Private sector wishes for Budget 2013

•  Biz community focus on concessions, human resource training and policy consistency

By Uditha Jayasinghe

A selection of leading industry heads yesterday presented what they viewed as the top concerns for their respective industries to Treasury Secretary Dr. P.B. Jayasundera during a forum titled ‘Speak Up Before 2013 Budget,’ organised jointly by the Daily FT and the MBA Alumni Association of the University of Colombo. Following the welcome address delivered by MBA Alumni Association of the University of Colombo, President Jude Silva, who observed the importance of having this exchange, the floor was opened by moderator Daily FT Editor-in-Chief Nisthar Cassim for comments from the private sector.

Agriculture

Broad points mentioned by Hayleys Agro Managing Director Rizvi Zaheed included the need to make agriculture take off. He emphasised on the role of agriculture in the domestic sector that had acute issues needing to be addressed. Need based approach on development that go beyond subsidies and use of resources in other areas including research and development were highlighted by him.

Some of the measures in the last Budget were deemed as positive but research concessions were limited to State backed research. Giving examples from premier agriculture companies in Sri Lanka he pointed out that private sector involvement in research and development also need to be recognised. He sought a proposal to include private sector research and development for the triple deduction.

“Don’t throw the baby out with the bath water but give private companies the chance to test out their ideas as well," he added.

The second issue is on the land bank. We want to promote the idea of nuclear farms but even finding 50 acres for long-term investment is difficult. Most State organisations give land only for short periods and that is not enough time for investment to make a return. Private land is  expensive. So a land bank is very important to boost large scale agriculture.”

Sprayer manufacturers need to have the ability to increase their production and Zaheed called on the Government to reduce taxes on the import of raw material so that agriculture companies could expand their products.

Banking

HNB CEO Rajendra Theagarajah acknowledged the positive steps taken by the Government to introduce key tax reforms during the 2011 Budget, which had been long overdue. The main proposal for 2013 would be that relating to the taxation treatment of the sector under the new financial reporting regime. Sri Lankan banks would be preparing financial statements in accordance with the International Financial Reporting Standards (IFRS) equivalent viz SLFRS and LKAS.

The industry through SLBA submitted a comprehensive set of proposals which includes some 20 key components of bank’s income statements and balance sheets which may be impacted by this change. Essentially, what is proposed is the accounting profits of banks when measured by the application of IFRS equivalent, would be accepted as the basis when compiling taxable profit with minimal adjustments. This is consistent with the practice adopted in other countries which have embraced IFRS. Among the 20 odd so components which have been assessed for impact, the three key items would be:

a) Use of effective interest rates instead of simple rate of interest.

b) Applying fair value accounting for listed shares classified as “available for sale” and

c) The impairment loss on loans and advances.

“Finally, industry also recognises that the adoption of IFRS in 2012 would result in a one off, non-recurrent cumulative effect when transiting from the historical cost base accounting to the new regime, which could result in a net gain or net loss. Consistent with the practice adopted in other countries, the recommendation is to defer the payment of tax (in the event of net gain) over a period of time, thus minimising volatility in earnings,” he said.

Conglomerates

Speaking in his turn, Hayleys Chairman Mohan Pandithage highlighted three issues, two with regard to exports. He appealed to the Government to work out a mechanism to move into emerging markets to explore benefits to exporters.

“Most of Sri Lanka’s exports are still concentrated on Europe and the US. The global financial crisis has exposed the need to expand to developing countries and there must be a Government system within which to do so,” he noted.

The second issue was that for most Board of Investment (BOI) companies the non-tax periods are over and Pandithage questioned as to whether anything can be done to continue PAYE reductions from expat staff.  Moving on he referred to an oil and gas multinational moving into Sri Lanka to provide services but compelled to pay high taxes that makes the business unprofitable for them. “Something needs to be done regarding this because the shipments have already started. In neighbouring countries where they are in operation most of the time business is done tax free.”

Construction

Access Managing Director Sumal Perera was on the whole upbeat about his industry, noting that it was “doing well now”. For first of his three issues, Perera requested the Government to look into occupational hazards within the industry. He also remarked that the Construction Development Act has been delayed for more than a decade. “If that can be passed we can deal with most of the issues in the industry. But continuous delays have prevented important proposals within the Act from being followed.”

Perera also urged for a mechanism to produce construction material in Sri Lanka to reduce overhead costs. Sri Lanka’s construction costs are not very competitive when compared with the region due to the need to import much of the raw material.

Moving on to the issue of taxation he pointed out that 12 per cent tax in the industry was acceptable but when it comes to electricity and telecommunication rates increase to 28 per cent, which is an impediment to the sector.

