commended the Government for addressing the training and development of the country’s human capital, which is an absolute requirement for the private sector in order for it to compete in the future marketplace. 

Ranatunga asserted that the Government had addressed a lack of technology, storage space and technology knowledge gaps in one go, creating more platforms for PPPs, including the small farmer, with the large value chains. 

“This has brought knowledge and capital encouraging investments into the areas of agriculture and SMEs. A lagging sector has been given due recognition where they can now contribute shoulder-to-shoulder with the rest of the economy’s aspects,” he added.

NDB Director and CEO Rajendra Theagarajah commented on the practical implementation of the transaction levy, the merging of National Savings Bank (NSB) with the new housing bank and capital infusion. 

He said that although the transaction levy of Rs. 5 for every Rs. 10,000 transaction looked reasonable from a revenue point, it was a fairly significant number considering the transactions carried out. 

Acoording to the Central Bank Annual Report 2015, Rs. 95 trillion goes through the Payments and Settlement System including real-time gross settlement (RTGS), and if you apply 0.5%, the number is around Rs. 47 billion which is fairly significant in terms of contribution towards revenue, he explained. 

 



“If there is going to be a charge then you are basically shaving off one half of the revenue from the systems,” he stressed.  

While praising the housing program, Theagarajah said there was certainly a mismatch between the NSB and the new housing bank’s ability to mobilise long-term liabilities to take risk fund revenue. “From a Monetary Policy and supervisory point of view it depends on how the Central Bank is going to monitor.”

In terms of capital infusion he said  from a local bank’s perspective, other than one or two smaller banks, most banks are within the threshold outlined by the Government, but he added that the issue was whether it was only applicable to local banks or for the banking system, which needs interpretation if they are to achieve true capital consolidation. 

Theagarajah hoped that in the same way that the banking system had embraced technology, the Finance Ministry, Government and Central Bank too would adopt technology to gain greater understanding by keeping pace with the latest developments. 

In response to the observations made by Theagarajah, the Finance Minister said: “The capital infusion will be a cross for the entire banking system. We did have consultation and our concern was more from the foreign bank point of view. We want to have stronger banking systems. We are going to rely more on the banking system, that’s the reason why we are creating that as a safety net.”

With regard to the financial transation levy, Karunanayake said there was a timeframe to rectify any grey areas or danger elements that existed, with the help of professionals. 

As for the NSB, the Minister stressed that the Government had looked at several innovatiove approaches to utilising idle capital in a number of areas. “The 7% rate with a tenure of 25 years was a call taken by the Government because we needed to ensure that there was affordable housing and our intention is to have a homeowning society. Certainly the banks lending at 10%-15% does not help and we need to break. From our end, NSB will be able to deliver. Also, we will ensure that the Central Bank will comply not to run the business but to regulate it.”

KPMG Sri Lanka Principal Suresh Perera said the establishment of a National Tax Council as well as a Tax Ombudsman would change the entire tax culture in Sri Lanka, which he called a welcome move. According to him, the National Tax Council will create certainity and consistency in the tax policy system, while the Tax Ombudsman would tackle malpractice in the system. 

Although the shortening of the time bound on provisions applicable for tax appeals was commendable he stressed that his concern was over the possibility of some appeals, but said that with RAMIS being introduced taxpayer efficiency should improve.

Pix by Ruwan Walpola

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Q&A session

Q: Is the 10% Capital GainsTax timebound? For what type of assets?  

Finance Minister: The 10% Capital Gains Tax is applicable to any asset which is held for less than 10 years and it will be applicable from 1 April 2017. The spirit of collecting that money is only for speculated businessman dealing and not as a personal inheritance. 



Q: There are proposals to mandate banks to lend to six specific sectors, which 50% of banks don’t do. The banking sector has a significant componet of institutional investors and having mandatory lending policies in banks often makes these large-scale investors nervous. Could you elaborate on the implementation? 

Finance Minister: A bank license is given by the Government to do banking and not unrelated activities. It was a call from the banks to look at the Government policies and lend towards certain projects and that’s why we want to drive 50% of the lending book to specific areas.

Every bank is posting Rs. 15 billion profit after tax (PAT), hence we want the banks to take a risk and spread it out. It is not a mandate but a request from the Government. It is a ‘may’ instead of a ‘shall’. For anybody who has encash more than Rs. 5 million we have implemented a imposition fee. We don’t want to be like Modi and take the Rs. 5,000 note out.



Q: The service income we get in the form of foreign currency is liable to be taxed. Does this measure take immediate effect? What is the reason to propose tax on dividends received from Unit Trusts, and at what rate is this being done?

Finance Minister: It will be applicable from 1 April 2017. In terms of Unit Trusts, we want to discourage corporates investing in them. We have given the benfits to the small investors not to corporates. Unit Trust has been using this for their benfit but I want the small investor getting the full benefit. Reciever nothing, corporate 28%. 

(Observation: The purpose of the Unit Trust is to broadbase ownership and enable people from rural areas who have neither the knowledge nor the capacity to invest in the market. The tax holiday was given for the qualifying investment relief to set up a Unit Trust, tax holidays and exemptions and to enable the small man. It was not intended for corporates to make money out of a vehicle created to broadbase share ownership.) 



Q: Is the private sector expecting any more concessions and opportunities or are you all ready to walk the talk?

Samantha: The Minister threw a challenge at the top 100 companies and called on them for specific investments with the Government. We accepted it. We have a forward-looking Budget and if its implemented as proposed, the private sector is ready. 



Q: It takes over seven years for an e-commerce company to be cash positive and still be within single-digit margins. Hence, tax on that would be a burden to those firms. Could you explain the rationale behind this?

Finance Minister: We appreciate the entrepreneurial skills but we are looking at an even playing field. You all come from outside and take the revenue that the Government runs through the banks. Pay the Government rates that are expected. Hotel booking engines like Agoda circumvent the 18%-20% taxes expected.



Q: Is the Government going to restrict Regional Plantation Companies’ (RPCs) land area to 5,000 acres? 

Finance Minister: Private companies own 28,000-30,000 acres, but how can you manage? We want to break it up into smaller units. You certainly cannot incorporate acreage into your group consolidated balance sheets. We want specific standalone companies where you will be able to make money through Government assets on a win-win basis. 

Currently, it is a win for the private sector and all problems are for the Government, that’s what we want to reverse. Only four out of 20 companies have performed well and they will be given priority. All the others will have to come and justify why they couldn’t deliver. 



Q: Will the proposed insurance scheme be open to the private sector? 

Finance Minister: Certainly, if you can improve Rs. 600 we will come to you. We have given that sense of opportunity and competitiveness. We studied this with the entire private sector. It is not a Government imposition, it is open. 


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