NCE Post-Budget Webinar highlights issues impacting the Exports Sector

The National Chamber of Exporters (NCE) conducted a post-budget webinar on 24 November to brief the impact of the Budget proposals for 2021 in view of highlighting the identified issues adversely impacting the Exports sector, based on the views of the exporter community. 

The main presentation which analysed the Budget proposal was made by KPMG Principal, Tax and Regulatory Suresh Perera, and was followed by a panel discussion focusing on the views expressed by the exporter community. The panel comprised of NCE President Ramya Weerakoon, Department of Inland Revenue Deputy Commissioner D.R.S Hapuarachchi, Verite Research Director – Economic Research Subashini Abeysinghe and Ernst and Young Senior Representative Suleiman Nishtar. 

Concerns of member exporters were clarified to the best possible extent and discussed as follows.

It was the general view of the Chamber that the Budget proposal encourages value-added production and exports, while discouraging imports. Tax rates remaining unchanged for 5 years, which began in 2020, encourages investment decisions to be made without uncertainty, when planning projects. The tax holidays offered for investments exceeding $ 10 million will serve to encourage new investments.  

In regard to implementation of the proposals, it was noted that each year there was much excitement at the proposal stage. However, later there was little information available to the public regarding implementation. The tracking process of Verite Research related to implementation of 2019 and 2020, revealed that the percentage of implementation appeared to be as low as 30%. Also, in regard to 40% of the proposals, which covered 37 project areas, information on implementation was hardly available.  

In this context, it was discussed how NCE could work with Verite Research to track implementation of aspects of concerns. It was noted that the area of importance for the Exports Sector is the implementation of policy proposals. For instance, the progress regarding hitherto proposed changes to the Customs Ordinance were important, since it affected other areas of economy. In this context, it would be valuable for Verite Research “to know the areas of concerns to exporters”.

The tax of 0.25 % of turnover is payable by enterprises employing more than 50 people to a special fund. 

This is to assist employees affected due to COVID-19 in the tourism sector, wholesale and retail trade etc. It was pointed out that export enterprises in many sectors are forced to operate on thin margins or at a loss due to adverse economic conditions the world over. 

For instance, the apparel sector accounts for only 40% value addition, since 60% are imported inputs. This threatens sustainability of enterprises in the sector. Hence, the tax should not be imposed based on turnover at this critical juncture. It amounts to taxing one sector to support another.

Mandatory requirement for employees in the private sector, both male and female to retire at 60 years. 

It was stated that this will adversely affect the enterprises, especially in the Export Sector. Currently private sector employers enter into contracts based on company policies to retire males at 55 years and females at 50 years. However, they have the flexibility to retain efficient employees of high productivity beyond the retirement age on contract basis. Similarly, those of low productivity could be replaced at the retirement age with young people, providing additional employment opportunities. Therefore, this measure will hamper productivity of companies.

Requirement for export enterprises to contribute an insurance premium of 1% of exports revenue to an insurance scheme through the Sri Lanka Insurance Corporation.  

This is to support those who export to risky markets, affected by trade embargos and markets faced with political risks etc. They are stated to have difficulties in receiving their export revenues through the established financial systems. However, it was pointed out that some of them do not utilise insurance schemes offered by the Sri Lanka Export Credit Insurance Corporations (SLECIC) to cut costs, therefore the 1% contribution forced on export enterprises who export to stable markets and dependable buyers, will be an additional burden on them, and discourage other enterprises to use the SLECIC facility. 

From the point of view of the Department of Inland Revenue (IRD), it was stated that exports always receive preference. Therefore, consultation regarding taxes imposed on the Export Sector were good for tax administration. With regard to the requirement to file tax returns online, it was stated that online transactions with customs encountered problems, since most companies were not ready for online transactions. However, the IRD is ready to do so. Therefore, making online transactions compulsory was stated to be beneficial, considering efficiency and effective tax administration. 

In regard to setting off expenditure on Research and Development against profit for high-tech processing of mineral resources, fertilizer manufacture, graphene products etc., it was noted that the prevailing facility for triple tax deduction of Research and Development Expenditure is still in place, while the requirement to prove Research and Development-related yields within one year under this facility is not applicable. 

Views were expressed in regard to the tax holidays alone to attract Foreign Direct Investments (FDIs). It was noted that consistency in policies, including tax policies is a necessity, and that the trade policy should be aligned to the tax policy. In the case of Sri Lanka, although the desire to diversify the export basket has been there for a long time, the country still has a narrow basket of export products. 

Exported products should either be resource-based or factor-based. Currently, the exports are not aligned to the strengths of the economy, although the apparel sector has been an exception due to the adoption of innovative approaches. Promoting resource-based exports in the present context is going to be challenging. It was further stated that the export policy and the strategies of the country has so far been inward-looking. On the other hand, South-East Asian countries have had an outward-looking strategy. Sri Lanka should analyse which products are in demand, as well as the measures that are needed to attract investments to exploit available resources. 

In regard to the Floriculture and Horticulture Sector, it was noted there is great potential for exports in spite of the impediments faced by the sector. Concerns were expressed as to whether the sector will be included under agriculture to make use of the incentives offered. It was noted that the Agriculture sector is broad-based and should accommodate this subsector as well. However, it was proposed to get any doubts cleared. 

In regard to protectionism practiced by developed countries and the strategy of Sri Lanka to encourage import substitution, it was stated that Sri Lanka will still need to import inputs to do so. The question of the lower quality of domestically-produced products was also a concern. It was noted the approach of South Korea was to encourage Foreign Exchange earnings through exports with State intervention. 

According to the IRD, the panel noted that the prevailing requirement for 80% of exports by manufacturing enterprises to enjoy tax incentives was redundant in terms of the current budgetary proposals. 

The panel also noted that since some of the policy proposals related to tax incentives and particularly applicable rates were not clear, there is hope for discussion and negotiation with the relevant authorities to apply different rates of tax to accommodate specific needs of different sectors.