The National Chamber of Exporters (NCE) conducted a post-Budget Forum on 15 November at the Kingsbury Hotel, attended by a large number of participants from the exporter community.
State Minister of Finance and Mass Media Eran Wickramaratne addressed the participants and thereafter fielded a few questions from them.
He stated that in recent years the country’s economic dynamics had become different to that of the previous inward-looking, state-centric economic policies of the country. The country has lost a sense of enterprise and the traditions as a trading nation have been buried under an ever expanding role of the State coupled with a blanket of protectionism, he stated.
As a result over the years, trade has contracted, making the economy more vulnerable and the Exports to GDP ratio, which was 33% in 2000, had declined to around 12% by 2016.
He stated that it was time to change this narrative, which the Government has begun to with this Budget. The program ‘Enterprise Sri Lanka’ will empower Sri Lankans and enable them to take their future into their own hands. As such, the objective of the Budget this year is to create a nation of entrepreneurs, where innovative business startups thrive in a competitive market economy.
He added that the Government wanted to bring that old glory back, and make Sri Lanka a trading nation. For this purpose, the Government has made a number of proposals which include empowering SMEs to reach global markets, making export procedures smoother and less cumbersome, removing of para-tariffs which hinder trade in certain sectors, removing ownership restrictions of foreign entities in the shipping and logistics industries, etc.
Most of the reforms proposed are a part of the holistic idea of liberalisation of the economy. Liberalisation increases competition, competition breeds success, tests limitations and forces innovation. He therefore emphasised that exporters should not be worried about the moves of the Government towards liberalisation, including entering into free trade agreements with trading nations and the removal of para-tariffs.
He added that such moves would not affect them adversely and instead would enhance the potential of exporters, enabling them to compete in international markets to achieve their objectives.
The Government will provide financial as well as non-financial support to local industries to be competitive and enhance their access to global markets. Trade adjustment packages will also be provided to protect local industries where necessary.
He further stated that in order to expand exports, it is imperative to diversify products, as well as export markets. For this purpose, the Government will provide financial assistance for the registration of intellectual property, to cover the cost of insurance and promotional measures undertaken overseas.
Furthermore, product development initiatives of the export sector will be supported with access to finance through the Export Market Access Support Programme.
Furthermore, testing facilities at various institutions such as the Sri Lanka Standards Institution (SLSI) and the Industrial Technology Institute (ITI) will be upgraded to be on par with international certification bodies. The National Intellectual Property Office will also be upgraded and better resourced. These actions will facilitate Sri Lankan products to be acceptable in global markets.
NCE President Ramal Jasinghe, in his brief introductory remarks, welcomed the participants and commended the Government for accepting the proposal of the Chamber for a contributory insurance scheme for farmers and assistance for solar power generation related to export ventures.
He expressed the hope that these proposals would be implemented early, and expressed concern regarding the negative comments from some quarters related to them. He added that the Chamber proposes to conduct a follow-up forum six months later to assess the implementation of export-related proposals, and their impact on exporters with a view to suggest corrective action where necessary.
The main presentation at the forum was made by Suresh Perera – Principal Tax and Regulatory and Director of Secretarial Services of KPMG. He made a very informative and comprehensive presentation focussing on the tax and fiscal proposals related to the Budget, the Inland Revenue Amendment Act and their impact on businesses, especially on export enterprises.
He stated that revenue arising from taxation related to GDP was relatively very low in Sri Lanka compared to many other countries and added that Budget 2018 has introduced four new taxes, namely the debt repayment levy, carbon tax, levy related to cellular towers and the levy on SMS advertising which has increased the number of taxes to 39. This factor could have contributed to the Doing Business Index of Sri Lanka declining from 109 to 111 while India has gained 23 positions in the ranking, probably due to consolidation of many existing taxes under the GST, among other factors.
He further stated that expansion of coverage of VAT was a good move as in the case of most countries, since the objective and the effectiveness of the VAT scheme was diminished due to several exemptions provided previously.
In this context if the coverage is expanded it should be possible to reduce the VAT rate from 15% to 12% to achieve revenue targets; and added that the sugar tax is also a good move since the sugar tax was first implemented in 1922, and has now been implemented in many countries.
