Budget proposals: Some observations

By S.A. Azeez

In the recently-presented Budget, it has been proposed to impose an annual licence fee of Rs. 60,000 on private companies. Most of the private companies are family-owned small businesses. The Government must give all the encouragement, motivation and incentives for these businesses to continue. 

Some companies are involved in small scale export of goods such as fruits and vegetables. Some companies are involved in small-scale BPO operations earning valuable foreign currency to the country. In most of these companies one of the directors serves as the company secretary also. Their secretarial expenses have been so far within a reasonable limit. 

Small and Medium Enterprises (SMEs) are the backbone of our economy. Most of the SMEs are private limited companies. When it comes to exports in most of the cases foreign buyers expect the local supplier to be a limited company. Even locally, for certain business activities limited company form of business entity is a must. Further, private limited companies are not entitled for any statutory tax free allowances as in the case of partnerships and individuals.

In this context the newly-proposed annual levy, which is not based on turnover, net income or assets of such companies, may highly discourage and even compel them to go out of business. The Registrar of Companies is there to provide a service to the public charging a reasonable fee to recover the cost. 

If the directors of some companies cannot be traced or if there is a heap of files with the Registrar of Companies, it is an administrative issue which should be sorted out separately by the relevant authorities. Now the question arises whether Sri Lankans require an annual licence to continue their business in Sri Lanka.

The pronounced policy of the Government is to increase the ratio of direct taxes compared to indirect taxes. Also the Government wanted to widen the tax base according to some pre-Budget pronouncements. Contrary to these pronouncements, dependence on indirect taxes has been increased in this Budget.

Raising the tax free limit to Rs. 2.4 million from Rs. 500,000 may have some drastic effects on future fiscal management and equitable taxation in the country. Large number of income tax files, in some cases up to 90%, of Regional Offices of Inland Revenue will become inactive or be removed from the system. Effectively this would reduce the tax base considerably. 

A person getting an income of more than Rs. 100,000 per month should definitely be able to pay some tax to the government. Small tax payers become big tax payers over the time. The successive governments were very cautious in raising the tax free allowance due to the risk of losing the tax base. If the proposal is implemented, only very few individuals will be paying income tax in this country. It will substantially erode the tax paying culture in the country.

Economic service charge is not an indirect tax since it is a set of against income tax. Therefore, the government can consider to reduce the minimum liable turnover limit to even Rs. 30 million per annum from Rs. 200 million at a reduced rate for turnover between Rs. 30 million and Rs. 200 million.

The Government must be very cautious in removing any tax concessions already given to exports, educational and healthcare sectors since it may go contrary to declared Government policies on these sectors.