Budget 2012’s impact on the export sector

Wednesday, 30 November 2011 01:36 -     - {{hitsCtrl.values.hits}}

Proposal: 1. Encouraging export industries

  • Devaluation of Sri Lanka Rupee by 3%.


  • The Sri Lanka Rupee has been appreciating vis-à-vis the competitor countries eroding the competitiveness of our exports. Therefore, the proposed 3% devaluation of the local currency is an encouraging step towards generating more export revenue and maintaining the competitive edge of our exports in the international market.

  • However it is necessary to adopt appropriate measures to increase the efficiency and productivity of the export industries to mitigate adverse effects of the probable increase in prices of imported inputs.

Proposal: 2. Exploring export market opportunities

  • Entering into new Trade Agreements with emerging economies in Asia, Africa & South Africa.
  • Adopting measures to consolidate our position in the traditional markets.
  • Introduce reforms to Sri Lanka missions abroad.


  • Nearly 57% of Sri Lanka’s exports are absorbed only by the USA & EU making Sri Lanka vulnerable to changes in those markets. Therefore, the State’s effort to diversify our markets is a timely move to exploit export potential of new/ emerging growth centres of the world.
  • This will lead to effective use of Sri Lanka missions abroad, as a channel for promoting Sri Lanka’s products and services.

Proposal: 3. New measures for investment promotion

  • Rationalisation of existing investment incentive regimes by amending the relevant laws.


  • In order to achieve the Government’s economic growth target of 8%, it is required an investment of 35% of GDP. The present savings level is nearly 28% of GDP. Therefore, the proposed steps will contribute to attract investment and thereby bridge the country’s resource gap.
  • At present investment incentives are granted under the Inland Revenue Act and the Strategic Development Project Act. Rationalising these provisions will provide clarity to such incentives thus creating an investor friendly legal environment. All existing, new as well as SME enterprises are encouraged through this measure.

Proposal: Investment incentives

  • Four-year tax holiday for small scale industries investing a minimum of Rs. 25 m in following areas:
  • Agriculture or agro processing
  • Animal husbandry or processing
  • Fisheries/fish processing
  • Creative work including artwork.
  • Tax holidays for medium scale enterprises engaged in any specified activity

Investment Tax Holiday

Rs. 50-100 m four years

Rs. 100-200 m five years

Over Rs. 200 m six years


  • Presently certain industries are eligible for tax holidays not exceeding seven years for a minimum investment of US$ 3 m. Lowering the investment criteria and extending tax holiday period by Budget 2012 will lead to attract more investment and also encourage SMEs to invest in export related activities.
  • Encourage private sector investment in export oriented undertakings

Proposal: Tax holidays for large scale enterprises

Investment/Tax Holiday

Rs. 300-500 m six years

Rs. 500-700 m seven years

Rs. 700-1,000 m eight years

Rs. 1,000-1,500 m nine years

Rs. 1,500-2,500 m 10 years

Over Rs. 2,500 m 12 years


  • Encourage export oriented investment in large scale projects

Proposal: Tax concessions for expansion of existing enterprises

nIf an existing enterprise is investing in an expansion project with a minimum investment of Rs. 50 m prior to 31 March 2015, such investment will be treated as a qualifying payment deductible from the assessable income of the enterprise subject to a maximum of 25% of the investment for each year of assessment falling within the period of four years commencing from the year of investment.


nExisting industries are encouraged to invest in expanding their activities.

Proposal: 4. Tea sector

  • Increasing subsidies for tea small holders
  • Replanting subsidy from Rs. 250,000 to             Rs. 300,000
  • New planting subsidy from Rs. 50,000 to             Rs. 150,000
  • A concessionary loan scheme with 8% interest rate and seven-year repayment period to assist Regional Plantation Companies [RPC] to plant and replant their tea lands.
  • Permit Sri Lanka Tea Board to promote and popularise ‘Sri Lanka Tea’ using cess funds.
  • Encourage joint ventures between tea producers and exporting companies to promote ‘Sri Lanka Tea’ in value added form
  • 12% concessionary tax rate for such             joint ventures.


  • Tea smallholders are contributing nearly 76% to the total tea production. Therefore, increasing the new planting and replanting subsidy substantially will encourage smallholders and thereby enhance the productivity of the tea industry.
  • At present, a large area of land under RPCs remains unutilised. The proposed loan scheme will encourage them to use their lands more productively.
  • Sri Lanka aims at increasing export income from tea to US$ 2.5 Bn by 2015. Hence, carrying out an aggressive marketing campaign to promote Sri Lanka tea in the international market will help to penetrate into new markets and also to increase country’s share in the existing markets.
  • At present a 28% income tax rate is applicable for manufacturing companies engaged in value added tea industry. Extending concessionary tax rates for joint ventures of value added Sri Lankan tea will encourage value addition and also promote productive alliances among industry stakeholders.

