First step in a long journey

Wednesday, 24 November 2010 00:01 -     - {{hitsCtrl.values.hits}}

DailyFT-Colombo Uni. MBA Alumni Association joint seminar discusses the strong challenges posed by Budget 2011 as well as opportunities for private sector and stresses on the need to walk the talk by both sides

By Uditha Jayasinghe and Cassandra Mascarenhas

Tagged as a ‘development Budget,’ the analysis of this crucial policy framework was discussed at length by a top panel of experts yesterday at a seminar titled ‘Dismantle the Budget and Analyse the Direction the Economy is Heading’. It was jointly organised by the MBA Alumni Association of the University of Colombo and the Daily FT.

Opening the seminar with a strong call for the private sector to live up to the high expectation outlined in the Budget, Treasury Secretary Dr. P.B. Jayasundera noted that 70% of the effort would have to come from the private sector.

Great expectations

At the onset of his keynote address, Dr. Jayasundera congratulated the Daily FT on its anniversary and insisted that if the Budget had met expectations, then it was up to the people to meet the said expectations.

“What we want more than seminars is implementation. The enabling environment has been created. People have to think differently and make the best of the opportunities given. Governments are governments. Everywhere they are the same. Even though people talk about reforms it is because the processors need to be overhauled.”

He insisted that unlike the Government, the private sector has the capacity to be flexible and take full advantage of the chances that have been given with the end of the war and now have every resource to reach international standards and expedite economic growth.

Calling the Budget a complex process, he recalled that the President had spent a lot of time to see what the country needed. “The President has travelled everywhere in the country and listened to the people – ranging from the capital to microfinance, taxation commission report and interaction with clusters and issues have been addressed,” he stressed.

“Some of our conclusions may be grossly wrong. Some may be spot on. But it is up to you to fall in line. That is the point of the Government. Over 30% of the Budget success depends on the Government; the remainder is up to the private sector. Structural characteristics, stable political environment and peace have been provided among other opportunities by the Government. The rest is up to you.”

Since Dr. Jayasundera addresses a string of post-Budget seminars, he quipped that the important part was not about conferences but returning to work so that Sri Lanka could achieve its missed growth as well as the ambitious targets that have been set out for it.

“On the deficit Rs. 434 billion, our figure is lower than the last two years. Even if you allow simple growth and simple inflation, we can maintain this amount. Rs.53 billion basic deficit revenue with grants and recurrent expenditure is included here. My fundamental question is, is this composition bad? If these investments include fundamental capital investments, then that needs to be built in as well, if you recognise capital trends in the Budget; for example agriculture and university salaries – I do not consider these as recurrent. Taxes on banks have been reduced so that private sector investment is encouraged. So the focus is on developing the macroeconomic environment.”

Increase investment

The vulnerability of this amount is less than in previous years, he noted, insisting that as a person who has managed these things before, he feels “comfortable” because the war is over. Earlier there was a danger that the Budget amounts would be overspent due to the conflict. Similarly the private sector can also make transaction cost savings due to the end of the war. Therefore the element of risk is less.

Comfort from the growing infrastructure development in port, power and irrigation is spurring growth. But even as the debates continue, the benefits are reaching the people at the same time. Infrastructure is not for free, he emphasised, adding that the provisions made were better than those in countries in similar economic situations.

“The risk is in meeting expectations. Tax reforms mean that the disposable income by way of lower tax gives the chance for investment. The concessions that have been given by the Government have to be internalised by business. Borrow at a lower cost and invest at a lower cost; these points have to hang together to prevent risk.”

On the other hand, commodity prices are all uncertain. Recovery from the global recession is happening but there are uncertainties. India and China are giving Sri Lanka comfort to grow, however Dr. Jayasundera opined that he liked this risk because it has given the Government the chance to make different policies.

Changing from coal to fuel was one example that was quoted in this instance. “These trends are compelling us to expedite mini hydros and find diverse ways for environmental friendly power generation.” He also urged the private sector to conserve power.

Key exports such as tea and rubber also need to have value additions and branding so that the value chains are expanded and find new markets. They must have the confidence to reach international standards without concessions and bilateral or multilateral ties. This aggression is important to spur economic growth.

He also noted that the wage bill would have been at least Rs. 50 billion and instead the Government prioritised on what was needed for salaries. “Revenue growth that we have built into the Budget is lower than the GDP that we have built into our macroeconomic outlook. We are conscious that things won’t happen in just one year. People will take time to start spending- people might even start saving initially. So the economy needs to move a bit in order to stabilise. But some of these revenues are not coming from taxes. So you do what you think is right and we will manage the macroeconomic situation. Rs. 20 billion can be transferred if necessary – these are not small numbers but we can arrange them as we wish.”