“This has been acknowledged in the past but the Inland Revenue Department has not resolved it even though a year has gone by. These are all aims to reduce the construction cost in the country. Because of the high taxes for electricity and telecommunication profit margins for projects are low.”

Financial markets

Three pressing issues that need to be addressed to increase depth and breadth of Capital Markets were presented by Heraymila Securities CEO Ravi Abeysuriya. He went on to say that listed debt platform remains an area, which needs pressing reform. There is clear empirical evidence that a well-developed local currency corporate bond market plays a pivotal role in accelerating economic growth than equity markets and bank lending, he said.

“Our listed corporate bond market remains in its infancy at only 0.6% of GDP compared to 43% of GDP in Malaysia. Interest payments on listed debentures are subject to 10% withholding tax deducted at source is a final tax in the hands of individuals, where credit for the tax withheld is not available to individuals.”

He proposed that resident and non-resident individuals to be exempted from paying withholding tax on interest income earned from investing in bonds and debentures listed in the CSE. He also appealed for all unit trusts registered by the Securities and Exchange Commission (SEC) to be exempted from paying tax on interest income earned from investing in bonds and debentures listed in the Colombo Stock Exchange (CSE).

“In order to incentivise companies listed in the CSE to increase their free float I propose a 20% tax rebate on corporate tax payable to those companies that maintain a free float excluding related party holdings of 25% for a period of three years from 2013.”

Abeysuriya observed that the infrastructure used by stock brokers in Sri Lanka has not kept pace with other frontier markets. He opined that many of the prevailing problems of the securities market originated from the lack of standardisation and unavailable or unreliable information at brokering houses as there is no integration between the back office system and front office trading system at present.

“I propose that stock brokers are allowed to recover input VAT on expansion initiatives such as IT infrastructure, branch networks and other similar CAPEX by making stock brokering firms zero rated for VAT.

Insurance

Janashakthi Insurance MD Prakash Schafter noted that the Government has already exempted Reinsurance Commissions and Reinsurance Claim Recoveries from VAT from 1 January 2011 onwards. However, many companies have been served assessments relating to past years which are running into very large amounts. As this could be a factor affecting the solvency and even survival of some insurance companies, it was requested that the Government takes administrative action to withdraw such assessments raised in the past in line with the exemption granted from 2011.

He added that Regulation of Insurance Industry (Amendment) Act No. 3 of 2011 required all composite insurance companies to split their Life and General businesses into separate companies.

“Actions that will have to be taken by companies to comply with this requirement such as the transfer of assets will result in significant tax liabilities. It may also not be possible to transfer accumulated tax losses from one entity to another. These can result in significant losses to composite insurance companies.” Therefore, he recommended to waive taxes arising from such transactions and to allow the transfer of tax losses within a limited time frame to effect the necessary changes required to comply with the Act.

As the third point Schafter touched on profit commissions, which have been given by the National Insurance Trust Fund (NITF) for more than a decade. “However this was arbitrarily stopped about three years ago in direct contravention of Government regulations and international practices. There have been appeals made to the NITF but there has been no positive response.”

IT

Top items for Sri Lanka Association of Software and Service Companies (SLASSCOM) Chairman Sujiva Dewaraja were human resource, real estate, electricity and communication costs. In the latter Sri Lanka is not competitive compared to the region due to the high costs. His requests, which were repeated from the previous year, were to ask that the IT sector be given the same concessions as the rest of the private sector.

“While even service industries enjoy the industry tariff on electricity but it is denied to IT. Due to taxation broadband Internet is expensive making Sri Lanka BPO firms uncompetitive. These issues must be addressed to boost the IT/BPO sector.”

He pointed out that the information super highway is a basic need for the future and is the base that many industries will be built on. He also urged to consider proportionately reducing the PAYE tax rate for professionals employed in IT/BPO sector in line with reduced tax rate via 2012 Budget.

Leather

Leather sector manufacture of complete leather shoes is impeded by lack of access to raw material, observed DSI CEO Kulathunga Rajapakse. Even though highduty exist on imports, they are not properly implemented so large quantities of foreign leather shoes are still found coming into the country. “For manufacturers allow advertising and marketing expenses to be treated as tax-exempt. There must be an incentive to promote manufacture as against import and trade.  The former generates jobs hence the need for reconciliation of Government policies to differentiate between the traders and the manufacturers," he said.

Logistics

The Government has focused on a logistics hub and in the last Budget where there were proposals for an apparel hub. But the guidelines have not yet come through, said Expolanka MD Hanif Yusoof.

“For Sri Lanka to become a true hub there is a need to speed up transactions and make it seamless. There are 40 State institutions that deal with trade documentation and this makes the process very challenging. A trade net must be formulated to establish a platform so that is can become a proper hub. This is badly needed to make Sri Lanka a true hub.”

