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Support for SMEs and slapping new taxes on supermarkets bringing in the biggest revenue of Rs. 5.25 billion figured prominently in most of the public and private discussions so far on the Government’s 2013 Budget presented by President and Finance Minister Mahinda Rajapaksa last week.
Most analysts noted that SME sector has been identified as critical to get fresh support as it is widely considered as the backbone of the economy. The SME sector employs 35% of the labour force representing 25% of the national economy.
However, as President Rajapaksa said in his Budget speech, “The performance of this (SME) sector is affected by various over regulating systems and procedures, taxes and levies imposed by the Government as well as provincial and local authorities. During Budget consultations with a cross section of people in this sector, their request was for simpler systems and procedures when dealing with Government agencies.”
Two key proposals in Budget 2013 were exempting SMEs having an annual turnover less than Rs. 12 million from Nation Building Tax (NBT) and Value Added Tax (VAT) with effect from January 2013 so that they can operate in a completely tax free environment. The other was the applicable annual turnover for taxation to be raised to Rs. 500 million, to allow SMEs to benefit from the low tax rate of 10%. Those SMEs having over Rs. 500 million turnover enjoy a 12% income tax as well.
In last year’s Budget SMEs benefited from the removal of Debit Tax and Economic Service Charge (ESC), and the amalgamation of Nation Building Tax (NBT) and Provincial Turnover Tax.
The 2013 Budget had several other direct proposals for the benefit of SMEs in addition to several others which will have a positive impact on them.
At the packed Daily FT-Colombo University MBA Alumni Association organised Budget Forum, the support for SMEs was hailed by DSI Group Managing Director Kulathunga Rajapakse.
“Relieving the sector NBT and VAT was one of the greatest achievements for the SME sector and it is something the sector has been clamouring for, for many years. Many small industries are now manufacturing and supplying to the larger companies and the tax exemption is a great relief for the sector,” Rajapaksa said.
The Ceylon Chamber of Commerce and National Chamber of Commerce have endorsed these measures as well. (See Page 2)
Bringing supermarkets under the VAT cover, however, was contentious. Finance Secretary Dr. P.B. Jayasundera justified the move at the Daily FT-Colombo Uni. MBA Alumni Forum, saying it was important to expand the base and shore up revenue.
The proposal was since the NTB and VAT are imposed only at the points of import and in the manufacturing stages, booming supermarket chains and luxury shopping complexes do not pay these taxes; the coverage of NBT and VAT will be extended to supermarkets and large-scale trading operations generating a quarterly turnover in excess of Rs. 500 million.
“As the threshold is high, small boutiques and shops will not be liable for these taxes. The use of the tax system to reach the high-spending society will contribute to expand the tax base and also promote equity in taxation,” President said on Thursday.
Dr. Jayasundera at the FT Budget Forum clarified: “Taxing everything in supermarkets was not the consideration. Only VAT-able items will be involved and there will be input credit. As we expand the base, we want to gradually maintain the low tax regime hence this move is a step towards that direction.”
To industry comment that the poor man also shops at supermarkets in rural areas, his rejoinder “super-poor man” saw the forum erupt in laughter. Jayasundera suggested that gradually the VAT coverage would be expanded.
When the issue was brought up at the Daily FT Forum, JKH Chairman Susantha Ratnayake said: “One thing is that people think supermarkets are for rich people but that’s a myth – 75 per cent of the bills in supermarkets are below Rs. 1,000 and only three per cent of the bills are over Rs. 10,000.”
However, he added: “We don’t know how it’s going to work so we are not too concerned about it yet. We need to work with Treasury officers to understand the logic behind it – there are some practical problems as well but I’m sure they had some logic behind it. We had our concerns with the practical issues, but I’m sure that we’ll be able to come up with a mechanism where it is a win-win for all parties.”
Popular tax commentator N.R. Gajendran said: “If the concept of VAT is implemented, there are small suppliers and manufacturers who may not be liable so the value addition is going to be significant from a VAT point of view because we don’t have many inputs. There is bound to be a significant impact straightaway on taxes. Even poorest of the poor go to supermarkets because the prices, quality, and service are better, so definitely this is going to have an impact on the lesser-privileged people as well. However, this is incrementally a most significant revenue proposal. There are definitely going to have problems maintaining a level playing field and these are issues that need to be managed.”
CT Smith Stockbrokers said the proposal is expected to negatively impact listed entities with retail arms such as Cargills Ceylon (CARG), Ceylon Cold Stores (CCS), and Richard Pieris (RICH), amidst a potential erosion of margins.
Taking into account the Maximum Retail Price (MRP) for products, supermarket operators will likely now sell at the prescribed price, impacting price-sensitive consumers who previously benefitted from efficiencies in supermarket operations through discounted prices on some products. However, retail operators are likely to seek a greater margin from suppliers to mitigate the impact, which could then lead to an overall increase in the MRP.
Suppliers in turn will likely increase product prices to protect margins, though the extent of price increases may be limited given tightening macro conditions. Most manufacturers have already taken price increases in 2012YTD to recover cost escalations, which in turn have negatively impacted consumer demand.
“If supermarkets are obliged to unilaterally pass on the higher taxes to customers, the segment may likely see a decline in its customer base to smaller grocery stores, as the possible price increases may be higher than what consumers may be willing to pay for the convenience of shopping at supermarkets,” CT Smith said.
