Participants seek more clarity on 2017 Budget from Finance Minister

Q: We see that for the retail investors in the capital market now have to pay slightly higher taxation of 14% when it comes to dividends and unit trust income levels, while a 5% final tax in banks for all investors, which is tax at the bank level. Is there a way we can make it a little fairer?

Finance Minister: There is a ray of doubt in one of the questions you asked. I prefer getting you down and giving a proper answer without making a wrong statement here because I do not want to profess I know it all here.

Q: The stopping of Special VAT (SVAT) has impact the medium-scale manufactures adversely. We are still not sure if the deferred tax is going to apply to us as well as when we supply to customer base, we get only 90 days. So, 15% tax on a 90-day cycle is almost 40% of total turnover we have to pay back. We need some clarification, as we don’t have working capital allocated for this.

Finance Minister: SVAT was unfortunately an area which was highly misused. We call upon all the investors. If they are genuine, we have given enough and more incentives. Private sector, it is time to stop doubting. Don’t postpone your investment decisions to tomorrow, do it today. We have given you all investment relief, depreciation allowances and all of that and I think this is the best time that we have given on this. The reason we stopped SVAT was completely misused. The manufacturers selling to these companies have used it by selling one company to the other and using that advantage to the disinterest of the country. There will be no delays at all because RAMIS will be operational from 1 January 2017. Exporters are an area we look at in a very big way.

Q: We are a BOI company and we set up with 400 employment where we were assured that foreigners will be able to own land also and do business in Sri Lanka. This investor is seriously looking at investing more with 2,000 jobs. Can he own land?

Finance Minister: Yes, we are encouraging. We didn’t want foreigners to buy land at the expense of locals who didn’t have the spending power. But if a foreigner wants to develop the country, we have all the opportunities opened up. If it is a public limited company, we have opened freehold, there is no problem at all. If foreigners want to invest in Sri Lanka we have given two criteria. A job creation of 250 which you have covered, or you should have ‘x’ amount of turnover which would add value to the economy. This should be maintained for three years and then you can leas it for 99 years to do what you want. This is the policy we want to pursue as there cannot be any misuse. 

However, if by any chance a foreigner comes and say he wants to have 1,000 jobs and end of two-and-a-half or three years decides to sell the land, then we slap a tax on that because it was not the intention. That’s the fairest approach we have looked at. Don’t wait till tomorrow, get the approval, start now and you can be a part of nation building process. These laws are effective from midnight 10 November, also for apartments.

Q: Is the Financial Transaction Levy (FTL) going to be taxed from banks or the customer? It is not clear, please shed some light on that.

Finance Minister: It is taken by the banks not to be passed down to the consumer. It is very clear so the consumer will not get affected. 

Q: How can we make land available through the concept of land bank in a fast track manner for specific proposals? 

Finance Minister: Our intention is to free the land as 80% of the land is held by the Government either at national level or at provincial level. Our intention is to put the land bank, where the private sector will have an opportunity to find land and make available it less than three months. These are for 1,000 acres above.

Q: Is there a proposal to bring down the number of taxes?

Finance Minister: When we took office there were 46 taxes and levies. Last year we reduced it to 35. This year we reduced two and introduced two. Our intention is to reduce it to 25, but if the taxpayers are paying that on time we have no problem in bringing it down to three or four taxes, but the problem is when they skip from one end to the other we have to catch them from somewhere. This is the reason why you have around 25 to 30 taxes going on. I hope this will get the message across, that avoiding is not the answer. Pay your little share and reduce the number of present 35 to maybe 25 next year. 

Q: Could you explain the rationale behind restricting land ownership of RPCs to 5,000 acres?

Finance Minister: At present there are few RPCs that are managing very well, others are misusing and some are fraudulent. We as the golden shareholder, the Treasury have no clue or knowledge at all as to what’s going on in the RPCs. We have subsidised as much as Rs.14 billion in 2015. If it was on a Private Public Partnership (PPP) or commercialised, why should the taxpayers be paying for some benefits used by the RPCs? Even when foreign companies were doing, it was only 5,000 to 6,000 acres was managed. You all have 26,000 acres and how on earth can you manage that? You all use it for your balance sheet advantage. These assets are given by the Government not to fatten the balance sheet. As long as you manage well, you get a head start. I guess there is no better way than that. When the tea prices go down you make it an excuse, thereby they can get that additional funds.