Despite Government servants getting low salaries, their dependents are taken care of. However, the private sector is more lucrative, perhaps to a point beyond justification, he said.  Dr. Jayasundera cautioned that the wage structure of the private sector should be revamped to assist the ageing population.

“These are challenges that will come in 2020 and that is the biggest risk that we face now. There is no pension scheme for the private sector; once you get the money is it almost too late to have something for the future. Remittances are growing. They are earning half of what all exporters earn. But when these people return to the country, they must have a way to live. The workforce that is not directly linked to the private and public sector must have a process to save. No point reactivating a Samurdhi for the old people.”

Taking these statistics into consideration the Budget introduced a policy along with a host of benefits, such as reduction of taxes, social levies and EPF concessions. “Save for your own future,” he urged, adding that contributory pension fund was a result of these sentiments. Withdrawals from the EPF are also exempt from taxes.

The President dedicated several pages to the difficulty of doing business in the Budget because of the inherent complications in passing projects. This has presented far reaching reforms including several key institutions, including the BOI and Customs Department. Budget has given provisions for better administration.

Skill development

Labour is another point that was addressed by the Budget. Dr. Jayasundera stressed that cheap labour was endangered in Sri Lanka and the emphasis was on skill development. Universities and other institutions have to be equipped to provide labour skilled in new industries for IT, BPO, research and value additions in a range of industries.

Companies will grow, structures will change and a knowledge economy will become a reality. Tourism and EDB as well as the BOI must market Sri Lanka differently so that sustainable investors are encouraged to come to Sri Lanka.

“Pioneers in the private sector must lead, not follow. Now is the chance for the private sector to take this chance. If you don’t act within the next three month, then some foreigner will take the chance. I know because I interact with a range of sectors.”

Moving onto the topic of tax Dr. Jayasundera insisted that the banks have to think of the future and develop a long term lending market. “Our people need long term loans. The private sector has the right to ask for loans that will give them the chance to make a long term investment. Through these Budget proposals we have freed up at least Rs. 15 billion for long term lending and this will be kept for three years because we know that the banks also need time to build up revenue.”

Admitting to teething problems, he remarked that there are other processes to take care of. The focus is shifting to a low tax rather than concessions. The cess is to give research and development a chance to counter uncertainty in the industries.

Drive investment

Underutilisation of free trade zones was stressed by the Treasury Secretary, who called on the BOI to “drive” investors to take advantage of the infrastructure provided. The other point is to attract large investment – with a fast tracked process so that it is presented to Parliament with a 30-day grace period to raise objections. This will give the chance for projects to be implemented faster.

“Investment requires risk. Strategic investment law is all about this. Tax law is also geared to give accommodation to large investments. Tax holidays have been reduced because we have assisted investors to fast track the process. Small investments are not considered. These adjustments have been made.”

Moving away from the preoccupation of the conflict, the country has moved to focus exclusively on development. “Now the time has come for you to give us the guarantee,” he said, to laughter from the audience, insisting that the Government has done its best to give the positive environment for business.

“Follow the apparel industry example. From a low value product they have made value additions without destroying the environment. Machinery has been taken off taxation to help factories. Tourism taxes have been slashed to enable high end products into the market. If you want more then you have to live up to expectation.”

Creative Budget

Straying slightly from the topic, Gajma and Company Partner N.R. Gajendran urged the private sector to covert Sri Lanka into a financial hub, as it would use little large scale investment and would be safe for the environment.

Creativity is seen in the Budget, the President has covered development tax structure, human resources social security, agriculture, society, women and children, infrastructure, revenue administration and SMEs amongst many other sectors were all covered in the creative Budget.

“Different perspective – 70% depends on the private sector. Look at your business models. We had a consumption based business model before the financial instability as we were able to cater to the West who consumed the products. After the crisis a fear psychosis has hit the West and they have now stopped consuming. It is now the emerging economies like China, India and even Russia which are wage-led economies and they will not consume as much as the West. They do not rely on imports.”

It is difficult dealing with these economies and Sri Lanka will have to face huge challenges from them. The US, Germany and China and other such big economies are blaming each other for their policies. Looking at the domestic market, it must either export or consume. There is huge potential in the tourism industry but no investments are coming in. The step forward is a major issue when looking to invest.

“Concessions have been made in this Budget and it is up to the various sectors to look through it and find the concessions that will prove to be advantageous to the specific sector in order to be more competitive. Research and development is also a way forward as shown by the Budget and this needs to be utilised by different sectors.”

Speaking about CEPA, he pointed out that the main opposition against it was through fear that the Indians would come into Sri Lanka and wipe us out, so to speak.

Tax impact

Dissecting the tax revisions outlined in the Budget Ernst and Young Head of Tax Lakmali Nanayakkara dwelt on the impact the various changes would have.

