2011 Budget a shot-in-the-arm for Sri Lankan economy says Heraymila Securities

Heraymila Securities Ltd., yesterday said the 2011 Budget was a shot-in-the-arm for the Sri Lankan economy.

“The 2011 Budget hit high notes. It will reduce tax distortions and promote economic growth and is a good start on the journey to transform the Sri Lankan economy,” HSL said.

The Budget enhances incentives for economic growth by promoting productivity consumption and investment.

Sri Lankan capital markets will benefit from freer cross border capital flows, enhanced tax treatment of unit trusts, promotion of IPOs and proposed contributory pension scheme expansions.

The Budget highlights were reductions in personal, corporate and value added taxes. These will boost household spending and saving, but also bolster firms’ ability to generate cash internally to fund expansion.

There were a number of additional policies put in place (such as increased depreciation loading and lower taxes on banks) geared to promote investment in the economy. These will support strong economic growth. Imposition of stiffer taxes on raw material exports will also encourage more value added activity over time.

The Budget has been presented as the foundation year plan of the medium term wider growth strategy being pursued by Sri Lanka.

The Budget achieves two key objectives. First, it provides incentives to promote economic growth, through increased purchasing power and investment in capital, people and technology. Secondly, it aims to address persistent fiscal deficits by broadening the tax base and restraining spending. Government projects the budget deficit will reduce from 8.0% of GDP in 2010 to 6.8% of GDP in 2011.

The economic impact of the Budget is positive. The most significant and immediate impact will be from reduction of direct taxes on income, profits and goods and services. These measures will encourage more spending and investment in the economy.

This may enable the Government to collect more taxes in the future, despite reduced tax rates. This was seen following the reduction of motor vehicle taxes; tax receipts swelled because of a significant increase in sales although the tax rate was lower.

The economy will also benefit from a range of policies that make investment and particularly construction more attractive. These policies will help supercharge rehabilitation of the post war northern and eastern regions, in addition to direct Government spending in these regions. Other regions will also benefit from a stronger focus on investment, which is a key driver of long term economic growth.

The Budget also contained price controls (mainly on food products) and specific exemptions (for airlines, ports, etc) which are not economically efficient. These should be phased out in future budgets to create a more open and efficient economy.

The Budget contained a number of positives for the capital market. An increase in the share trading tax from 0.2% to 0.3% is trivial in comparison. The positives include freer cross-border capital flows (both in and out of Sri Lanka), easier equity market listing, fairer tax treatment of corporate debt securities, reduced tax burden on unit trusts, and proposed expansion of pension funds to fund future retirement costs. These will deepen Sri Lanka’s capital markets, which Sri Lankan businesses can tap profitably to grow.

These policies, particularly those relating to cross border capital flows, are essential to allow Sri Lankan investors to achieve a well diversified investment portfolio. There is an urgent need for the investment community to provide expert and considered advice to investors to ensure a proper appreciation of risks and benefits of foreign investment.

Tourism, construction and agriculture sectors were the key beneficiaries of the Budget. These sectors will benefit from a number of concessions, including lower corporate tax rates and favourable treatment of taxes on imported items.

However, the telecommunication and media sectors may be adversely affected. A reduction in floor rate for local calls from Rs 2 to Rs 1.5 per minute will further reduce margins and profitability in this intensively competitive industry. A tax on imported programmes will also add to programming costs (which are significant for broadcasters) and reduce profitability in the sector.

The Government has also taken a bold decision to ease the taxes on financial transactions, despite the obvious revenue loss: abolition of the bank debit tax, reduction of the VAT on financial transactions and the corporate profit tax on financial institutions. This will help Sri Lanka to become a financial hub in the future.

Taken in its entirety, the 2011 Budget delivered a range of proposals to boost economic growth by lowering the tax burden of its citizens and providing incentives to invest in our future. Execution of these proposals to their true intent will deliver economic benefits and deepen Sri Lanka’s capital markets. This Budget will be seen positively by ratings agencies and foreign investors.

Development-oriented Budget, Ceylon Chamber

THE  Ceylon Chamber of Commerce (CCC) yesterday described the 2011 Budget as ‘development oriented” and complimented the Government for it.

“The Ceylon Chamber compliments the Government of Sri Lanka for presenting a development-oriented and forward-looking Budget,” the premier private sector lobby group said in a statement.

“From a policy perspective, it is heartening to note tha t the Budget has given prominence to key areas such as promoting domestic value addition, promoting exports of goods and services, taxation reforms and administrative reforms. These are vital areas that need to be addressed to lay the foundation to optimise the peace dividend and achieve sustained growth,” the CCC added.

It said that Sri Lanka was at a critical turning point and emphasised that it was the duty of all citizens to make their best effort to take the country forward.

“We urge our members to make use of this opportunity to invest and contribute to the economic development of the country. We note that many of the proposals in the Budget are in their formative stage and we look forward to contributing to their finalisation,” the CCC said.

Its statement also said that the Chamber extends its fullest cooperation and support to the Government to ensure effective implementation of these proposals.