2021 Budget and challenges and opportunities for SMEs

By Medha de Alwis

The Chartered Management Accountants Sri Lanka, recently held a webinar with many speakers who are committee members of the COVID-19 SME Development Committee.

CMA Sri Lanka Founder President, CMA Sri Lanka COVID-19 SME Development Committee Coordinator Prof. Lakshman R. Watawala in his introduction stated the SMEs are the backbone of the Sri Lankan economy, and that the COVID-19 pandemic has severely affected this sector. Elaborating in detail on the COVID-19 SME Development Committee, Prof. Watawala explained that the committee has been formed to assist the SME sector in these challenging times, to obtain necessary monetary facilities as well as other logistics and infrastructure to combat the challenges faced by the SMEs.

State Minister for Money, Capital Markets and State Enterprise Reforms Ajith Nivard Cabraal in his webinar speech elucidated that the times are sensitive and volatile for the Sri Lankan economy at the moment, and that it is vital how to provide strength to the SMEs. He announced that the last five years was a bad period for the economy of Sri Lanka and that currently steps such as a loan break, stabilising the rupee and other facilities are provided by the current government.

The Minister asserted that the budget proposals are targeted at strong economic development within a short time. He was confident that a growth of 5.5% is expected within the next few years. Stating that the economic process is important, Cabraal said that 10,000 bridges will be put up paving way to numerous employment across the island. 

Affirming that the Port City investors will be provided with facilities with an investment of a new legal structure, he stated that growth orientation is the focus of the 2021 budget. The country would again be a work base, and load facility is a key for such. He has already discussed with organisations to provide with the equity capital, and that a fund is being created to provide SMEs with the required equity capital. Currently the leverage ratio is not favourable for the industries in Sri Lanka, and that he has already spoken to Minister Namal Rajapaksa to provide economic stability for the youth who are involved in the economy.

The Minister intends to provide a proper training to the SME sector so that they will be better equipped to handle their businesses. Access to technology, access to markets, access to knowledge and access to training are the key focus of the SME sector. He also requested the business community to make compliance with the tax policies, especially as the 2021 budget has reduced the taxes.

Answering the question by the President of CMA Sri Lanka whether support could be extended to raise capital and support the SMEs, the Minister pledged his support to do so. 

Chaminda Kumarasiri moderating the webinar stated that the first workshop of the CMA Sri Lanka COVID-19 SME Development Committee was held at Hambantota. Though the Committee intended to conduct workshops island-wide they had to stop the same due to the second wave of COVID-19.

Summarising the speech of the Minster Cabraal, highlighted the commitment of the Government to maintain political and economic stability as well as reduction of taxes and provision of capital in terms of forming an organisation to establish a fund to provide such equity capital.

Damith Gangodawilage, MD/Chief Compliance Officer – Taxpert, Vice President Sri Lanka Institute of Taxation elaborating on Budget Proposals 2021, stated that what qualifies as an SME is an independent business that earns less than Rs. 500,000,000 yearly. The tax reductions that they can obtain are for research and development, initiation expenses for agriculture and fisheries. Reduction of interest is given for loans obtained to acquire capital for start-ups.

Tax-free payments include donations to charities, to government and to government approved organisation and funds. Further tax reductions are provided as a Rs. 3,000,000 as a personal allowance, and an expenditure allowance of Rs. 1,200,000 and 25% tax reduction of the rent earnings.

Agricultural companies, service organisations and IT-related service companies are released from taxes. VAT has been reduced from 15% to 8%. 

A salient improvement

He stated that it is important that the Government has given the assurance that the proposed tax scheme would continue for the next five years. It is a salient improvement as Sri Lanka has had the tendency of frequent change of tax rates even during one regime. Introduction of a tax number as well as a tax appeal court too are noteworthy. 

New tax introduction is made for liquor, cigarettes, communication services, gambling, motor vehicles and selected agricultural products. Import tax too is reduced which will boost international trade. CESS tax is imposed on imports and exports.

Investors are allowed to get tax concessions without disclosing what investment he has made. 

Retirement age has been extended for 60 years which Gangodawilage saw as a positive turn on the aging population. 

Corporate Doctors Ltd. Founder/MD Dr. Chamara Bandara on the impact of Budget Proposals on the SME sector stated in his presentation that it is important the perspectives entrepreneurs adopt in this regard. Entrepreneurs are challenged at present times, and that would not be an issue, as per Bandara, as entrepreneurs see opportunities and take the initiative to these opportunities into profitable business situations. The main advantage he sees in the budget proposal is the consistent tax policy for the next five years. 

Buildup of a strong infrastructure is vital for an economy. Bandara sees to establish five fully-fledged plug and play Techno parks in Galle, Kurunegala, Anuradhapura, Kandy and Batticaloa districts as a strong encouragement for start-up entrepreneurs. Another is to propose establishing a modern investment zone for local and foreign private investors to manufacture drugs for healthcare under the Strategic Development Act. There is a proposal to provide loans of Rs. 500,000 at an interest rate of 4% as start-up capital to start own businesses on the successful completion of vocational education for approved businesses. 

