A Tale of Taxation A rundown on Budget

2016

Featured image courtesy nation.lk

by Raisa Wickrematunge

- on 11/27/2015
In the wake of the Budget being presented in
Parliament, Groundviews spoke to several people, including economists,
trade union representatives and government officials, on their thoughts
from positives to reservations.
Senior Economist Hayleys Group Deshal de Mel said that the 2016 budget
introduced some very progressive measures which went some way towards
the structural reforms necessary to drive the Sri Lankan economy forward.
The proposed investment in education, particularly in IT, science facilities
and most importantly teacher training, are crucial. It is essential that Sri
Lanka progresses towards a comprehensive overhaul of school curricula to

develop a creative, problem solving, and innovative work force in the

future he said.
Steps had also been made to move towards export orientation, with
increased resources for commercial officers in Sri Lankan embassies
overseas being an important element of economic diplomacy with a view to
market diversification, Deshal noted.
Budget 2016 also made greater room for private sector participation in the
economy with the proposed sale of non-strategic public enterprises and
private management of export zones. More sectors were liberalised,
including some trade liberalisation, which is important in terms of driving
long term competitiveness.
The proposed digitalisation of the economy is also an essential measure,
allowing for wide ranging benefits if implemented well, he added. This could
help with reducing bureaucratic processes in doing business and will
support the governments commitment to fulfilling investment approvals
within 50 days vital for much needed FDI attraction.
However, Budget 2016 did have some pitfalls, Deshal noted particularly in
the area of revenue generation.
With a 38% growth in revenue anticipated, a significant improvement in
the revenue administration process is needed, since the proposed revenue
measures do not appear to give credence to such high revenue growth.
There is a risk of fiscal slippage which could result in higher interest rates,
which in turn could hamper economic growth in 2016, he said.
The government also anticipated higher foreign commercial borrowing in
2016, which might be challenging in a more difficult global economic and
financial environment. This could also require more domestic borrowing,

pushing up interest rates.

The budget also continued the practice of guaranteed prices for certain
products, which tends to distort resource allocation in the economy. In this
sense, Deshal said he hoped that such practices would no longer be
necessary, particularly with the digitalisation of the economy, which could
for example enable targeted cash transfers to achieve welfare objectives.
Notably, the budget was at odds with the PMs expectation of shifting to a
tax system with greater focus on direct taxation and away from regressive
indirect taxes. This budget has in fact reduced effective direct taxes and
increased indirect taxation, which could be said to be at odds with equity
objectives, Deshal said.
This concern was shared with Shiran Fernando, Economic Analyst and
Product Head- Economic Research of Frontier Research, who pointed out
that corporate tax for most institutions had been slashed from 28% to 15%,
apart from banks and casinos that would be taxed at 30%. Meanwhile, the
threshold for personal income tax had gone up from Rs. 750,000 to Rs. 2.4
million, with those earning beyond this amount being subjected to a 15%
flat rate regardless of their earnings. While the tax regime has been
simplified, the tax net hasnt been broadened. The strategy was to get
more revenue via direct taxation, but its more weighted towards indirect
taxation such as through Nation Building Tax (NBT) and service charges,
Shiran said. In addition, indirect fees such as registration fees and annual
liquidation fees might adversely impact small businesses, he added. In fact,
the budget didnt adequately address Sri Lankas budget deficit and
currency rate. However, considering the Budget was touted as
revolutionary leading up to the Speech, it did in fact have many positives,
with some long term ambitious reforms paving the way for growth,
particularly in the agricultural, Small and Medium sized Enterprises (SME)

and start up segments.

Speaking from the SME point of view, Co-Founder at Kantala (Private)
Limited Vikum Rajapakse said initiatives like the Government backed
guarantee system, the Fund of Funds scheme, concessions for those
investing in small industrial zones in designated areas, as well as
concessions for Venture Capitalists (VC) and Private Equity (PE) will help
SMEs in particular startups to access the funding, resources, expertise
and knowledge required to get their businesses up and running and
expand.
The proposed SME authority for the CSE is also a welcome idea, Rajapakse
said, as it relaxed regulations while ensuring reporting requirements met
international standards. This would help SMEs access public investment
while also ensuring that VCs and PE could efficiently exit from the
investment they made, without legal and regulatory wrangling.
However, concerns remained that capital gains made by VCs may may be
treated as profits from normal business and thereby subject to income tax
which currently does not apply. As such private sector participation in VCs
might not increase, he added.
In addition, Rajapakse noted that SMEs registered with the Registrar of
Companies now have to make an annual payment. This might push start
ups to avoid registering, losing out on the benefits they would otherwise
receive. It might even create a shadow sector where the investments,
innovation and contribution made by start ups go unaccounted for.
More could have been done to deregulate the sector, he added. All SMEs
now have to register with relevant local authorities, adding paperwork to
their burdens. Another improvement would have been to bring all the
Government boards and authorities under one central authority.

