Colombo Stock Brokers Association Chief has his say on 2018 Budget

By Ravi Abeysuriya

The Budget has proposed far-reaching reforms to protect the environment, liberalise trade and foreign ownership to unlock Sri Lanka’s location advantage to attract more Foreign Direct Investment. The SMEs have been given significant support by proposing to establish a Development Bank, SME Guarantee Fund to expand the borrowing capacity of SMEs, and Government financial support for formations of companies.

The removal of over almost 1,200 para tariffs on imports to liberalise trade whilst supporting the local industries and introducing strong anti-dumping and countervailing laws and consumer protection is positive move for the economy for the long term, and also help prevent corruption and undervaluation. 

Further, liberalisation of shipping and logistics allowing major international shipping lines and logistics operators to base their operations in Sri Lankawill facilitate Sri Lanka to establish as a trade and commerce hub. 

The Budget has proposed to liberalise labour laws which prevent women from working in emerging service sectors such as the IT/BPM industry which is earning over $ 900 million today.

Increase license costs (Carbon Tax) on old fossil-fuelled vehicles and plastic resin (polythene) being a good policy to protect the environment in the long run will have a short-term effect on the poorer segments of the people, who run their old cars occasionally or use plastic as they cannot afford the alternatives to plastic.

Introducing the Debt Repayment Levy of 0.02% on cash transactions by banks and financial institutions as a temporary tax to be enacted for three years with the view of utilising the tax proceeds to Government’s debt repayment will generate a significant Rs. 20 brevenue (second highest revenue measure) to the Government. However, if the banks truly absorb this cost without passing on to the customers, it would bring the profitability of the banking sector collectively down by Rs. 20 billion at a time they are required to implement Basel III capital rules by early 2019 and increase minimum core capital from the current Rs.10 billion to Rs.20 billion by 31 December 2020.

The Finance Minister has pointed out the importance of building a vibrant capital market to provide lower cost funding to the economic activity of the country. For this purpose, it has been proposed that the two State banks, Bank of Ceylon and People’s Bank, evaluate options of tapping international capital markets without diluting the controlling ownership of the Government as done by State banks in several countries, including India and China.

The removal of VAT exemption on sale of condominium housing units is a regressive policy; having given the exemption just 12 months ago, it highlights the Government policy inconsistency and lack of long-term certainty of the tax regime applicable to private sector investments in Sri Lanka. VAT, which is a service tax, is not charged on property transactions in almost all the countries, except a few.

Further, Sri Lanka requires over 1.5 million housing units in the next 15 years according to the National Housing Policy and most of them are likely to be condominium housing units with vertical living becoming popular.People who have already agreed the purchase price for condominium housing units and pay on an instalment basis will have a significant additional 15% VAT burden on the instalment with effect from 1 April 2018. 

A more prudent method for the Government would have been the VAT to apply on sale of new condominium housing units with effect from 1 April 2018 where the developer could price the condominium housing units giving due consideration to the VAT that can be reclaimed on the inputs.

(The writer is President of the Colombo Stock Brokers Association.)