The urban development projects that came up in the city was a fine way to build a healthy economic atmosphere. Rs. 20,000 million is allocated to construct 50,000 kilometres of rural roads as well as urban walking tracks associated with common amenities in municipal and urban council areas islandwide in an eco-friendly manner. This is beneficial to SMEs in providing raw materials and labour. Furthermore this would be a golden opportunity for the SMEs to connect with large scale companies. To do this successfully, it is important that the SMEs gain knowledge so that they can make use of these opportunities in a viable manner.

Rs. 70,000 million is allocated to expedite the construction of 10,000 rural bridges. Rs. 5,000 million is assigned to improve rural hospitals, dispensaries and maternity clinics, and Rs. 3,000 million to develop rural school playgrounds. 

Concessions will be granted to the tourism sector to recover loans granted under the re-financing facilities of the Central Bank of Sri Lanka until September 2021. Banks would be provided with a Treasury Guarantee covering 50% of the loans obtained. This will show some light to the tourism sector as to how they could manage till the COVID-19 situation settles down. 

Dairy industry is another focus. Currently Rs. 55 million is spent on importing milk powder. The budget has proposed to provide strategic investment tax concessions for a period of five years for capital investment of over $ 25 million with the view of facilitating these companies to process milk powder. Initiatives are to be taken to develop SMEs for breeding. A loan scheme to provide special loan facility up to Rs. 500,000 at an interest rate of 7.5% per annum for the purchase of dairy cattle, settling up of eco-friendly cattle sheds and purchase of equipment for SME dairy industry.

Rs. 2,000 million is proposed to be allocated for the development of Fisheries Farm Zones in many districts across the island. 

Relief on custom duties and financing facilities to obtain land and modern equipment for entrepreneurs investing in value additions to local crops in the plantation sector.

The Government intends to ensure that by 2030 that 70% of the total energy requirement of the country could be sourced through renewable sources, by private rural entrepreneurs by installing solar power plants connected to 10,000 transformers. 

Providing solar panels generating 5 KW to 100,000 rural houses through a loan scheme by the Asian Development Bank.

Automobile businesses are to take a turn with the budget proposals. Concentration is given on vehicle repair, assembly and modification.

Income tax exemptions are given to the sectors of agriculture, information technology, income earned from foreign sources and income earned from non-resident foreign currency (NRFC) and resident foreign currency (RFC) accounts. 

Challenges and opportunities for the SME sector

DSI Samson Group MD Emeritus Dr. Kulatunga Rajapakse highlighting challenges and opportunities for the SME sector, said the budget proposals seem beneficial to the SMEs. Looking at another perspective, Rajapaksa explained that as much production of goods is challenging enough for the SMEs, sale of the same would be even more difficult. Suggestion is made to construct a few export houses, as the manufacturer will not be able to directly get involved with the foreign buyer. This is a process in which help of the government should be sought after like it happens in countries such as Japan, Korea and Taiwan. Sub contract system also may come in handy in the said department. 

Talking about the CESS tax, Rajapakse shared his opinion that this paves way to better compete with foreign products. There is a 2.5% insurance tax. It is arguable that this tax is imposed on all kinds of businesses irrespective of the fact whether they are profit making or loss incurring. Many concessions are allowed for agricultural products. Nevertheless, as much as concessions are allowed, it is important that capital is available for businesses. As many businesses are already closing up, due to loss of revenue, it is dubious whether these new businesses could be started at all. Furthermore, in a quest of guarantee, the current COVID-19 financial situation is such that the entrepreneurs may not be in a position to provide such a guarantee.

The current emphasis is on agriculture, as the tourism industry has collapsed, and the workers who were employed abroad are returning back due to loss of jobs. The major scale development projects such as construction of roads and bridges may look large scale, yet the end suppliers would be SMEs. 

In regard to the automobile industry, the second hand market for vehicles has skyrocketed. This in turn has provided a boom of employment opportunities to motor vehicle repairmen, as well as suppliers of materials for the repairing of the automobile trade.

Speaking of the boom in turmeric producers, Rajapaksa stated that it is to be born in mind, that the turmeric producers would not be disappointed by the time the harvest is reaped. 

Entrepreneurs have to make sure that they do not fall into a debt-trap. The SMEs particularly in lack of financial knowledge might be tempted to obtain loans as many loans are provided with at the moment at a low interest rate. Yet it is needed to be born in mind, as to whether these enterprises would take off in a way that the loans can be repaid. Hence it may be advisable to not go into further debt, but to think of innovative means to build up the SMEs.

The panel discussion followed suit that shared ideas on the same thoughts the speakers expressed, which was moderated by HCP Consulting Chairman and Management Consultant Chaaminda Kumarasiri, while the panellists were Dilshan Fernando, Manager SME Development Credit, Commercial Bank of Ceylon, Athula Edirisinghe, Managing Partner Strategic Management Alliance-Lanka, Suresh de Mel, Board Member Hambantota Chamber of Commerce, Kanishka Weerasinghe Director General Employers’ Federation of Ceylon, Ajith Perera, Secretary General Federation of Chambers of Commerce and Industry Sri Lanka, Shiran Karunaratne, MD, Gospel House, Chillaw, Puttalam Regional Chamber, Chanaka Kariyawasam, Director T & D Group, Galle Regional Chamber and Amal Piyatilleke, Past President Anuradhapura District Chamber, President, Sri Lanka Automobile Service Provider’s Association (SLASPA).