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Monday Nov 25, 2024
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Mathai said that this is a very good Budget and I share his views. The Finance Ministry has produced something that everyone can be pleased and happy about. Money has to be found, either locally or internationally. Locally, I think, we have enough and more resources, provided we all put them all together.
If we strengthen the Excise and Customs, about Rs. 30-40 million can still be extracted by regulation. These are decisions that have to be taken by the policymakers and they must keep up to it. Coomaraswamy said that we have FTAs with India and China and while there are many items covered in these lists, there are regulatory problems at the port of discharge and many other restrictions. Before even coming to an FTA with China, they have introduced many bottlenecks. This is why all these agreements have not worked to the desired results.
India has not been able to come here and manufacture. Those importers who do come here and export are having problems with clearance and therefore, these arrangements haven’t worked so far. There will be many more manufacturers who will come here if the regulation at that end is relaxed or at least follow international standards, not their own standards, which are unreachable.
Increasing revenue is possible but the opportunities are not harnessed. If the exports are assured, more incentives can be given. Our FTAs, therefore, are not reaping the best results.
John Keells Holdings Deputy Chairman Ajit Gunewardene
Revenue generation is crucial going forward. It is important that this whole broad-based issue about the tax revenue base is addressed properly now. The general methodology that is used is the carrot and the stick – the carrot essentially is the lowering of tax rates, offering of incentives, etc., so that people pay tax, and the stick obviously comes from the IRD, with prosecution and so on.
I think there is a third aspect that needs to be leveraged and that is pride – the ability to convince people that they must pay and must want to pay tax for the use of the economic assets of the country that the Government is investing in. When using an economic asset, you must pay for it and when you do, the asset keeps improving and this I think is very important. That element of pride has to be led from the top, from the political leadership.
You have proliferation of what is known as the informal sector in tourism. There is possibly an equivalent number of tourist infrastructure in terms of hotel rooms and vehicles in the sector equivalent to the formal sector but what we know is that there is no tax being paid at that level. It is crucial that they be brought into the formal sector.
The thrust towards the consolidation of the banking and finance sector is something that has to be pushed, however it cannot be left to the individual entities to go down the road of looking for partners and merging. This has to be driven from the centre, there has to be a policy framework that drives it, a supporting structure that enables it.
The positive consequences of mergers and acquisitions are greater productivity and efficiencies but it does result in issues such as staff retrenchment. A formula that is visible and upfront about what happens, if you do have to go down the route of retrenchment, is needed, one that will enable and support banks and finance companies merging.
Science and technology is a very good initiative – the initiatives that were taken forward through the budget a few years ago have in fact resulted in lot of corporates that were not involved in R&D creating R&D units and engaging in it at a very high level, and if this ecosystem continues, an environment for scientists to come back is going to be created over the next few years.
However, while the acquisition of IP has been addressed, one has to realise that these R&D units that have to be monitored by the creation of a new company, have no income that they can claim tax deductions against until they commercialise projects they are researching. We need a formula that enables deduction because there is significant investment in scientists and R&D for five years before revenue generation. If that formula can be worked out, I can see exponential growth in this environment.
The clarification of lease of land to foreigners now appears to be quite clear. There is a 15% tax on foreign acquisition or long term lease of land. I hope that this does not mean that 15% is applicable on short term lets or rentals, which was a bit confusing last year, and if this could be defined clearly, that would be a very positive thing.
Carson Cumberbatch Director Mano Selvanathan
Over the last few years after the war, the Government has done so much to develop this country. The ‘Mahinda Chinthana’ very clearly stated that Sri Lanka should follow the hub concept – maritime, aviation, energy, knowledge, commerce and tourism – and a new one has been added in this Budget – a professional services hub.
How do we further internationalise Sri Lanka and take it to the next level? It’s not only about localised growth. In the Budget this year, there have been benefits given specifically to offshore companies basing themselves in Sri Lanka, which is a very good move. But it’s not tax alone that will attract them here.