Overall, the tax proposals are large in number and have affected different sectors, she noted. “Financial services and banking sector bringing down their tax rates from 70% to 40%; corporate tax rate going down to 28% from 35%. New proposal giving these reductions in tax rates each institution has to contribute to a new fund created by the CBSL that will be utilised for long term lending.

“Telecommunications – the biggest change with more than four or five indirect taxes being withdrawn and merged into one tax at a 20% telecommunications levy; collective impact is high in terms of decreasing the complexity and brining on a much needed simplicity into the regime.”

The turnover tax that was imposed on wholesale has been withdrawn and instead the nation building tax has now been extended to the retail level. It is a whole new culture for the wholesalers and retailers of the country and signifies a cost structure change revenue sharing agreement is a foundation for a better relationship between the provincial and central Government.

Speaking of changes made in the capital markets, she remarked that they had been largely unaffected and the tax concessions continue as it did previously. “Income tax has changed. The rate reduction has been significant with the 35% tax reduced to 28% except for the tobacco and liquor industries. The concessionary rate has further reduced from 15% to 12% and the rate remains the same for venture capital, local software development and agriculture.”

“Certain anomalies in the income tax law have been adjusted as well it is all a whole fairly low tax regime.

Personal tax has now reached an all time low with the maximum rate now adjusted at 24%. VAT being the key indirect tax in Sri Lanka, has been reduced from 20% to 12%. The 85% input tax limit has increased to 100%. There is now a VAT exemption on telecom, software and other items and changes have been made to the VAT suspension scheme. A key change for the financial services sector is that the VATFS rate has reduced to 12%.”

“NBT rate has been reduced from 3% to 2% and now extends to the wholesale and retail sectors in lieu of the turnover tax that has been taken off which may lead to pricing issues and have a cascading effect in the future. Import and export changes are many and one important change is that a cess has been levied on certain exports, that is, in the absence of value addition, and motor vehicle tax has been revised as well. The tax administration has been given a prominent position in the Budget speech with the Board of Review being discontinued amongst many other changes.”

Rational role

Giving the rationale behind these changes was Finance Ministry Tax Advisor Dhammika Gunatilleke: “Income tax amendment is to make it the final tax. This will ease the process and assist people to make their payments easy and there is no need to open files. As far as Government employment is considered there is an idea that they don’t pay taxes but it is done; however, now they are taxed under the current regime.”

Interest income – the Government intention is because there was a Rs. 200 000 income threshold and that has been increased to Rs. 500,000 but the amount must be in Government banks. The reason was given that this would increase safety of investment. Administrative provision will be made to cancel files.

New machinery tax cuts are given special allowance so that within three years capital costs can be recovered. New buildings constructed on or before 1 April within 10 years the entire cost can be absorbed. Total research and development expenditure as well as capital expenditure are included in the provisions. The 15% concessional rate has been reduced to 12% effective from 1 April.

“New investment fund account rationale is that with the tax deductions on banks to accommodate that amount the tax savings have to be invested in a special account established by the Central Bank. Off-shore and on-shore companies are the same but there are changes in certain provisions. This is seen as an investment for lending at a lower rate. Income from foreign sources has been expanded on professional sources with a gazette notice and this will be extended.”

Under VAT, vehicle tax reduction will be effective immediately. SME sector write offs have been introduced to bring them into the tax system and certain areas have been taken to the NBT sector as well.

Grab opportunities

Brandix Lanka CEO Ashroff Omar giving his viewpoints noted that Rs. 50 billion investment for infrastructure and human resource has to deliver. He admitted that any Government which has focused on such large amounts has much to achieve.

However, moving onto the industry, he noted that there was much labour still to be mopped up and with the hub concept, there is potential. Increasing income and increasing productivity was focused on, but he opined that migrant workers would be better employed here with better salaries.

“E-economy focus is good,” he noted, adding that double deduction on research and development was positive and universities must push for more grants. “We as a business community must deliver. In 1977 when the predecessor to the BOI started, we had a group of very powerful apparel industrialists in the country.

Then the laws came in and things were opened up and that power crowd was not happy with the new regulations. After 1987 those companies were not around that main table. If you look at Singapore, its exports amount to US$ 254 billion. If we aren’t bold enough to grab this, then someone else will be pushing on our behalf.”

India’s has a large trade deficit so there is a large market in South Asia if we want to use it as a labour market and those assets can only be won if the agreements can be used to Sri Lanka’s advantage. “The challenge is scary but enticing and a year from now we’ll know whether we walked the talk or let someone else do our job.”

First step

Giving his ideas, Colombo University Senior Lecturer in Economics Prof. Srimal Abeyratne recalled the suggestions that were made when the Budget proposals were being formulated and insisted that this was the time for bold changes. Striving to be realistic, the proposals took into account the targets set out by the Government but also considered the prevailing atmosphere.