Proposal: 5. Rubber sector

  • Development of 10,000 ha of smallholder rubber lands in the Ampara and Mahaoya areas
  • Allocation of additional Rs. 200 m to improve tea and rubber and develop related research.


  • The present rubber production of 153 m kg is not adequate to meet the increasing demand by the local value added rubber industry. Therefore it is vital to expand rubber cultivation to non-traditional areas. At present 54% of total area under rubber cultivation of the country is owned by smallholders.
  • The productivity of the tea and rubber industry is not satisfactory and it is vital to introduce better agriculture practices, new high yielding varieties and improved techniques of tapping, etc. However, attention on R&D activities in these industries is not adequate. Therefore allocation of funds for R&D has positive effects on the plantation industry.

Proposal: 6. Minor export crops

  • Allocation of an additional sum of Rs. 150 m for the Export Agriculture Department to promote intercropping of cinnamon, pepper, cardamom and cocoa.
  • Concessionary duty on equipment required for the promotion of high quality water management techniques.
  • Tax concessions for establishing high standard processing factories for spices.
  • Permit R&D expenses to be deducted from taxes.


  • International demand for our minor export crops is increasing but there is a supply limitation. Therefore, introducing inter-cropping as a mean of enhancing supply as well as productivity of these lands is an important initiative.
  • An appropriate water management system is required to enhance the productivity of lands.
  • Budget-2011 introduced export cesses on spices to encourage local value addition. Hence proposed concessions will further encourage the enterprises engaged in the value added industry.
  • Encourage R&D leading to introduction of value added products and processes.

Proposal: 7. Rice export zones

  • Establish rice exporting zones in the Southern, Eastern, North Central and Northern Provinces.
  • Allocation of Rs. 200 m to related R&D and extension services.
  • Tax concessions for setting up of modern rice processing mills in the zones.
  • Allocate Rs. 100 m to increase production of seed materials, to provide extension services and technical knowhow in seed cultivation.


At present 1.06 m Ha of the country is under paddy cultivation and the total production is around 4.3 m MT. In 2010 Sri Lanka has exported 199 MT of rice to the value of US$ 80 m to Indonesia, Singapore and Thailand. As the result of the Government’s initiatives for developing rice cultivation, an excess production is expected in the future. International demand for rice is also increasing steadily specially in the Asian, American, European and African regions. Therefore establishing dedicated zones for paddy cultivation for exports and also granting concessions to attract investment to this sector is vital at this stage.

Proposal: 8. Fish sector

  • Expanding prawn farming in selected lagoons in the Eastern Province.
  • Concessionary loan for improving fishing in lagoons, tanks, rivers and for growing fish in tanks and ponds.
  • Allocation of Rs. 50 m to set up an ornamental fish exchange.


  • The prawn industry has been experiencing a setback due to inadequate supply base for exports mainly due to attacks of diseases. Prawn farming in the Western Province has been restricted due to environmental concerns. Therefore, expanding the industry into new areas is vital as there is a high demand for Sri Lankan prawns in the international market.
  • Encouraging fishing with new techniques will lead to increase quality supplies for exports.
  • Promote self employment and enhance supply base for exports and to introduce new species to export range.

Proposal: 9. Livestock sector

  • Assistance for dairy industry to explore export market opportunities.
  • VAT exemption for modern machinery and equipment.


  • Encourage to exploit export potential of the dairy industry of Sri Lanka.
  • Enhance productivity of the industry.

Proposal: 10. Craft sector

  • Rs. 100 m allocation for the development of traditional craft villages [10 villages].
  • Rs. 100 m to set up new art gallery in Colombo.
  • Promote high standard art galleries in an around famous hotels/city centres.
  • Financial assistance through Lankaputhra Bank to improve their product.
  • Tax exemption for artwork, craft and related transactions.


  • Harness local resources and skills for the development effort of the country.
  • Generate market opportunities for the products of local artisans.
  • Encourage adoption of new techniques to enhance design capabilities and productivity thereby meeting the needs of the international market.

Proposal: 11. IT industry

  • Allocation of Rs. 500 m to broad base the IT literacy development programme.
  • Setting up a Technology City in Hambantota.
  • BOI concessions to attract investment to the proposed Technology City in Hambantota.
  • Duty exemption for automated processing machines/computers.