Where laws are concerned, he pointed out that even though the logistics hub is a protected industry there is a need to open up. “Some investors find it strange that there is a 40 per cent limit for foreign ownership. Logistic companies need incentive for training because like the tourism industry there is going to be a shortage of trained labour in the near future,” he added.

Energy/lubricants

“This sector is a burden to the country’s taxpayer,” was the frank opening given by Chevron Lubricants CEO Kishu Gomes.

“There are two large entities under the Government that are making huge losses. The Ceylon Electricity Board (CEB) and the Ceylon Petroleum Corporation (CPC) could make losses as large as Rs.60 billion by the end of the year. Reforms are urgently needed and the country is expecting reforms to be implemented.”

Gomes recalled that five years ago the country started talking about oil and gas exploration but while six basins were demarcated, only one was given out with the others are still idling. “Moreover we know that there are hydro carbonic deposits along the shoreline but after the survey follow-up work has stagnated.”

He commended the Government for promoting local value addition, but noted that recent decisions have gone against that at times. “Out of the 14 licensed players, there are only two local manufacturers but six per cent CESS was imposed resulting in reduced production and profit. This effectively discouraged investments and value addition. At the moment 40 per cent of the industry is controlled by foreign finished product companies. Despite being taken up with relevant institutions there has been no response.”

According to Gomes, 17 illegal players are operating in the market due to lack of regulation and they control 20 per cent of the market. “These are all people that do not pay tax.  The ‘shadow regulator,’ which is the Public Utilities Commission, does not have enough power to regulate the sector so they only get the complaints but no steps taken. The Petroleum Act has been the talk of the town for years and even in the latest round of talks last month it was said it would be presented to Parliament soon. However this has been said for the last five years but nothing has happened. It would be in the best interests of the country to get the Act passed as soon as possible.”

Manufacturing

“The five hub concept does not include manufacture and we would like to know what steps have been taken by the Government and what their focus is because companies have invested heavily. Recent credit squeeze by banks have impacted smaller firms and the tail end of the value chain,” said Phoenix Industries CEO Hasith Premathilake. “What are the steps being taken to increase tradability in domestic market? Increase credit worthiness in small players so that trade can take place similar to what took place in the last two years. In 2011 the Government initiated vegetable and fruit transportation in plastic crates but the law was not completely implemented. Many companies manufactured the plastic crates, but they are still languishing,” he added.

Automotive

The huge deficit in labour was pointed out by DIMO MD Ranjith Pandithage. “Very soon we will have to import labour from abroad for the automotive industry,” he stated, adding that DIMO was providing training to minimise this shortfall. But there should be tax incentives for companies to do so and expand the training process before it is too late.

Speaking on the duty free permit system followed by the Government, he noted that they created a lopsided playing field with foreign exchange going out of the country but little benefit being achieved. The present high taxes, which Pandithage acknowledged he understood was needed, nonetheless created a difficult situation for motor companies.  “Lack of good public transport is a problem in Sri Lanka. The development of a country depends on its mobility. There needs to be a concentrated effort to improve public transport, perhaps with the inclusion of mini buses or luxury vans to provide variety at a reasonable cost.”

Plantations

Productivity remains a huge challenge in terms of land and labour for plantations, said Sunshine Holdings MD Dan Seevaratnam. “In terms of land productivity 50 per cent of tea is too old but expenses are high for replanting so long-term concessionary funding is needed. Around 70 per cent cost of production is on labour and training them and motivating them is a huge focus and tax exemptions for training would help the industry go a long way.”

He pointed out that industry viability and competitiveness depends on improving productivity, which Sri Lanka has fallen behind in. He called for the doubling of tax relief for expenditure of labour training as well as greater emphasis on research and development. Optimising land resources for agro forestry and Dendro forestry was pinpointed as it would lead to substantial import substitution of timber and petroleum fuel. The process of planting and more importantly harvesting the trees would be done within the law.

Tourism

Admitting that tourism was riding a wave at the moment, Jetwing Travels MD Shiromal Cooray noted that there is need for Government funds to be funnelled into marketing needs.

“An annual allocation to reach out to new markets and still be present in generating markets is needed. Electricity tariff on hotels has been a subject of much discussion and there have been repeated requests made to reduce this and we are still in hope of some relief. As has been already highlighted, if a reduction on vehicle traffic is made it would be beneficial for the tourism industry as well because vehicles for guides are sorely needed.”

Participants in their turn urged to differentiate the role between the private and public sector and clarify the roles played by each, particularly in regard to State-Owned Enterprises and role of military involvement. Incentive for carbon neutral companies was also requested as this is something that is becoming prominent around the world and it must be encouraged locally as well. Plantations concessions for branding and value additions as well as for long term funding to develop industry was also highlighted.

Time to listen for Dr. P.B.