It is clear that the connectivity to the rest of the world cannot be forgotten and it must also be a competitive one. To double per capita income, Sri Lanka must be competent in at least Asia. This year the Budget is pro-development and this has been impressed, describing the document as a “small step in a long journey,” he said, noting that the changes could have been greater.

“We have seen the report about the reduction in tax rates. But to my understanding the problems are not limited to high rates and I expected the tax net to be expanded. This has been done in this Budget, a measure that has been delayed for many years. Yet the challenge is on the collection of taxes and the administration as well as the refund processors.

The concern has not been paying the taxes but the other interlinked issues that are hindering investment promotion.”

These issues need to be addressed within the next few years, he insisted, adding that the investment level has to be around 35% but to raise it to this level the private sector has to play the major role. The Government is already doing public investment; nonetheless the question is how strong the private sector is and if it is capable of making this investment.

The business community has to increase investment by at least 15% but in the short term this cannot be expected.

“So this means that we have to depend on foreign direct investment and in this we have always performed poorly. Traditionally these investments have never been too keen on South Asia. International investors have a massive amount of choice and we have to compete at a high level and policies have to be consistent.” He noted that the first step has been taken but much remains to be done.

Declining to argue on the economic principles on which the Budget was based, he opined that this was a bigger argument that should not be ventured into during the seminar. Expenditure side has shown changes with the provincial council tax reforms which instigated a need to decide the fate of these institutions.

“We need to get them to work but with accountability and they must compete among themselves to promote their regions.

This has nothing to do with taxes but there are fundamental changes that need to be made to address these issues.” Trade is more important than remittances, Dr. Abeyratne observed, as his concluding remarks.

Relevant for all

MBA Alumni Association Jude Fernando noted that the Budget was of interest to all stakeholders and that deeper analysis through seminars was necessary to understand the ramifications for the public.

All stakeholders are keen to find out what opportunities have been presented by the Budget, he noted in his welcome address. The Government has announced that this will be a landmark Budget with more focus on stability and growth.

With this in focus, Sri Lanka has been projected to achieve 5% growth but others think that nothing less than 7% is acceptable with the post-war opportunities, but most of this is based on the implementation of the policies outlined in the Budget.

“We are happy to have this discussion this year and are happy to have it with the Daily FT. With this association we have taken our relationship with Wijeya Newspapers to a higher level,” he noted. He welcomed Keynote Speaker Treasury Secretary Dr. P.B. Jayasundera and the other resource personnel.

Talking point

The Q and A session proved to be interesting, with a range of topics raised for discussion. The session was moderated by Daily FT Editor Nisthar Cassim. Given below is a synopsis of the opinions presented:

Access to credit for farmers is not an issue in Sri Lanka, stressed Dr. Jayasundera, responding to an extensive comment from the audience. Pointing out that the microfinance sector might need some assistance but it was not a great need of changing regulations pertaining to collateral, he insisted that the State banks had taken care of this in the rural areas.

Answering a question from the moderator on how the market dipped on the day of the Budget, the Treasury Secretary noted that if interpreting the market response to the Budget was a guideline for success, then the country would not have reached US$ 2,000 per capita income. He insisted that the other sectors were doing well and therefore the stock market sometimes worked in “reverse gear”.

Touching on an appreciating rupee, a question was raised as to what policy would be followed in this regard. “I don’t believe that the exchange rate is important to increasing trade. It is more to do with value additions and that is what we have incorporated in the Budget. This is what we have focused on and deviated from the traditional thinking patterns,” Dr. Jayasundera maintained.

Lack of liquidity in the stock market was the basis of another question from investor K. Vignarajah and without the public float issue being addressed, rapid and stable growth would not be possible, he stated. “If we had the mechanism of capital expenditure from companies though rights issues following a good dividend to investors? I request Dr. Jayasundera to take this into consideration,” he said.

Careem Yusuf, an importer of essential commodities, raised the point that the change in taxes would have a cascading effect and increase prices of basic goods so it would be better charged at one point. “This tax should not be charged at the point of sale and keep it to the point of purchase,” he said, giving food for thought.

Regarding research and development taxes, a question was raised by a service industry professional on what defines this requirement. To this, the Treasury Secretary advised companies to present a definition of research and development to be implemented into law.

Repayment mechanisms have to be upgraded, Dr. Jayasundera admitted, but insisted that the refund procedure had been streamlined but broader tax issues have to follow accepted procedures. Dispute settlement should be taken out and companies are compelled to come to more acceptable measures. “Roughly the refunds are an industry in itself. It should be a manageable procedure and has to deal with the challenges.”