Q: At present Rs. 4.6 trillion worth Treasury Bonds have been issued. Earlier we used to pay 28% on the interest income, but 10% of that was actually a notional tax which was deducted at source. With the recent proposal to abolish the notional tax credit and also to increase notional tax from 10% to 14% as for our understanding the effective tax any investor would pay on Government Bonds will go up from 28% to 38.08%. Corporate Tax being 28% and Government Security will have to pay 38%. So, the investors will look at it to invest on fixed deposit or a corporate debt as they will have to pay only 28%. But if investors buy Government Securities they will have to pay 38%. This will discourage investors investing in Government Securities and to compensate this the market rates will have to be increased, which will increase Government expenditure. Your thoughts on this?

Finance Minister: I think your knowledge is superior on this subject. There are some areas of discomfort and it is our intention not to reduce the liquidity in the market and we want the activity going. I prefer getting you down and please give your input, we appreciate it.

Q: The final Budget gave a good direction for foreign borrowing, but sad to say, it took six to seven months to publish the Gazette for regulations to come out. This time also you all have finance companies to borrow from outside Sri Lanka. How long will it take? As the funds will not be available until the regulations are in place.

Finance Minister: I think it was a delay because they had to do a correction. The Central Bank on their own brought a limit of 35% and we have taken out all that. Any bank, non-financial organisation on the strength of their balance sheet can borrow from overseas. Only aspect you have got to confirm is that you have a currency swap, so that even though there is a currency devaluation, it will not impact the Government. It is a risk-free approach. You all can borrow as much as your balance sheet can get. We have no problem at all. This is effective with immediate effect. Sometimes we as policymakers spell out, but it takes months and years to get going because Government servants sit on them. Let us know if there are any delays in such implementation.

Q: After three days of presenting the Budget to the Parliament, water tariff was increased by 30% and traffic fine was increased. Can we expect more changes? Is it customary after Budget is passed?

Finance Minister: We are taking action against the Water Board Chairman because there was no approval given at all and that is why we withdrew it yesterday (16). There is a necessity to increase especially for industries that are getting water for almost nothing, but it was not the way it was done. Certainly not the innocent customers that have to pay 30%. I am sorry on behalf of the Government. That was not the intention and there won’t be any such inconsistent actions in future.

Q: Imposing any tax on banking is going to be transferred to the consumer via the pricing mechanism. Although you said it was for the bank’s top-line and for the bottom-line, it will not happen so. Banking system should not be tapped as a tax collecting base for the Government, rather go to businesses directly and collect it. Rain or shine, banks are going to make adequate money for their shareholders. By this policy you are making things more difficult for entrepreneurship and making Sri Lanka more uncompetitive in the markets. What’s your view?

Finance Minister: Banks will have to compete for their profits. At the moment each bank is posting Rs. 15 to Rs. 20 billion PAT. We are going to have more competition coming in. We want to ensure that the banks come out of their safe zone and take some risk. We will ensure that international competition comes into Sri Lanka. They will have to do portfolio lending the way Government wants and not just consumption-oriented lending. Bank license is given for banking activity and not for leasing. Banks have the parate rights and CRIB is there, what more safety do the banks want? We will ensure that the banks will lend to the people who want money because that’s what propels economic growth and not just have a fat profit at the end of the year. We will be discouraging that kind of approach, because we want a win-win approach.

Finance Minister’s responses to panellists

Port City: We appreciate what you mentioned. About the 40% LTV, we certainly don’t mind increasing it as we see there is a positive trend, but the debt servicing has to be done with foreign currency. Certainly we don’t mind opening up. 

 

Piramal: Customs will be open 24x7 from 1 January 2017. Even today it is 24x7, but the implementation will be fully blown from 1 January. Employment link to investment was done to ensure opportunity for locals. Employment is the most important aspect. It will be misused if we only allocate on the basis of investment and turnover. Therefore, we have linked all three investment, value addition and labour. It is not all three, it is one of the things you maintain. If you are trying to get automated from labour-oriented investment approach you had, we will certainly look at that value addition and turnover because the reduction in labour would obviously increase your efficiency. The value addition is good enough for your eligibility for investment criteria. 

 

Glaxo: I will look at what you said. There are a bit of discomfort with some of the policies. I will leave it to the Health Minister to come out because he is a doctor and he is taking decisions with the consultation of the industry. I presume those things will be settling down before too long.

Chevron: There is no distinction between SMEs or a multinational. In fact, we prefer Sri Lankan companies, because it is 100% value addition. When it comes to multinationals we look at what is good for us rather than what is good for them. In that process, we see that there are certain advantages which we cannot match. There we look at to the best advantage for the country. You are an American company and if you do what Donald Trump did, you will not have an opportunity in Sri Lanka. We like you all taking full advantage because in certain areas you all have the expertise that we cannot match for the next 10 years, but look at it for nation development. Super Gains Tax was imposed at a particular time we came in because there was a lot of political expectations. I guess the Super Gains Tax was useful for three to four companies to survive. I also appreciate the idea given on the tiered incentive scheme for listed companies. We will look at it. 

