Groundviews

A Tale of Taxation – A rundown on Budget 2016

Featured image courtesy nation.lk

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 – Hayley’s 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 government’s 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 PM’s 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 hasn’t been broadened. The strategy was to get more revenue via direct taxation, but it’s 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 didn’t adequately address Sri Lanka’s 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, that’s 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 fishermen’s 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 Minister’s policy statement. While some might argue that the reforms weren’t 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 Lanka’s 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 Lanka’s 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 non-taxable 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 it’s one we need to do, since we’re trying to tap sectors that we haven’t 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 people’s 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.