Govt.’s Interim Budget’s tax proposals and impact on business: Part 2

Wednesday, 18 March 2015 00:00 -     - {{hitsCtrl.values.hits}}

The Institute of Certified Management Accountants of Sri Lanka (CMA) recently held a useful seminar on the new Government’s Interim Budget’s tax proposals and impact on business. The event saw key insights shared by two separate panels dealing with a wide range of issues. The Session II panel comprised Ernst & Young Partner Duminda Hulangamuwa, CIC Holdings PLC Managing Director/CEO Samantha Ranatunga, LIRNEasia Chairman Prof. Rohan Samarajiva, University of Moratuwa Department of Transport and Logistics Management Senior Professor Prof. Amal Kumarage, NDB Investment Banking CEO Vajira Kulatilaka and KPMG Principal – Tax and Regulatory Suresh Perera (Moderator). Following are excerpts from the second panel session. The report on the first session was published last Wednesday.     By Charumini de Silva Q: Mansion Tax is not something that we have invented. It’s a tax which was introduced or conceptualised in the UK in 2009. What are your comments on it? Are there going to be new statutes introduced? Hulangamuwa: Conceptual wise I don’t know if the Mansion Tax is right or wrong. I really don’t know how they are going to implement it. However, all these statutes are coming as part of the Finance Act such as the Mansion Tax and Super Gains Tax.   Q: Do you think that that the Government has taken directions to develop the ICT industry? Samarajiva: I’ve been working in the region than in Sri Lanka alone and I had this slight confusion as if I’m in Bangladesh. Because all these years, I used to write to the newspapers in Bangladesh and advise the Government on the rationale which they should approach to the telecom sector. In 2008, I had a pretty strong go in the particular tax that was proposed which was Rs. 50 levy every month and we actually succeeded in getting that regressive proposal, which was highly applauded then. It is unfortunate that we seem to be in a situation like in Bangladesh. That is my general comment. The basic principle with regard to these taxes is that one should treat all goods and services more or less the same. As consumers, we should not be matched this way or the other, but then we have merit goods and demerit goods. Therefore, if there are demerit goods there are negative impacts like smoking and diesel they should be taxed higher because they consume bad things for the society. For merit goods we could apply concessional taxes. Based on the research we have done, we have gone over 7,000 research publications; it seems that mobile networks and telecommunications is a good thing and it falls into the merit goods. So, I never have asked for any concessional taxes even when I was the Director General. But today I see that they have considered ICT as a demerit good. As I said earlier, I’m quite confused.   Q: The move in which the Government waived off the 25% tax paid by customers when reloading phones ... how do you see the rationale behind this? Hulangamuwa: There’s no additional tax that had been imposed. Previously for the pre-paid customers although 100 airtime was given the customer could enjoy only 75 airtime. So, what has been done here is that the full benefit of the 100 airtime has been passed on to the consumers while 25% tax has to be absorbed by the company. This is the concern of the industry because there are low margins with high competition and high investment cost to the companies in their technologies. It’s too early to comment how this would work.   Samarajiva: In the 2007 and 2008 period there were taxes for environmental, value added and all kinds of things. But then we went to a standard 20% tax and they removed the value added tax. It was actually good for the customer but it was negative for the companies. Even with this formula, according to some of the international comparisons done it was declared that world’s lowest mobile and broadband prices are in Sri Lanka. What I see here as the problem is that there is no demand. People are not saying that they are being over charged. This 25% being absorbed by the companies doesn’t make any difference to the Government’s revenue either. They would anyway get the projected Rs. 32 billion or more this time because there is higher usage. According to the previous years’ Annual Report of the Finance Ministry they were projecting Rs. 32 billion from this particular tax and they have received Rs. 24.5 billion in the previous year.   Q: What are the key challenges and way forward for the agriculture industry? Ranatunga: One of the key issues that prevail is the high cost of production and in this budget most commodity prices such as tea, rubber, potato and milk minimum prices have been fixed. Also, concessionary loans for machinery and 50% of the loan amounts borrowed by farmers to be waived off are some encouraging moves. Fertiliser subsidy is a mandatory issue that must be dealt with at various levels and we hope that it would be in the future. Another concern is the price pressure on paddy. Rice pricing is a very difficult yet a sensitive issue that should be managed with care. But in the way forward, adapting to changes and changing needs of the market is important. This way we could build capacity and produce value addition across Sri Lanka. Re-invention must go on if we are to stay ahead in the market. Government should provide opportunities to partner a scheme to move into the cultivation and production of rice varieties that have a ready export market. At present we see a lot of SMEs entering into food processing in the industry, which is commendable. However, it is important to provide necessary guidance in the fields of marketing and availability. I think this way we could get more participation in assistance of the international companies in getting the farmers the right price and market for them.   Q: In going forward, how should the Government look at enhancing the public sector transportation system? Prof. Kumarage: There is no doubt that the public sector transport needs to be supported. There was a query from the audience in the previous session as to what we could do to minimise the traffic in Colombo and the reply was more roads. But, more roads mean more traffic. So, what is more important here is investment on modern urban transportation methods into the public sector. These investments need to come through public transport and not through fuel prices because the service is the focal point here. Productive and efficient public sector transportation is quite important in reducing the traffic in Colombo. People must realise when and where to use public transport and privately owned vehicles. It is high time that Sri Lanka too join the ‘smart cities’ in the region like Singapore, Hong Kong and India. I think these are the paradigms the Government should focus on in their budgets than meddling with the fuel prices.   Q: How do you think the stock market would perform in the coming months? Kulatilaka: Well...there was a 5% drop in the market, but that’s not a considerable depreciation. However, at the moment the market is in a very volatile situation where even a slightest bad news can badly affect the momentum of the market. People are in a more questionable mood right now. But on the other hand, with international commodity prices coming down the consumer demand is picking up. During last year we were trying to stimulate the consumer demand and only now it’s picking up. But, overall the market is in a questionable situation.   Pix by Upul Abayasekara