Women drying fish at Negombo Beach – Pic by Shehan Gunasekara
- ‘CMA Sri Lanka COVID-19 SME Development Committee’ submits proposals to Govt.
- Establishment of the SME Credit Guarantee Institution
- Tax incentives for a period of three years to overcome ill-effects of COVID-19 pandemic
- Recommendations for labour law revisions
- Establishment of private sector export houses to support SME exports
- Identify leading Sri Lankan companies to attract Japanese investment affected by COVID-19 pandemic
- Skill development and retraining
The ‘CMA Sri Lanka COVID-19 SME Development Committee’ comprises members from professional bodies, chambers of commerce and industry, commercial banks and industry experts who have been meeting since April to find solutions to problems faced by the SME sector.
The inaugural CMA Sri Lanka COVID-19 SME Development Conference 2020 – ‘Solutions to meet challenges faced by SMEs in Financial Management, Bank Funding and Entrepreneurial Leadership in the Post COVID – New Economy’ was held on Sunday 20 September at the Magam Ruhunupura International Convention Centre (MRICC), Hambantota.
Prime Minister Mahinda Rajapaksa was the Chief Guest and Minister of Irrigation Chamal Rajapakse, Minister of Environment Mahinda Amaraweera, Minister of Industries Wimal Weerawansa, State Minister of Money and Capital Market and State Enterprise Reforms Ajith Nivard Cabraal, State Minster of Aviation and Export Zones Development D.V. Chanaka, together with other distinguished invitees attended the conference.
The Prime Minister who inaugurated the conference and delivered the Chief Guest’s address stated that the SME sector forms the backbone of the economy and is found in all sectors of the economy and accounts for 52% of the GDP, and 45% of the total employment, whilst making up more than 75% of the total number of enterprises in the country.
After the address, CMA Sri Lanka President and CMA Sri Lanka COVID-19 SME Devel-opment Committee Coordinator Prof. Lakshman R. Watawala presented the proposals for the development of the SME sector affected by the COVID-19 pandemic to Prime Minister Mahinda Rajapaksa and the other ministers.
A summary of the proposals is given below briefly:
1. Establishment of the Small and Medium-sized Enterprises (SMEs) Credit Guarantee Institution
The first proposal is for the establishment of the Small and Medium-sized Enterprises (SMEs) Credit Guarantee Institution, a new nonbank financial institution that would help SMEs to access commercial loans by providing credit guarantees a substitute for collateral. This would target under-served SMEs such as those that cannot provide collateral, women entrepreneurs and new start-ups. With its support to SMEs that lack collaterals to access loans, the proposed credit guarantee institution will also address issues of sustained regional disparities.
The proposed project is aligned with the Government’s policy which aims to inter alia accelerate economic growth, improve access to finance and address low private sector investment which has been highlighted due the COVID-19 pandemic. This proposed project is expected to form a credit guarantee institution targeting SMEs in Sri Lanka, with a special focus on borrowers without collateral.
This support is likely to benefit underserved constituencies, which are generally constrained by their ability to provide collateral, such as those affected by the (1) COVID-19 pandemic (2) new SMEs; (3) SMEs wanting to expand and provide working capital (4) lower income areas outside of Colombo, including in the post-conflict areas in the Northern and Eastern Provinces and other undeveloped regions and provinces; (5) women-led SMEs and (6) Start-up entrepreneurs.
This is now appearing as a proposed project under the ADB pipe line projects to grant a loan of $ 50 million to support the establishment of the Small and Medium-sized Enterprises (SMEs) Credit Guarantee Institution and the committee expects the Government to make use of this loan provided by ADB together with a Government contribution to set up this much needed credit guarantee institution.
The Minister of Industries has submitted a cabinet paper with regard to this matter and awaiting approval from the Finance Ministry and Prime Minister who is also the Finance Minister has agreed to support this proposal.
2. Recommendations for labour law revisions
SME sector has contributed to the economy both domestic and exports in all developing countries while in Sri Lanka the contribution is extremely low specially compared with India. With COVID-19 pandemic many SMEs had to close down their businesses due to various reasons. Restarting them will need revision and flexibility of labour regulations apart from financial assistance for startups. We have given below some proposals in order to revise these regulations.
a. EPF Act has been enacted as far back in 1956 and this Act needs a revision to avoid cumbersome procedures needing additional clerical efforts. If Unique ID number together with bank account reference can be introduced to the system, we can avoid all these procedures and all transactions can be performed digitally.
b. ETF is another fund contributed by employer only and it is another clerical burden to the Employer. By amalgamating the EPF and ETF we can reduce this burden. Alternatively, it can be converted to a pension fund with an increase in contribution so that present rush to get employment in Government sector even for a lower salary can be minimised. We have noticed that the Govt. Pension scheme attracts employment in state sector although the salaries are much lower than the private sector.
c. In special circumstances like COVID when an employee doesn’t have any income there should be a system to withdraw a limited amount from EPF subject to a maximum limit as done in India. Presently only housing loans can be obtained. This facility needs to be introduced to the system to assist employees affected by the pandemic. This has been carried out in India successfully.