Modernising Government authorities dealing with SMEs would also be

extremely helpful, Rajapakse said, since in his experience he found them to
be outdated and slow to respond to queries.
I can say that over the last 12 months, other than for regulatory
submissions or a regulatory payment I have not stepped into a government
office for anything. So the question is, do all these payments we make to
the government have any tangible return for us as SMEs? Rajapakse
asked.
Senior Lecturer to the Department of Philosophy and Psychology, University
of Peradeniya, Charitha Herath was less positive, saying the budget
smacked of republicanism.
The issue with this budget, and the ideology behind it, is that they assume
the players in the market are of the same category, and have the same
status and powers. In reality, thats not the case, Herath said.
He added that in his view the budget was focusing more on the market than
on governance. The responsibility of the Government is to act as a
regulator, where development and business affairs should be in the realm
of the private sector, Herath said.
I would liken this effort to asking two people to run to Fort one from
Bagatalle road and one from Girandurukotte, Mahiyangana. One will reach
there, and the other will most certainly die on the way, he said. This
Government is assuming all players in the market are equal and then
asking them to run.
Speaking from a trade union perspective, Herman Kumara, Convenor from
the National Fisheries Solidarity Movement (NAFSO) said that the Budget
had included some social security measures to improve fishermens lives,

such as making provision for life insurance worth Rs. 1 million. However,
the budget could have done more to provide for fishermen, including social
security measures for fishing gear. In addition, Kumara said there needed to
be a mechanism to ensure that vessels abided by international regulations.
Currently some fishermen, notably the Chinese, were straying into
international waters flying the Sri Lankan flag, and flouting maritime law.
Deep sea fishing is in danger thanks to practices like this. At the same
time, we should have the capacity to grant Sri Lankan fishermen licenses to
go into international waters. Of course not much can happen within a year,
but we hope they will take this up strongly in the future, he said. President
of the Lanka Private Bus Owners Association (LPBOA) WMGR Wijerathne
said that he was still in the process of studying the budget in detail.
However, he said that to his knowledge, there had been no definite
proposal made on public transport, which was unfortunate.
Meanwhile, Chief Economist, Ceylon Chamber of Commerce Anushka
Wijesinha also said that Budget 2016 had hit many of the right notes,
particularly in terms of the private sector and had even managed a certain
amount of consistency with the Prime Ministers policy statement. While
some might argue that the reforms werent drastic enough, so that
underlying structural issues had yet to be addressed, it had to be noted
that the political realities of a unity government had to be accounted for, he
added.
Overall, much had been done to encourage foreign and domestic
investment.
The Government had gone beyond the usual concessionary loan strategy
with the micro and SME segment, while there were also several key reforms
made on education that would help enhance the quality of Sri Lankas
workforce. Similarly, the agriculture sector too saw some interesting

proposals that would boost entrepreneurship and value addition while

removing the distortion created by the fertiliser subsidy. In addition, many
areas indicated a greater move towards increasing private sector
participation in public projects.
The target for maintaining Sri Lankas budget deficit was ambitious- and it
was uncertain whether the stated revenue sources would be enough to
deliver, he added. In particular, there had been a lot of hope pinned on nontaxable revenue, with a projected 200% increase.
The integrity of the Budget really lies on whether the revenue and
expenditure targets go through in the same way at the end of the year,
Anushka said. In this sense, meeting the ambitious revenue targets (a
projected increase of 30%, as opposed to the average 5-15% revenue
increase) was a major concern.
Failure to meet these targets would lead to a greater reliance on borrowing,
which would impact the market. If the borrowing was domestic, interest
rates would rise, making it harder for the private sector to borrow and
creating competition. On the other hand, if the Government decided to
borrow internationally, they would be going into a market which is already
expecting a rate hike in December or January with continued fiscal
weakness to boot.
This year is going to be an experiment and maybe its one we need to do,
since were trying to tap sectors that we havent tried before, he said. In
particular, efforts had been made to lower the tax regime and improve
compliance, as well as introduce some formality into the SME sector, asking
them to register with local authorities and encourage more transactions in
the banking sector, which would help with tax collection. However lowering
the tax regime was offset by peoples perception and whether the money

was being used on pet political projects. A spirit of transparency and good
governance was important, he added.
The need of the hour was strong implementation to ensure these ambitious
proposals were adhered to, Anushka said.
While there were many concerns raised, the overall attitude among those
interviewed was one of cautious optimism, with most noting key avenues
for growth. Yet the focus on indirect taxation and revenue sources remained
areas for concern.
Posted by Thavam