 

JICA Advisor: If Japan can give us the same, we will give the same. It is very difficult to get into the Japanese market and you want us to open up to have access to India? If you have 25%, we will reciprocate the same. But there is an international norm and we cannot go below that. If you look at India, 35% is the bare minimum. We also want to have access to markets and we are looking at expanding on bilateral basis with India, China, Pakistan, Bangladesh, Japan, Korea and Singapore. We are certainly looking at countries of origin that have been 35%.

PwC: IT/BPO sector has no impact at all. Taxes remain the same and it will there without a change for the next couple of years as well. If you look at the significant change since we took office is that the revenue to GDP was 10.2%. Today, it has increased to 13.6% and we are looking at 15% by the end of the year. These are matters that will help us increase fiscal space. You could see the taxpayers’ money being put to the best use. KPIs is something unique we are bringing from top to bottom, starting from the Ministers downwards where we are putting them in Public Service Delivery Act which comes in. This will make Government servants respond within 10 working days to a request made by investors. If it is not responded within the set time frame, it will be deemed as not approved. These are the things being done currently, and we hope it will continue successfully. We welcome any ideas because we want to ensure that we are in line with any other developing or developed country so we will not be lagging behind. FTAs are one such initiative, we are trying to make Sri Lanka an investment destination. The market access that is going to come through this process is significant. 

Questions to Finance Minister from Panel

Chevron’s Kishu: One issue we have in Sri Lanka is the painful process we have in issuing business visas?

Finance Minister: Due to the time constraints, I couldn’t read out these details, but it is there in the Budget. We have given visa on arrival and business visa for 30 days on arrival. We have opened it out for five years. This came from the Indian CEO Forum and we responded very positively. This is in effect from 10 November 2016 midnight. There were complaints that a lot of neighbouring countries come and misuse the holiday visa for permanent visa. Hence, we have increased the Immigration Police and liberalised the visa system. Of course, if get caught, you will be fined Rs. 1 million.  

Daily FT: The Government is planning to increase listing in the capital market next year by giving incentives, but the context is that around 80 companies are going to get delisted because of the public floating requirement. Where does the confidence come to you all to initiate this successfully?

Finance Minister: Delisting is going to be for the present regulations that are there not imposed by the Government. It is an area that needs to be relooked at.

Kishu: The public float requirement was not implemented.

Finance Minister: Then that is a policy not being adhered to. We are calling the Securities and Exchange Commission (SEC). We want them to do a Police role and not a CID role. They carry out a fearful operation, whereas when we want a more investor-friendly operation.

Daily FT: The increase of Corporate Tax from 12% to 28% is a huge leap. How do you justify that?

Finance Minister: We have three steps in this, 14%, 28% and 40%. Again it is a national call. We have looked at wherever it is possible. We have given the benefit to exports and IT. Wherever there has been misuse, we have brought that back to the tax net. Just because it was given at a time when it was thought it was good, but then it has been misused we got to bring that back to order. 

Piramal: Out of the 12 foreign banks only two are within the capacity required by the Government to increase their capital to Rs.20 million. For FDI to come into Sri Lanka it is important to have foreign banks. How do you justify this?

Finance Minister: This came up with the complete concern of the banks. Initially it was for them to have Rs. 100 million. Then the rupee devaluated, but they didn’t bring in the dollars. Now we have to realign it. None of the banks complained about it because it is a necessity in today’s context. Requirement is for a win-win approach.

Daily FT: How confident are you that these proposals will get implemented by 1 January 2017?

Finance Minister: There are three areas. Some will be with immediate effect from 10 November 2016, 1 January 2017 and 1 April 2017. We believe that all these will be on time and our officials at the Treasury will get it done one month before, not later. Last year was a different problem because of the mismatch, but this time it is a more unison approach.

Questions from audience to panellists

Q: How is the price control on Paracetamol going to affect your continuity on business in Sri Lanka?

Glaxo: We are abiding by the prices. We have moved to the new prices. In the medium to long-term this is not really sustainable. GSK value says we need to partner with the Government for a dialogue. We are planning to have a dialogue with the Government and the Health Minister to get affordable prices for medicine. That’s where we are today.

Pix by Daminda Harsha Perera and Upul Abayakseara