He analysed the impact of many direct and related taxes and fiscal measures on business, including their beneficial features, explaining as to how businesses could make use of them for maximum benefit.
The panel discussion featured S.R. Atygalle – Deputy Secretary to the Treasury of the Ministry of Finance; D.R.S. Hettiarachchi – Senior Commissioner of the Inland Revenue Department; Subashini Abeysinghe – Director Research of Verite Research; Suresh Perera – Principal Tax and Regulatory and the Director of Secretarial Services of KPMG and Ramal Jasinghe – President of the NCE. The panel discussion was moderated by the NCE Secretary General/CEO Shiham Marikar.
At the panel discussion the Chamber expressed the following views.
The State Minister of Finance was requested to include the Chamber on a Public Private Partnership basis in the unit to be set up by the ministry to evaluate the implementation of the Budget proposals, since the Chamber could contribute with the suggestions of exporters related to their impacts. This was agreed to excluding the disclosure of confidential information.
The Chamber pointed out the removal of the previous corporate tax exemption offered to the IT and Gem and Jewellery sectors, placing them in the 14% bracket along with other export ventures in terms of the Inland Revenue Amendment Act. The Chamber pointed out the representations made by the gem and jewellery industry which was stated to be severely affected due to some of the most difficult market conditions the industry has ever experienced, as a result of which there was the likelihood of a drastic shrinking of this formal sector of the export trade, with permanent damage to the industry and the economy.
The Minister of State for Finance and the Deputy Secretary to the Treasury however stated that the tax proposals made in the Inland Revenue Amendment Act cannot be changed in principle. However, they were open to provide any justifiable assistance required by the gem and jewellery sector as a measure of relief during the period of adjustment.
The main thrust of the Budget proposals revolved around the several financial assistance schemes in the form of subsidised interest covering term loans, under the ‘Enterprise Sri Lanka’ program which mainly targets SMEs but includes maximum Tern Loan facilities up to Rs. 750 million for agro processing and manufacturing enterprises.
The Chamber stated that the interest subsidy by the Government would only address one aspect of the problem viz to reduce the cost of finance but the issue of access to finance specially by SMEs from the banking sector would remain. Therefore clarification was sought as to how effectively the ‘Credit Guarantee Fund’ of Rs. 500 millon will be used to cover the available loan facilities to overcome the problem of providing collateral to banks.
In this regard, clarification was also sought regarding the role of the proposed bank to provide development finance, which appears to be another form of EXIM Bank proposed in the previous Budget, but not implemented for the last two years, including the proposal to provide equity capital under the package of assistance for the IT sector.
The officials of the Ministry of Finance stated that proposed bank will be the “apex institution” to mobilise capital from international institutions to provide the envisaged support through the banking system.
Some of the issues raised by participants are as follows
Concerns were expressed regarding the proposal to remove para-tariffs (CESSes) on certain imported products and the need to strengthen Anti-Dumping Laws in order to protect local enterprises. It was explained that the rationale behind the reduction of para-tariffs was to encourage competition under a level playing field to enhance efficiency of local enterprises, thereby reducing the cost of ‘doing business’.
It was stated that it was important for manufacturing enterprises in a developing country like Sri Lanka to engage in Research and Development in-house. However, the deduction of such expenses for tax purposes is allowed up to 200%, whereas if the R&D is outsourced the expenditure is deductible up to 300%, and after three years deduction allowed reduces to 100%. It was clarified that under the amended Inland Revenue Act the deduction allowed is up to a flat 200% irrespective of the location of the R&D activities.
In regard to the ‘Export Market Promotion Support scheme’, it was clarified that financial support will be provided to small-scale exporters who need to promote their brands and products abroad including assistance to display products in supermarket shelves. The EDB will be the institution that will implement the scheme.
It was stated that it is necessary to create awareness among small-scale village entities in the agriculture sector and particularly farmers regarding the financial assistance available under the ‘Enterprise Sri Lanka’ program.
The Chamber expressed its thanks to member exporters who participated in the forum and said that it trusted that the information provided through the presentation and discussions were beneficial to participants. The Chamber also recorded its appreciation and thanks to the main sponsor Hatton National Bank and co-sponsor J Lanka Technologies for supporting the conduct of the program.