Wednesday, 27 November 2013 00:12
Says sleeping giants must wake up; if biz can’t pay 12% lowest tax they must close down and join Samurdhi or Divi Neguma
Ernst & Young Sri Lanka held its 12th consecutive post-Budget forum last week with a record 1,600 in attendance. This included EY clients witnessing the proceedings via live feed out of the EY office in Kandy and Galle. Secretary to Ministry of Finance and Planning Dr. P.B. Jayasundera was the Chief Guest for the 10th consecutive year.
EY Country Managing Partner Asit Talwatte described the 2014 Budget as “very progressive and business friendly” for reasons such as promoting investments, exports, value addition and listing of companies among others. He also welcomed most of the tax proposals in addition to measures to stem brain drain out of Sri Lanka and encourage professional expatriates to return.
EY Partner Tax Services Duminda Hulangamuwa said the 2014 Budget is an “all encompassing” one, whilst it has laid greater emphasis to imports competing industries. He also said the 2014 Budget reflects consistency in fiscal policy sans any major deviations.
Dr. Jayasundera kicked off his detailed presentation with a candid remark saying as in the case of Budget, a degree of continuity has been assured with him been the Chief Guest for 10 successive years.
When tax works better…
Taking a cue from a saying in EY’s document on the 2014 Budget which read ‘When business works better, the country works better’ (which goes alongside EY’s global slogan ‘Building a better working world’), Dr. Jayasundera spiced up the early morning presentation saying “When tax works better the country works better.”
He said that the emphasis of the 2014 Budget as well as those of the recent past was making life simple with clarity, consistency and continuity, or now famous 3Cs which Dr. Jayasundera first shared during last year’s Budget Forum of EY as well.
Noting that the President Mahinda Rajapaksa’s Government has a great 2020 vision for the country, Dr. Jayasundera said that constant dialogue and cooperation between fiscal and monetary policy aspects has improved macroeconomic fundamentals and bolster economic growth.
“The economy has been resilient and third quarter data showed a growth of 7.8%. Our focus remains to ensure an economic growth above headline inflation unlike in past years. There is a structural shift across the country and the economy. We have maintained single digit inflation for almost five years and are confident of keeping it at 5 and 6% in the medium term in a growth phase of 7 and 8%,” the Treasury Secretary said.
“We hope the private sector will harness this growth opportunity,” he added.
Focus on the real economy
He said that with peace and improved macroeconomic fundamentals and the unprecedented potential arising from this environment; it was high time all (private sector and financial sector) focused on the real economy. “The President told banks to focus on the real economy than concentrating on trade finance or imports,” Jayasundera added.
He also said the private sector needs to embrace a business model that espouses doing what is viable with least Government support since the potential and opportunities are out there. He listed sectors such as livestock and dairy, food and agriculture as well as a host of import replacement industries.
“Tokyo Cement or Holcim now shouldn’t let there be a need for imports. These companies must expand capacity to boost local supplies,” he added. “We import $ 400 million in milk powder and that is an opportunity for local dairy industry,” he added. Dr. Jayasundera said that the massive public investment drive has enabled a rapid improvement in infrastructure and the Government remains committed to persist with 6% public investment to GDP ratio.
He also said that the country had an era when the budget deficit was double digit but today it has been coming down gradually. The confidence of achieving the targeted deficit of 5.8% in 2013 was expressed whilst 2014 Budget aims to lower it further to 5.2%.
“The President has stressed if you don’t have revenue, don’t plan recurrent expenditure. However, the Government has made it clear there is no compromise on public investment. Successive Budgets have endeavoured to translate his vision accordingly,” Dr. Jayasundera said. “The President is keen on continuity in public investment avoiding the past experience of rushing and abandoning halfway through,” the Treasury Boss said, referring to the case of the accelerated Mahaweli Development program in 1977 which ran out of funds later in the 1980s
Focusing on taxation, the Treasury Boss said: “We need revenue, but not at any cost. We can hike the rates, but people don’t pay. So we are mindful of the affordability. Therefore, we have focused on expanding the base and compliance.”
“We know tax is two-edged – it can boost revenue or destroy the source. So our reforms and initiatives need time,” he added.
Nevertheless he said a fair number pay taxes directly or indirectly. Those employed pay PAYE, and ordinary people who smoke and drink pay taxes, people who buy goods and services pay taxes. We also have one of the lowest corporate and personal income tax regimes whilst having made the tax system simpler, he said.
Dr. Jayasundera also said that the 12-13% revenue to GDP ratio was manageable since heavy expenditures of the past such as financing the war, and more recently IDPs and de-mining were no more. This comfort was in the context of recurrent expenditure to GDP ratio being at 13-14%. “Those who talk of the need for a high revenue to GDP ratio refer to an era when it was 20%, but they forget recurrent expenditure to GDP ratio then was also at a high 24%,” Dr. Jayasundera recalled.
However he said that the Government remains committed to enhancing revenue effort whilst making the economy buoyant in the medium term.
“We are confident of surplus in the primary account and reducing the debt to GDP ratio to 65% in the medium term,” Dr. Jayasundera, said adding amidst laughter from the audience that the “Secretary to Treasury must not be in his post if fiscal deficit is double digit, nor should the Central Bank Governor if inflation is high. In a global meeting of peers, having high figures of deficit or inflation is very embarrassing for a Central Bank or Treasury Chief.”
Focusing on the development aspect, Dr. Jayasundera said public investment from 2014 onwards will also focus on clean and quality drinking water, irrigation, road connectivity and rural development apart from health and education. “The emphasis is inclusive development, which the 2014 Budget has clearly demonstrated,” he added.
He also touched on several sectors which the 2014 Budget has focused such as revitalising the plantation sector, imports, competitive industries, ICT, value added exports, healthcare and professional services and shipping and aviation. He also said that if businesses can’t pay 12% tax which is the minimum, they should close down and “join Samurdhi or Divi Neguma” self-help programs.
Greater value addition
The need for greater value addition in tea and apparel and within overall exports sector was emphasised – all aimed at fetching higher price for ‘Made in Sri Lanka’ produce or products. “For example, we still sell 330 million kilos of tea for $ 3 billion. The industry must focus on fetching higher prices via greater value addition. In the case of apparel, for example the Indo-Lanka FTA has access for 15 million pieces and getting a few dollars per piece will not be sufficient. Sri Lanka is no longer a cheap labour economy so we need to attract high skill industries and services,” Dr. Jayasundera said. On its part he said the Government was committed to improving the ease of doing business and 2014 Budget has made an important start especially for the SMEs. Further improvements will be made, he added. To empower the entrepreneurial community the banking sector needs to be stronger by embracing consolidation. “These banks need to finance the real economies across the country. Than opening branches to lure only deposits,” he added.
Sleeping giants must wake up
“Sleeping giants must wake up,” he told the participants at the EY Forum given the unprecedented opportunities in post-war Sri Lanka and support extended via the 2014 Budget. “We as a country should not let this opportunity pass. The all-encompassing 2014 Budget’s medium term framework has taken into account the need to liberate the country from the middle income trap,” Dr. Jayasundera emphasised.
Pix by Upul Abayasekara