Sri Lanka Budget 2012: Growth in focus

Quick take on 2012 Budget by IIFL Securities Ceylon

The 2012 Budget was relatively uneventful. It could be viewed as building on the significant tax reforms brought in by its predecessor whilst focusing on long-term infrastructure-led development and fiscal consolidation.

The Government envisaging a fiscal deficit target of 6.2% of GDP for 2012 is a bet based on expectations that:

1) Tax revenue growth will be at 21% YoY;

2) Expenditure growth can be contained at 14% YoY thus marginally lowering it to 21.2% of GDP or a 20bps decline YoY.

For the bet to pay-off, Sri Lanka will have to achieve a near 8.5% real growth in 2012 in the midst of external headwinds.

The Government has attempted to give growth a fillip through concessions and tax holidays to SMEs and the leisure sector and incentives to agriculture whilst not raising tax rates significantly. Expenditure on infrastructure is budgeted to grow 30% in 2012 whilst the recurrent expenditure is expected to increase 9%.

We remain positive on agriculture, leisure, manufacturing and auto sectors.

Key revenue and expenditure proposals

•  Tax concessions for new investments and expansions in selected industries to encourage import substitution
• Simplifying taxes applicable to the credit and interest payments involving borrowings from abroad
• Reduction in income tax to 12% from 28% for the healthcare sector
• 10% wage increase to all public servants Other key proposals/initiatives
• Sri Lankan Rupee to be depreciated 3% from 22 November 2011 to improve export competitiveness.
• Rs. 37 b has been allocated to expand the railway network.
• Identified 37,000 hectares of land in the plantation sector which are not being used, to be distributed among smallholders as two acre blocks.
• Rs. 5 b has been provided in 2012 for roads and highways.
• Rs. 750 m will be allocated in the next year to commence the construction of domestic airports in Iranamadu, Nuwara Eliya and Kandy.
• Rs. 35 b will be spent on account of investments in the irrigation sector in 2012.
• Rs. 34 b has been allocated to improve the generation and distribution of electricity.
• Rs. 10 b will be infused to the two national carriers SriLankan and Mihin.

Budget impact

Tourism: Positive – Enhance occupancy

The fee on electronic visas will be US$ 10 for travellers from SAARC countries and US$ 20 for others. There will be no visa fees charged from children. There will also be no visa fee charged from a tourist who spends less than 48 hours within the island.

•  Tax breaks on new investments and expansion of existing enterprises.

Manufacturing: Positive – Margin expansion

(TKYO, RCL, TILE, LWL)

• Tax breaks on new investments and expansion to existing cement manufacturers.
• Exempt local roof tile and clay related products manufacturers from NBT, ESC and VAT.
• The CESS on sanitary wear of plastics, steel sink and baths has been removed.

Motors/Autos: Positive – Higher sales

(DIMO, SMOT, ASHO)

• VAT/Customs duties on buses, lorries and trucks used for mass transportation and carriage of goods have been reduced/abolished.
• Reduce import taxes by 50% on vehicles for those who are operating transport services to and from airports.

Agriculture/fisheries/animal husbandry: Positive – Long term growth

(CIC, TESS)

• Tax breaks on new investments and expansion to existing enterprises.
• The supply of locally manufactured canned fish is exempted from VAT.

Healthcare: Positive – Windfall

(CHL, NHL, ASIR, AMSL, LHCL )

• Income tax rate to be reduced to a maximum of 12% from its current 28%.
• Tax breaks on new investments and expansion to existing hospitals.

Banks: Neutral

(COMB,HNB, SAMP, NDB, DFCC)

• Profits and income of newly set up branch of a commercial bank dedicated to development banking will be taxed a lower rate of 24%.
• Simplifying taxes applicable to the credit and interest payments involving borrowings from abroad.

Plantations: Neutral

• 37,000 hectares of land identified as under underutilised in the plantation sector is proposed to be taken back and leased back to smallholders.
• Concessionary tax rate of 12% to tea manufacturers who establish JVs for value added tea exports.
• Concessionary loan scheme at 8% annual interest to assist in replanting.

Footwear & Textiles: Positive – Better margins

(ODEL, TJL, MGT)

• The CESS on imported branded products (beauty products, luggage, apparel, footwear etc) was removed. Customs duty on footwear, ornamental porcelain, sunglasses and similar goods of tourist interest reduced.
• Exempt all taxes on the importation of Yarn. VAT and Customs duty is removed on machinery and equipment. Tax breaks on new investments and expansion to existing enterprises (fabric).

Food and Beverage: Positive – Margin expansion and growth

(DIST, NEST, LMF, BFL)

• Liquor produced from local plant material or plant products will be subject to a lower excise duty of Rs. 100/per proof litre.
• Tax breaks on new investments and expansion to existing enterprises (milk powder, animal husbandry).

Telecommunications: Negative

(DIAL, SLTL)

• Levy on outgoing international calls increased to Rs. 3 from Rs. 2 per minute. Levy on incoming international calls increased to US$ 0.09 from US$ 0.07.