d. The present shop and Office ordinances do not permit working on Sundays without Overtime payment and an extra day leave to be granted within seven days. This needs to be changed to grant a holiday on the seventh working day.
e. Most of the labour laws have been violated during the COVID period, from all sectors of business as they were unable to pay workers’ salaries and statutory dues. This will result in filing labour tribunal cases. In order to avoid litigations, separate unit to be setup in the labour department to settle the claims in the best interest of both employers and employees.
f. With COVID, new employment culture has been generated with social distancing, working from home, etc. Part-time work is a another opening that came up along with the COVID. Then working in several places part time and full-time few days for the week is also a new development during COVID-19 period. However present labour regulations do not cover this type of arrangement. So therefore, new regulations are needed to cover this area.
g. No Pay Leave is not much practiced in private sector even though it is very common in universities. With COVID there are many institutions that had to suspend their operations and later started in smaller scale with limited number of employees. The balance employees need to be allowed to grant No pay leave to be recruited later.
h. Present VRS scheme is prohibitive for SME sectors who had to close the operations due to COVID. There should be an easy system to be introduced for termination of employees until they start the operations.
Proposal for the tax incentive to SMEs
Common identity for SMEs
It is a known fact that Small and Medium Sized Enterprises (SMEs) are contributing significantly to uplift the economic landscape of the country. In Sri Lanka, the contribution of SMEs to GDP is 52% while this sector generates 45% employment opportunities. Therefore, it is recommended to adopt simple and common definition for SMEs as follows;
Micro Enterprises – Turnover less than Rs. 50 million per year
Small Enterprises – Turnover between Rs. 50 million to Rs. 500 million per year
Medium Enterprises – Turnover between Rs. 500 million to Rs. 750 million per year
This will facilitate for Government and other agencies to formulate regulatory policies to protect SMEs affected by COVID-19 pandemic.
To exempt all SME sector businesses from all forms of taxation for a period of three years provided they are registered, maintain proper books of accounts and maintain a bank account.
1. A five-year tax holiday be applicable to all export houses established to assist the SME sector and earn valuable foreign exchange and registered with the Export Development Board.
2. Small business relief
3. It is evident today 40-48% of business establishment of the country not registered with any authority in Sri Lanka. On the other hand, these businesses operate either as proprietorship or partnerships. It is proposed to increase the Partnership Relief of Rs. 1,000,000 to Rs. 6,000,000 to provide an incentive to those investing in SME business provided they submit annual accounts and operate a bank account.
Goods Sourcing Relief (GSR) The second biggest challenge face by SMEs are to access to the market for selling their goods at a reasonable price. To connect SMEs to the supply chain of large organisation create the opportunity to access market indirectly it is proposed for this purpose any person purchasing goods manufactured by SMEs with the local value addition of 35% shall be granted the Goods Sourcing Relief as follows;
(a) Additional deduction of 25% of the total cost of goods purchased from SMEs which carry out their manufacturing process in Western Province.
(b) Additional deduction of 50% of the total cost of goods purchased from SMEs which carry out their manufacturing process in difficult areas in the country as defined by the authorities.
(c) Additional deduction of 100% of the total cost of goods purchased from SME which carry out their manufacturing process in most difficult areas in the country as defined by the authorities.
(d) Relief for Agricultural Produce: Any person purchases unprocessed agricultural products for further processing from SMEs shall be granted additional deduction of 200% of the cost of purchases
4. Indirect Exporter Relief (IER)
In the post pandemic new normal economy, will be a good opportunity for Sri Lankan products to be sold in the global market. To promote export sector and the setting up of Export Houses to promote SME exports it is recommended to grant an additional deduction of 300% of the total cost of purchases made by direct exporter for the payment made within 30 days from the date of purchase from SMEs. Further, Committee recommends to extend the exporter status benefits to the suppliers who supply export houses and are treated as indirect exporters.
5. SME business development to encourage SMEs to develop their business in post pandemic, Committee is proposing the following fiscal measures.
a. Food processing industry – Currently food wastage level of the country is very high.
b. Agricultural vegetables and other food crops – Currently wastages are high due to no proper storage, packing, transport etc which results in very high wastages and also losses to the farmer and low farmgate prices.
c. Hence it is suggested
d. Any person invests on upgrading machinery to expand food or agricultural processing to be granted double deduction for the investment on capital assets such as machinery, storage such as cool rooms 200% of the capital cost.
e. Alternative Energy Source to get uninterrupted electricity supply for continuous operation of the business be granted 200% capital allowance on the investment
f. Technology adoption for business Technology adoption for business in post pandemic -
g. Any SME invest up to Rs. 50 million during 2020-2025 to automate the manufacturing process with locally developed software system by any entity owned by Sri Lankan citizens to be eligible to claim 200% Automation Capital Allowance.
h.Corporate Social Responsibility incentive. Everyone in the country shall operate their business in a socially responsible manner. Tax system can used to establish socially responsible businesses in the country. To promote socially responsible business in the country, committee is proposing the following incentives.