  • The IT sector has a large potential for employment and for export. The subsequent governments have made special efforts to develop the IT literacy of Sri Lanka. This proposal will further encourage the spread of computer literacy and thereby create a pool of persons with IT skills needed by the industry.
  • Sri Lanka has targeted export earnings of US$ 1 b from the ICT sector by 2015. Establishing IT cities with dedicated infrastructure is essential to attract investment to the ICT industry.
  • Create level playing field for BOI and non-BOI ICT and BPO industry.

Proposal: 12. Textile industry

  • Exemption of all taxes on imports of yarn.
  • Duty exemption for machinery imported for factory modernisation.
  • Tax concession for substantial investment made to modernise existing factories.
  • Extend long-term tax holidays for related new investments.
  • Permission to sell 25% of the production in the local market.


Creating backward integration is one of the strategies in achieving US$ 5 b export income from garments by 2015. At present net foreign exchange capacity of apparel industry is around 35%. Therefore concessions granted for the textile industry is vital at this juncture to enable our exporters to source their raw materials locally.

Proposal: 13. Apparel industry

  • Permit export oriented apparel manufactures to sell up to 25% of their production in the local market on the payment of all inclusive taxes at Rs. 25 per piece.


  • Relief to apparel exporters. A means of disposing export surplus.

Proposal: 14. Encourage local value addition

  • Impose / increase cess on raw rubber, natural graphite, clay, sand, phosphate, stones, granite, sand stones, mica, ilmonite, rutile, titanium, zirconium and timber logs.


  • This measure will lead to discourage export of such products in primary form and thereby promote value addition.
  • Export cess on raw rubber has been increased from Rs. 12 per kg to Rs. 15 per kg or 2% of FOB to further encourage the local rubber product manufactures.

Proposal: 15. SME sector

  • Income tax concessions for SMEs
  • Pre commencement expenses of SMEs will be allowed to be deducted from the total statutory income of the year of commencement of commercial operation.
  • Reduce taxes on the importation of machinery and equipment not manufactured in Sri Lanka.
  • Impose mandatory requirements on financial institutions to lend 10% of their long-term funds to the SMEs and agriculture sector.
  • All State commercial banks and regional banks to set up a special SME Bank branch in all districts.
  • Reduce income tax rate from 28% to 24% for such branch activities.
  • 50% Government guarantee for banks providing loans for SMEs.
  • Increase threshold of ESC from Rs. 25 m to Rs. 50 m.


  • Creating an enabling business environment for SMEs to realise full potential of the sector.
  • Encourage adoption of new technology and thereby enhance productivity.
  • Lack of access to concessionary finance is a burning issue experienced by SMEs. This innovative approach will lead to make available finance needed by the sector.
  • An effective institutional arrangement to broad base the industries across the country.
  • Encourage banking institutions to lend to SMEs as this measure will reduce the risk of lending to SMEs.
  • A relief to SME sector.

Proposal: 16. Skills development

  • Allocate Rs. 500 m to undertake special accelerated vocational training programmes.
  • Financial support to universities to commence diploma/degree programmes targeting creative industry.


  • Develop human resources needed by the export industry.
  • Universities are encouraged to conduct demand driven programmes and thereby will provide HR needs of the industry to improve the quality of the products especially in the textile, jewellery and leather sectors.

Proposal: 17. Research & Development

  • Reduction of income tax rate from 24% to 16% on research income.
  • Reduction of personal income tax rate applicable to all engaged in R&D field from 24% to 16%.
  • Concessionary tax rate of 20% for R&D institutions and exempting them from VAT.
  • Allow triple reduction of R&D expenses done through Government institutions.
  • A nominal fee for SMEs obtaining R&D from State institutions.
  • Allow 50% of the R&D income of State institutions to be shared among researchers.
  • Allocate Rs. 300 m to the National Research Council to encourage special research that would facilitate economic development.


  • Sri Lanka’s R&D capacity is not adequate and industrial research being carried out is not demand driven. Therefore measures proposed for the R&D sector are important to motivate researchers and research institutions to carry out effective R&D work which meets industry requirements.
  • Encourage individuals engaged in research.
  • Encouragement for R&D institutions.
  • Encourage to build up relationship between the enterprise and R&D institutions.
  • Encourage SMEs to carry out R&D activities to improve their product.
  • Motivation for research staff of State institutions.
  • Strengthening capacity and competency of the institutions.

(The writer is the Chairman and Chief Executive of the Sri Lanka Export Development Board.)

Recent columns