Treasury Secretary Dr. P.B. Jayasundera noted that the gathering was “more of an opportunity for you to talk and for us to listen and then after the Budget for us to talk and explain and to justify why certain decisions were taken. It is clear that we are slowly moving where we should be and are more aware of where we are heading.”

The private sector must graduate to operating in a broader macroeconomic framework. The country needs to move away from living on concessions. No private sector can claim to be competitive if they live on concessions, he added. The attempt by the Government has been to create that enabling framework. This Government has recognised has recognised the role of the State-Owned Enterprises(SOEs) and military as well as other sectors, he said, and referred to the demining, reconstruction and rehabilitation work done by the military and insisted that they would return to national security eventually.

In terms of SOEs, he pointed out that the public banks have proved that SOEs can perform well. CEB and CPC are to liberalise pricing and apart from the politicisation of banks, he noted that this would reduce the losses. “The general list of the speakers focuses on concessions but the role of the Government is to enable a proper environment for business.” He noted that there were no power cuts despite high oil imports, which have hit US$ 6 billion.

“This is not because of us; we made massive adjustments in February. Oil prices are stubbornly high and the drought has also had an impact. I am not sure it’s still over and there are massive expenses for power. There is no one asking for the port to be expanded, because that has already been done. Government is becoming fiscal and monetarily more responsible and so like the private companies that spoke about their balance sheets, the Government is doing the same and seeing how it can manage its balance sheets in a dignified manner.”

In terms of his judgment, the Budget will move towards areas that are least detrimental to all sectors, including civil society and the public. But it is a judgment on adjustments that can be affordable to everyone, he insisted. Dr. Jayasundera recalled that there has only been the space of two years for peace to really take affect and that adjustment is still being made in relation to global realisations such as food security.

He pointed out that agriculture is becoming more profitable because personal incomes have increased and people can consume more. Fisheries and livestock as well as food industries have the capacity to expand and he claimed to be heartened by the industry enthusiasm. He took down all proposals, which would be considered with chamber proposals and would be shared with the President.

Intense Budget consultation is taking place with President taking the initiative to travel around the country and see the development as well as the shortcoming of bureaucracy in terms of service delivery. He acknowledged that around 2,000-3,000 proposals have also come to the President and the 2013 Budget would concentrate on consistency.

“I am only the messenger. I would tell the President the following. His Government has invested through public investment to create an enabling environment through infrastructure. This would not be feasible by anyone else; it can only be done by the Government. In some areas this has been done, for example ports will be in operation by this time next year. The Southern Expressway has earned universal positive responses and the President has decided to concentrate on the Northern Expressway. The justification is to link ports so that they can in turn link Sri Lanka to the rest of the world. They aren’t just ports; they are connected to tourism zones and industry zones as well as logistic hubs. So in that context the Northern Expressway is important. The feasibility study has been completed and we ask the construction industry representatives to build it and if possible run it.”

The Government is also learning from drought and has realised that water management is needed. So building on tanks should continue. In the last seven years the Government, among many challenges, has managed an average of six per cent GDP. The beneficiaries include the private sector. Infrastructure will assist the private sector. “The Government will continue with a low fiscal deficit no matter how challenging and I will help to reduce it to five per cent if I can. Inflation has remained at single digit and the President has stabilised this trend. Growth needs to be maintained and it cannot be done by the Government alone.”

He called on the industries to increase value additions and insisted that the country should continue to see low unemployment, poverty, fiscal deficit and inflation. Sri Lanka is facing low employment rather than unemployment now, he noted adding that this needs to be recognised. Remittance earnings are almost at the same level as exports and the country has moved to sending out more skilled workers so he insisted that productivity clearly needs to increase. Thus labour will become a challenge but there is shifting within the sector with less skilled people moving into professional services while others are choosing to leave the country.

“These are things that no tax concessions can accommodate. My advice is that tax regime we got in 2011 must be protected and promoted. If for any reason we keep asking for concessions, it can lead to erosion in the tax base, resulting in tax increases again. It is not perfect and we need to get IT platforms together and within the next two years we will get a fully-automated system. Income tax people need a change in attitude so that their interpretation is more convenient.”  “You should not do business if you can’t comply with taxes,” he said, insisting that current tax levels are affordable.

“Those who can afford must pay. We must slowly but steadily move away from concessions and expand the base of tax. Despite the criticism levelled at the Government, we have done our best to provide the needs to the people. My wish is that someday a forum of this nature can debate a fiscal surplus. A country needs a goal and those that have seen such a future have reached that level of stability,” he said in conclusion.

The strategic partner of the pre-Budget forum was Standard Chartered Bank, hospitality partner was Cinnamon Grand and Creative Partner was Phoenix O&M.

 – Pix by Upul Abayasekera