1. Up-skilling and re-skilling of employees Currently digital literacy rate of Sri Lanka is 40% where the citizens and business in other countries are moving very fast in the digital adoption. Any person who has incurred expenditure for up-skilling their employees with digital skills shall be eligible for double deduction of such cost incurred locally as a Digital Social Responsible Relief.
2. Differently abled and disabled people. Any organisation obtain services from differently abled and disabled person shall be eligible to claim triple deduction on such cost incurred.
3. Social Security Scheme to assist the ageing population of the country which is increasing. This has created a burden for Government to provide social welfare facilities. To overcome this to promote self-funded social security systems by individuals who shall be granted a relief of up to Rs. 1,000,000 per annum on contributions made to a pension fund approved by the concerned authority.
4. Other measures a. Internship program for human capital development is an important factor for sustainable business. However, in Sri Lanka graduate employability skill is very low. Any person providing internship opportunities for graduates to get early exposure to the working environment and enhance the capabilities shall be eligible for double deduction of the cost of internship program carry out in collaboration with Skill Council established by the Ministry of Skill Development
5. Threshold for VAT payment. Most of the time SMEs are purchasing goods and services after payment of VAT on such purchases. As the most of SMEs are below the VAT threshold, their product and services become uncompetitive in the market. Hence, it is proposed to increase the VAT liability threshold to Rs. 500 million per annum and any sales made by SMEs shall be exempt from VAT.
Establishing of private sector Export Houses to support SMEs to secure overseas markets
Sri Lankan SMEs achieve approximately 5% of the national exports in comparison, to the global exports of SMEs of around 30 to 35. The two concepts proposed to promote exports are (a) Setting up of Export Houses to boost the Sri Lankan SME Exports (b) SME Exporter Support and Development Centre to be set up by the Ministry of Industries.
The role of Export Houses: Making products or service exports ready and having access to international markets are the main advantages for SMEs to become exporters or indirect exporters and earn valuable foreign exchange. Establishing of private sector export houses to support SMEs to secure overseas markets export marketing support to SMEs.
Export Houses will optimise supply chains and logistics; Improve value addition, aid in fulfilling the requirements for appropriate quality standards and related certifications; Decide on suitable packaging solutions; Deploy information and communication technology and e-solutions to improve overall performance. Overall linkages in logistics, with shipping and forwarding companies.
The Government to grant a tax holiday of five years to encourage private sector entrepreneurs to set up Export Houses (Companies) in addition to the following facilities: Grant concessionary loans to potential investors that are similar to what has been offered to SMEs with long grace periods to set up Export Houses. Provide Credit Guarantees through the Credit Guarantee Institution to borrow to install facilities such as cold rooms, warehouses, purchase transport vehicles, reefer/cold trucks and localised collection centres and regional offices. By providing under-utilised government owned building facilities in outstations, by charging nominal rentals.
Alternate strategy where Ministry in charge of SME sector to set up a SME Exporter Support and Development Centre parallel to the National Small Industries Corporation of India (NSIC) that provides following services to SMEs. The products of the small scale sector are displayed in specified trade fairs/exhibitions free of charge. Inquiries, specifications and samples received directly or through its specified indenting agents are passed on to the concerned small scale units for development and final offer.
NSIC assists units to do costing and pricing for International markets and also assists them by providing technical information. Also assists the small scale sector by providing assistance in negotiations with the overseas buyers by sending samples and for subsequent correspondence for procuring export orders at its cost. Raw Material Assistance Program; plus other assistance for leasing for technology upgradation, pre shipment advances, export documentation and other assistance for exports.
One of the bold initiatives taken up by the committee is to take advantage of the current business climate in Japan based on the proposal of the Japanese Prime Minister Shinzo Abe, whose government offered relief to industries shifting out of China to Japan and other countries. It all began with a news item published in India wherein Government of India was taking the lead to attract these Japanese industrialists operating in China to shift their production bases to other countries.
Having seen the opportunity for Sri Lankan businessmen too to take the advantage of this shift of paradigm, CMA, Sri Lanka COVID-19 SME Development Committee took the initiative in spearheading a task force to assist Sri Lankan Industrialists.
This initiative has received positive response from the many leading corporates in Sri Lanka seeking Japanese links for trade and investment for their businesses. Industries comprising IT and Communication, Apparel, Pharmaceuticals, Tea, Footwear, Rubber products, Agro Processing, Healthcare, Food and Beverage Manufacturing and Confectionary Sectors are among those showing keen interest. Several reputed companies were identified by the National Chamber of Exporters (NCE), Chamber of Young Lankan Entrepreneurs (COYLE) and Federation of Information Technology Industry Sri Lanka (FITIS) and shortlisted as companies eligible for submission to Japanese counterparts.
The Japanese consultant will render initial services of promoting Sri Lankan facilities to prospective Japanese companies on free of charge basis and once a suitable Japanese party is located and a relationship is established a fee will be levied by the Japanese consultant for his services.