2011 budget heavy on tax cuts, lower deficit

*  Banking, tourism and income taxes slashed

*  Revenue-raising plans seen as unclear

*  Public employees to get wage hike of up to 5 pct

 (Reuters) - Sri Lanka’s president proposed a 2011 budget on Monday promising a swathe of tax cuts and the lowest deficit in 19 years, aiming to quicken the pace of post-war economic revival.

However, there were few specifics about how revenue would be raised in the budget, the first full-year spending plan since the country won a quarter-century war over the Tamil Tigers separatists in May 2009.

No full 2010 budget was presented due to delays because of presidential and parliamentary elections.

The 6.8 percent deficit forecast by President Mahinda Rajapaksa is the lowest relative to gross domestic product (GDP) since 1992, even though the Indian Ocean nation plans to boost spending by 11.4 percent to 1.42 trillion rupees ($12.7 billion) to fund post-war development.

The forecast is in line with what the government told the International Monetary Fund it would achieve in terms of narrowing a perennially yawning budget gap, as part of a $2.6 billion loan programme.

The defence budget, which the government had earlier forecast to increase despite the end of the war, was not specified in Monday’s announcement.

Revenue was forecast to grow 18.6 percent to 963.5 billion rupees, but Rajapaksa’s presentation gave few details. The government has pledged to boost efficiency in the state sector to raise revenue.

“So far it looks positive because of the taxation coming down on the banking and financial sectors, which will help to reduce lending rates,” said Danushka Samarasinghe, an economist with Frands Consultants.

Rajapaksa proposed tax cuts on financial services and bank profits, and also for profits made by the resurgent tourism industry, which the government aims to have bringing in $2 billion a year in revenue by 2016.

“But still we have to see how they are going to collect the revenue,” Samarasinghe said.

The budget is aimed at simplifying the tax administration, said P.B. Jayasundera, the secretary to the ministry of finance and the island nation’s treasury — the architect of this budget, speaking to a public post-budget seminar.

“This budget has the courage to give up many taxes. We didn’t think of revenue figure per se. We have dropped few taxes to generate more revenue with a more simple and sophisticated tax administration. Nobody can grumble about high tax now,” he said.

Two sectors likely to take a hit in 2011 are the telecoms and tea industries. Rajapaksa proposed that the current telecoms tax scheme be merged into a single 20 percent levy.

Rajapaksa, who took his oath for a second six-year term on Friday and has a two-thirds parliamentary majority, has long promised to smooth out a taxation system the World Banks says creates an effective corporate tax rate of more than 60 percent.

The 2011 budget also aims to make good on a pledge Rajapaksa made five years ago when running for president: a wage hike for Sri Lanka’s 1.3 million state sector employees, which he delayed as the country finished the war.  That could help soothe increasing agitation by state labour unions, who in the past wielded enough political force to topple governments.  However, Rajapaksa’s popularity and the current opposition disarray mean they are less influential.

Bourse slips ahead of full Budget

All eyes on CSE today as analysts say tax cuts will boost investor sentiment

Asia’s best performing Colombo stock market had a surprise dip yesterday after gaining in early morning trading prompting analysts to say early reaction of investors over Budget 2011 was somewhat mixed.

Both indices dipped by over 0.5% though turnover was a respectable Rs. 1.46 billion.

Whilst it may be too early to confirm how the market ended yesterday was the final verdict of investors, all eyes would be on the Colombo bourse today after a proper and fuller assessment of the implications of Budget 2011.

Most stock market analysts having listened to the full Budget said last night that it was “most market friendly” in addition to being pro private sector growth. However UNP MP and economist Dr. Harsha de Silva noted Budget 2011 was more favouring the rich and despite cuts the decline of the market yesterday was a sad indictment on the Government.

NDB Stockbrokers said that tax breaks may improvement investor sentiment. “Indices declined again, after gaining during early trading amid modest turnover. Foreign selling was witnessed in JKH, RCL and GLASS etc. Broad tax reliefs proposed in the budget may revive investor attention particularly on the banking sector,” it said in its market report yesterday.

Diversified and Bank Finance & Insurance sectors were the highest contributors to the market turnover, while the sector indices decreased by 0.44% and 0.62% respectively.

Premier conglomerate John Keells Holdings made the highest contribution to the market turnover with three crossings of 1,372,300 shares at Rs. 300, while the share price was stable at Rs 300. Foreign holding of the company declined by 1,322,726 shares.

Royal Ceramics also contributed significantly to the market turnover with two crossings of 375,000 shares at Rs. 300, although the price decreased by Rs. 1.00 (0.34%) and closed at Rs. 297. Foreign holding of the company decreased by 71,300 shares.

Another two crossings were recorded (1,500,000 shares at Rs. 21 and 1,550,000 shares at Rs. 21.50) of John Keells Hotels. Reuters report attributed index slip to investors being hobbled by a credit crunch and awaiting the outcome of the 2011 budget reading.

Foreign investors have sold a net 28.2 billion rupees in shares this year, and on Monday sold a net 402.9 million rupees.

The bourse is trading at the highest forward price-to-earnings ratio in Asia and global emerging markets at 20.3 times, compared with 13.3 and 12.5 respectively, Thomson Reuters StarMine data showed. The CSE’s 14-day relative strength index is at 45.5, toward the lower neutral limit of 30.

Rupee ends firmer

The rupee ended firmer at 111.35/40 per dollar from Friday’s close of 111.68/70 as exporters sold dollars on an expectation of rupee appreciation once the central bank unveils forex control relaxations on Tuesday, currency dealers said.