There has to be ease of doing business plus legal and connected matters, comfort of life – including healthcare, transport and education for expats. We need to get back our Sri Lankans who are living overseas and give them incentives for a short period to relocate themselves in Sri Lanka. Maybe we should consider what Malaysia has done – a second home policy – where expats can come here and make it their second home.
We don’t have a big capital market but it’s quite vibrant in terms of local business. Why don’t we strengthen it to attract stock market listings from neighbouring countries? Many small to medium sized companies in SAARC nations want to be listed but they can’t be listed. Take a mid-sized Indian company – for it to be listed in Chennai is too cumbersome and costly. Why shouldn’t Sri Lanka allow mid-level SAARC companies to list here? Even a mid-level bond market operation. We have to look at these options.
Today, we have many ports and two international airports, and we could attract much more business and encourage much more people to move into Sri Lanka to live here and set up their offshore businesses here, and cater to the SAARC and neighbouring markets.
It’s also important to internationalise certain events. For instance, you see the Galle Literary Festival, the Hikka Fest, the Kandy Perahera – we need much more of those, we need MICE, music shows – and these are all achievable things. It’s not difficult to market Sri Lanka to the world. If Dubai, which was a desert many years back, could do it, I’m sure we can. I hope policymakers really look at this. I’m not talking about the long term; I’m talking about the next two years – where do we go next?
Hayleys Chairman Mohan Pandithage
With the green port concept that was introduced recently, I’m sure people will come in and set up their centres and take part in this. The Budget to me is very positive. One area that has been looked at is exports – continuing at 12% for all exports is a commendable thing.
The other area is the terminal handling charge, it’s a benefit to exporters but ship owners will include this in the freight rate so we need to look into this. Another aspect is the high-performing plantation companies; I think the initiatives taken in the Budget are excellent. In the manufacturing side, the increase in cess for imported items is very commendable.
CT Holdings Managing Director Ranjit Page
Let me commend the Treasury on giving us a crystal clear Budget, a continuation from where we were last year, especially in the area of VAT. We in the industry last year were taken aback when VAT was introduced and it was something we wondered if we could overcome because it was limited to a few of us. However, the Budget this time around has increased the spread to include many others.
We like to see an even playing field and it has been made clear that this is what the Government wants to do, not to burden the consumer further with the VAT but to see how best we through our processes could absorb some of the expenses and look at the long term benefit of the country rather than look at our short term gains. The VAT rate, I believe, should come down in the long term. In terms of the organised rate, I believe that it is now clear what the Government expects us to do.
I would also like to touch in the dairy industry, as we import close to $ 400 million worth of our basic dairy needs. Encouragement has been given to the dairy industry, especially to the small people through low interest bearing loans so that they will be encouraged to produce better quality milk, along with the introduction of the animals that they plan to bring in.
We need to invest in value addition in terms of processes within the industry, else there will be a situation where farmers who produce the milk will be unable to get a continuous income and I think that has been made very clear for us, in terms of the expectations of the State, that Sri Lanka should be self-sufficient in its milk requirements and in its basic food requirements.
On brain drain, I feel that for the country to move forward, there are many aspects we need to look at in terms of development of the youth. I feel the private sector has a role to play as our environment in the private sector needs to be geared to retain, enhance and create value from the youth in the long term so that they become the leaders of our businesses, as well as the country.
Hemas Holdings Chairman Husein Esufally
I too feel that the Budget is a very progressive one and it continues the growth trajectory that we have been expecting, especially with the investments in infrastructure, health and other areas. There are many measures to actually make the fruits of these progressive steps very inclusive, in terms of reaching rural and also marginalised communities.
I would like to add a counter to Mathai who spoke a lot about the evils of import substitution. If we instead look at it from the context of helping make local industries more competitive in order to compete and win in the global marketplace, then I think we can see this in a different light.
Take the example of India and its pharmaceutical industry – it is a huge income earner for the Government – and they are where they are today because the Government supported them in terms of regulation and other areas. Helping specific Sri Lankan industries, not across the board, but where the Government has a strategy, I think is a very laudable initiative.
