Panel discussion in progress with Finance Ministry Treasury Deputy Secretary S.R. Atygalle, Inland Revenue Department Senior Commissioner D.R.S. Hettiarachchi, Verite Research Director Research Subashini Abeysinghe, KPMG Tax and Regulatory Principal and Secretarial Services Director Suresh Perera, NCE President Ramal Jasinghe and moderator NCE Secretary General/CEO Shiham Marikar
The National Chamber of Exporters (NCE) conducted a post-budget forum recently at The Kingsbury Hotel, attended by a large number of participants from the exporter community. Finance and Mass Media State Minister Eran Wickramaratne, who graced the event, addressed the participants and thereafter fielded a few questions from them.
He stated that in recent years, economic dynamics have become different to that of the hitherto more inward-looking and 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.
As a result, over the years, trade has contracted, making the economy more vulnerable and the exports to gross domestic product (GDP) ratio, which was 33 percent in 2000, had declined to around 12 percent by 2016.
He stated that it is time to change this narrative, which the government has begun with this budget. The programme ‘Enterprise Sri Lanka’ will empower Sri Lankans and will enable taking 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 start-ups thrive in a competitive market economy.
He added that the government wants 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 small and medium enterprises (SMEs) to reach global markets, making export procedures smoother and less cumbersome, removing 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 part of the holistic idea of liberalization of the economy. Liberalization increases competition and competition breeds success, tests limitations and forces innovation. He therefore emphasized that the exporters should not be worried about the moves of the government towards liberalization, including entering into free trade agreements with the trading nations and the removal of para tariffs.
He added that such moves will not affect them adversely and instead will enhance the potential of exporters facilitating them to compete in international markets to achieve the objective. 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 the 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 cost of insurance and promotional measures undertaken overseas.
Further, the product development initiatives of the export sector will be supported with access for finance through the Export Market Access Support Programme.
Furthermore, the testing facilities at various institutions, such as the Sri Lanka Standards Institution (SLSI) and Industrial Technology Institute (ITI), will be upgraded to be on par with the international certification bodies. The National Intellectual Property Office will also be upgraded and better resourced. These actions will facilitate the Sri Lankan products to be acceptable in global markets.
NCE President Ramal Jasinghe in his brief introductory remarks welcoming the participants, 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 hence to assess the implementation of export-related proposals and their impact on exporters with a view to suggest corrective action where necessary.
Tax and fiscal proposals
The main presentation at the forum was made by KPMG Tax and Regulatory Principal and Secretarial Services Director Suresh Perera.
He made a very informative and comprehensive presentation focussing on the tax and fiscal proposals related to the budget, Inland Revenue Amendment Act and their impacts on businesses, especially on the 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 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 the consolidation of many existing taxes under the goods and services tax (GST), among other factors.
He further stated that the expansion of the coverage of value-added tax (VAT) is a good move as in the case of most countries, since the objective and effectiveness of the VAT scheme is diminished due to several exemptions provided hitherto. In this context, if the coverage is expanded, it should be possible to reduce the VAT rate from 15 percent to 12 percent to achieve the revenue targets and added that the sugar tax is also a good move since the sugar tax was first implemented in 1922 and 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 business could make use of them for maximum benefit.
The panellists at the panel discussion comprised Finance Ministry Treasury Deputy Secretary S.R. Atygalle, Inland Revenue Department Senior Commissioner D.R.S. Hettiarachchi, Verité Research Director Research Subashini Abeysinghe, KPMG Tax and Regulatory Principal and Secretarial Services Director Suresh Perera and NCE President Ramal Jasinghe. The panel discussion was moderated by NCE Secretary General/CEO Shiham Marikar.
At the panel discussion, the chamber expressed the following views:
The finance state minister 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 the exporters related to their impacts. This was agreed to, excluding the disclosure of confidential information.
The chamber pointed out the removal of the hitherto corporate tax exemption offered to the information technology (IT) and gem and jewellery sectors, placing them in the 14 percent bracket along with the 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 economy.
The finance state minister and treasury deputy secretary 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 programme, which targets mainly the SMEs but includes the maximum term loan facilities up to Rs.750 million for agro processing and manufacturing enterprises.
Govt.’s interest subsidy
The chamber stated that the interest subsidy by the government will only address one aspect of the problem, viz. to reduce the cost of finance but the issue of access to finance, specially by the SMEs from the banking sector, will remain. Therefore, clarification was sought as to how effectively the Credit Guarantee Fund of Rs.500 million 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 Finance Ministry stated that the proposed bank will be an “apex institution” to mobilize capital from international institutions, to provide the envisaged support through the banking system.
Some of the issues raised by the participants are as follows:
Concerns were expressed regarding the proposal to remove of para tariffs (cesses) on certain imported products and the need to strengthen anti-dumping laws in order to protect the local enterprises. It was explained that the rationale behind the reduction of para tariffs is to encourage competition under a level playing field to enhance the efficiency of local enterprises, thereby reducing the cost of ‘doing business’.
It was stated that it is important for the manufacturing enterprises in a developing country like Sri Lanka to engage in research and development (R&D) in-house. However, the deduction of such expenses for tax purposes is allowed up to 200 percent, whereas if the R&D is outsourced, the expenditure is deductible up to 300 percent and after three years, the deduction allowed reduces to 100 percent. It was clarified that under the amended Inland Revenue Act, the deduction allowed is up to a flat 200 percent, 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 Export Development Board will be the institution that will implement the scheme.
It was stated that it is necessary to create awareness among the small-scale village entities in the agriculture sector and particularly farmers, regarding the financial assistance available under the Enterprise Sri Lanka programme.
The chamber expresses thanks to the member exporters who took participated at the forum and trusts that the information provided through the presentation and discussions were beneficial to them. The chamber also records its appreciation and thanks to the main sponsor Hatton National Bank and the co-sponsor J Lanka Technologies for supporting the conduct of the programme.