Budget must focus on local industries to enhance revenue and growth

The Government needs to urgently enhance revenue, and as alluded to before in previous reports, policymakers must turn attention to domestic sources of income that do not upset apple carts of voters. The beedi and toddy trades provide ample opportunity for the cause, promising over Rs. 30 billion in additional revenue

• Beedi and toddy trades can yield over Rs. 30 b in earnings

By Lal Gunatunga

The long overdue and much-anticipated Budget 2019 presents the Government with a myriad of challenges given the dire need for economic course correction, in the backdrop of its poor performance at local government elections early last year, whereby it may want to resort to populist measures to turn the tide. 

Consequent to the damning political tragedy of late last year and continuous maladministration preceding that event, Sri Lanka’s budget deficit for 2018 is anticipated to be around 5.3% of GDP against a target of 4.8%. Accordingly, the Finance Ministry’s previous laid target of 4.1% for 2019 becomes a tall order, lest it can entice significant foreign direct investment into the country plus generate savings. This is in addition to $ 6 billion in debt repayments due this annum, which should drive domestic interest rates up. 

However, with the nation’s productivity far below its potential, the Central Bank would be hard-pressed to maintain a tight regime. A growing import bill and trade deficit burgeoned by the falling rupee will add to the exchequer’s woes, in a year that serves as a critical juncture in Sri Lanka’s political future. 

Export earnings will play a pivotal role in righting this ship, with onus on the garment industry and other industrial exports. However, better effort is needed to ensure sustainability as these are fraught with challenges ensuing from high energy, manpower and other infrastructure and resource costs; aspects that need further consideration under the National Export Strategy launched last year. 

It is difficult to anticipate the Government will attract the $ 3 billion in investment in 2019, at a time when both international and local business confidence is at a low driven by political uncertainty. Accordingly, in the short to medium-term it becomes prudent to cut foreign borrowings and turn greater focus on domestic industries and inspire local investment. However, investments take time and effort to mature, and the Sri Lankan leadership and voters know very little of patience. 

The Government needs to urgently enhance revenue, and as alluded to before in previous reports, policymakers must turn attention to domestic sources of income that do not upset apple carts of voters. 

The beedi and toddy trades provide ample opportunity for the cause, promising over Rs. 30 billion in additional revenue. Industry reports suggest the Sri Lankan beedi trade produces and consumes over three billion sticks annually; sold at retailer points for as low as Rs. 5.00. Considering these are tobacco products and harmful to health, it is implausible that they must be priced almost Rs. 50 less than a standard cigarette. 

Such ignorance and disparity will lay waste to the Government’s objective to reduce smoking-related harm, and low price will provide incentive to youngsters to get into smoking. An introduction of a tax of Rs. 5 on a beedi stick will result in over Rs. 15 billion in additional income, if the Government can devise a method of monitoring on the ground as it does with the legal tobacco and alcohol trade. There is ample manpower in Government offices for this task. The cess levied on tendu leaves used for the manufacturing of a beedi is laughable, with little over 25% of total stocks landing on our shores subject to tax as revealed by the Department of Customs itself. Beedi must be brought under an effective tax net and subject to regulation given the extent of harm caused by the trade to human health. 

The toddy industry too has grown exponentially as manufacturers devise innovative but harmful means to generate volume, as toddy-tapping has become a dying trade. We seldom see the age-old art of tappers toeing across trees on ropes, but toddy is available in abundance lending evidence to these claims. A cup of toddy sells for as low as Rs. 50 a cup in some areas, whilst a bottle would retail for Rs. 200. In comparison, a standard bottle of arrack will cost over Rs. 1,000. On a per millilitre basis, toddy is taxed Rs. 0.44, whilst for regular local spirits it averages Rs. 3.30.

As per an industry study done recently, 82% of toddy manufactured in the country is undeclared and evade any form of taxation amounting to over 40 million litres, that is Rs. 18 billion in lost revenue to Government. 

Appropriate policy and action on both these fronts will yield much-needed revenue to the Government, and generate savings through enhanced public health and reduced national health expenditure. Rs. 33 billion is significant revenue earned from just two industries, whilst the informal tourism, agriculture and fisheries sectors offer further promise. 

However, aside the alcohol and tobacco sectors considering toddy and beedi, a great deal of thought and careful consideration must be given on appropriate and non-invasive mechanisms to tax these trades. The people must be made to understand that they too must be part of a consolidated and candid national development process. However, this is where we constantly seem to fail – honesty and genuine intent. 

With toddy and beedi serving as the bread and butter of very powerful leading personalities within both sides of the political fold, we are more often left pandering to political lip service. Toddy and beedi are harmful to human health – tax them like everyone else! The country needs it, our future generations need it! 

In Sri Lanka, every industry will drum up a sob-story when it comes to taxation. No one wants to play their part. A fine example are local vehicle importers who have mushroomed under one banner and use political and funding clout to ease their way out. Sri Lanka is buckling under a balance of payments crisis with adverse implications on our future and that of our future generations. 

Fortunately, greater resolve through loan-to-value ratios and import requirements have resulted in a reduction in vehicle imports. These restrictions must remain and be further streamlined under a long-term sustainable plan. Governments must learn to demonstrate greater resolve and strength if it is to steer us out of this mess, but our disparaging political culture keeps us constantly in storm. 

(The writer is a retired superintendent of Government and private plantation organisations and counts over 40 years of experience in the Central and Southern Provinces, engaged in plantation administration and operations.)