How can some of these industries be competitive? By being able to innovate and have better R&D and from that standpoint, there have been many excellent initiatives that have been taken by the Government. Firstly, in terms of investment in education, there was mention of a national science centre and the triple tax benefit will help us very much in investing in R&D. At the moment, sometimes the technology or knowledge that we need is not available within our shores so perhaps allowing to engage with foreign research institutes would help.
The biggest thing here is to try and tap into the knowledge and contacts of Sri Lankans who have gone overseas – I believe that is one of the biggest ways in which we can be more competitive and it will help us innovate and develop better products for our country and for the export market.
The focus on exports is an obvious one as serving the Sri Lankan market by itself will not be enough and for the first time ever, efforts have been made to reach out to foreign IP – I hope it refers to the acquisition of foreign brands. It’s not an easy thing, at least in the consumer goods area, to acquire foreign brands but it is a step in the right direction.
There was also a credit line that was extended to help industries revamp themselves but I’m not sure if it only applies to export oriented industries. All of us have legacy plants that need to be revamped and new plants need to be built, and if this credit line can be extended to help us be competitive, that would also be a very good thing.
I would like to comment on the transformation of public institutions by offering web-based facilities. I think this is a very important aspect as if the ease of doing business with the Government can be made easier, it would really help us as businessmen.
KPMG Sri Lanka Managing Partner Reyaz Mihular
Sri Lanka has been declared the Outsourcing Destination of the Year. We don’t have the manpower to do BPO but we have the ability to do KPO because of the high level of literacy and skills that we have. We must try and leverage that but having just the infrastructure and connectivity is not enough, we need people. A lot of clients setting up KPO centres are finding it difficult to fill up the seats and it is an industry with high rates of attrition.
It is very important that we try and keep people within the country. Unlike the Indians and the Pakistanis, all Sri Lankans want to return home. They leave because they want to earn money. We need to ensure that we have a supply of young professionals who can staff KPOs which I think is a very attractive proposition for Sri Lanka.
On paying taxes, I find that in other countries, if you say you don’t pay taxes, you are looked at like a pariah. In Sri Lanka, if you don’t pay taxes, it’s a great thing. I think we need to understand that we have the lowest tax rates in the world and with this concessionary rate, you can’t get a better deal. Up to Rs. 25 million, you pay 25%. It is important that all professionals wake up and do their duty towards the country.
From the revenue administration side, they should not wring professionals who pay taxes dry. People are scared to open tax files because the IRD puts them through the wringer, trying to squeeze every last rupee out of them and there are a lot of people outside the net who don’t pay a single cent and that kind of injustice sometimes discourages people to pay tax. Everybody deserves to be caught in the net because the rates are low.
A lot of overseas clients don’t talk about tax holidays, they only talk about consistency and as long as there is consistency to the process, they are happy. Towards that end, today, the fact that Sri Lanka has only two rates – the normal 28% and 12% – is a healthy trend.
The consolidation of finance companies is great. The Budget said that 20% companies have 90% of business and the balance 10% is shared amongst 38 companies. The problem is that if one of the smaller companies crash, the entire system will have an issue. The move to consolidate and reduce the number of finance companies is a step in the right direction.
We are talking about reducing our budget deficit to 3.8% by 2015. This will lead to interest rates going down and when you investigate finance companies, they put their gratuity in finance companies in order to enjoy the high interest rates, and then get caught to Ponzi schemes. The challenge for the private sector is to come up with instruments to cater to retirees. We can’t wait for the Government to come up with the pension scheme, it’s up to us to come up with one that gives people decent returns on their investment.
Q&A session
The Q&A session at the seminar was brief, with just two questions being posed to the Secretary of the Finance Ministry:
Q: Is the NBT for the financial sector on gross turnover or value addition?
Jayasundera: NBT will be imposed as VAT is on financial services
Q: Does the tax on foreign acquisitions of land and leases on land apply for buildings as well?
Jayasundera: In the case of land, State or private, no outright sale to foreigners is permitted. Subject to a payment of 15% tax upfront, the land can be leased for 99 years. This provision does not apply above the third floor of buildings, leaving aside other taxes, etc.
Pix by Daminda Harsha Perera and Upul Abayasekara
