Groundviews

Budget 2017: The good, bad and ugly

Featured image courtesy Rukshan Abeywansha/The Nation

Mixed feelings prevail in the wake of Budget 2017 being presented in Parliament.

Overall, the Budget was fairly holistic in coverage, being broadly linked to Prime Minister Wickremesinghe’s statements to Parliament earlier this month, Chief economist at the Ceylon Chamber of Commerce, Anushka Wijesinha said. The focus was on modernisation and innovation, social inclusion, investment and supporting the middle class.

The Government had taken steps to expand tax collection, from the closure of exemptions, to proposals to raise more through direct taxes. However, there were several areas for concern as well, Wijesinha noted. For instance, one proposal was for a platform for online transactions, managed by the ICTA, which would be subject to taxation.

Wijesinha added that many online platforms such as booking.com, Agoda and AirBnB enabled small-time entrepreneurs in tourism to reach a global audience. A new tax could negatively affect these players.

“I don’t see how this platform is going to work. Is the Government agency [ICTA] going to force the global players to use it, or will it be optional?” Wijesinha asked.

Speaking further, he added that the interests of ‘legacy players’ – large established groups in the tourism sector who were not adjusting to new business models – also played a role in the implementation of this new tax. “There is a lot more analysis that needs to be done before jumping into the creation of a platform by a government agency,” Wijesinha said.

The proposed platform also drew criticism from economist and former Central Bank Deputy Governor W A Wijewardena.

“The payment system is the responsibility of the Monetary Board of the Central Bank,” Wijewardena told a post-budget forum in Colombo. In fact, the Central Bank in collaboration with LankaClear (the national payment infrastructure provider) are reportedly working on a ‘Sri Lanka Payment Gateway’. Wijewardena disapproved of what he termed as a high-handed approach towards trying to regulate the banking sector, while interfering with the Monetary Board’s activities.

That was not the only weak point.

Regulations on foreign land ownership too had only partially solved the issues raised. Earlier, foreign owned companies had no freehold rights to land – which raised numerous difficulties to those companies publicly listed on the Stock Exchange, which could turn from domestic to foreign owned within a day of trading, according to Wijesinha. In such a situation these companies were forced to either dispose of the land they had acquired, or to reduce the number of foreign shareholders in the space of a year. While this issue was now resolved, a new regulation on private companies allowed foreigners to lease land only if they made an investment of USD 250 million (excluding the land itself) and with 150 employees.

What’s more, if the company did not maintain this status quo for three years, they would have to pay what effectively amounted to a 100% lease tax in the third year – a massive increase from the 15% that was proposed previously, Wijesinha said. This was not feasible as it shut out many sectors from investing. IT companies, for instance, could usually easily meet capital requirements but rarely had 150 employees, being mostly small companies. This shut them out from investing in Sri Lanka. Worryingly, existing investors would also have to comply with these new regulations, Wijesinha explained.

Regional Plantation Companies were also restricted to managing 5,000 acres for an individual company; an unviable proposal. Most of the larger players own 15 to 20,000 acre holdings each, and have already been listed on the Colombo Stock Exchange. The practicality of implementing this proposal therefore is questionable, as it would involve splitting up listed companies, Wijesinha said.

Questions also arose around implementation of the carbon tax on motor vehicles – it wasn’t clear whether tax would be levied depending on the level of pollution or the type of the car, for instance, Wijesinha pointed out. “The worst thing would be to levy a uniform tax,” he said. At present, the budget speech mentions that the cost of the emission test will now be absorbed into the carbon tax, but has no mention on how this tax will be calculated.

However, Wijesinha said there were also many positive moves, such as the initiative to enable students who do not receive places in state universities to learn in private institutions, with government support.

There was a clear focus on primary industry, perhaps to appeal to the masses. However there were also concessions given to encourage modernisation,such as a 50% interest subsidy to farmers, allowing them to invest in new technologies, and the removal of customs duty and value added tax for imports related to mechanisation.

Reducing the fees and taxes on tea was also a positive move to boost the industry, Wijesinha said.

[The tea industry has been beset with issues, as highlighted by the recent wage negotiations for estate workers. At the time of negotiations, the companies highlighted low productivity compared to countries such as Kenya, while the workers unions said the low wages they received pushed many to leave the estates in search of different occupation – raising the possibility of labour shortages in future.]

Other positives included a proposal to expand vocational training in partnership with the private sector, Wijesinha said.

Under this scheme, the private sector would receive Rs. 30,000 from the state, over three months. This stipend would be used to train an estimated 10,000 youth on urgently needed skill categories.

There were also performance-linked incentives for exporters in Budget 2017, in the form of tax rebates which would be linked to increases in foreign exchange earnings.

Overall, implementation of the proposals would be key, Wijesinha said.

The track record compared to last year on implementation was a cause for worry, as several proposals put forward in last year’s budget were repeated this year as well.

“The proposal to establish a SME board on the Colombo Stock Exchange, introduction of Real Estate Investment Trusts, listing of non-strategic stakes of the Government, the setting up on an EXIM-bank, repealing of the current Exchange Control act and the setting up of an Agency for Development were mentioned last year as well,” economist at Frontier Research, Shiran Fernando said. “This shows the delay we have been seeing in implementation in the last 12 months.”

Bureaucracy and internal processes were mostly to blame for the delays in the past year. However, the fact that the state had re-emphasised certain changes in this year’s Budget showed that they were still priority areas. Fernando said he believed there was a better hope of these measures being implemented this year, although he remained sceptical that repealing the Exchange Control Act, for instance, would be possible in the short space of a year.

On the positive side, most of the additional revenue proposals were in the form of direct taxes, which would improve the disparity between direct and indirect taxation. However, there continued to be a lack of clarity on proposals, such as the carbon tax – though a Sunday Times report gave a breakdown by vehicle type. In addition, although the Government has spoken of a policy of pushing forward with digitization, this was not supported in the budget itself, with an increase on the telecommunications levy on internet services from 10% to 25%.

The tax on mobile voice, SMS and value added services has risen from 27.55% to almost 50%, as Rohan Samarajiva flagged on November 3. This means that for every Rs. 100 spent, Rs. 50 is levied as tax. This raised the question whether telecommunications were considered ‘demerit goods’ such as alcohol and tobacco. Yet, the Finance Ministry has massively increased the allocation for the Ministry of Telecommunication and Digital Infrastructure, suggesting that they simultaneously want to invest in the sector, while discouraging its use- a confusing position.

Despite these caveats, Budget 2017 was a distinct improvement to last year, Fernando opined. “Last year, it was rather too ambitious in trying to take on several key reforms in one go, resulting in back tracking on most the policies discussed. This year would not be as challenging as last year on the revenue front, though not all the proposals might be implemented,” Fernando said.

This year, there was rare accord between the SLFP and UNP, as the Budget was presented after several rounds of consultation between the two parties. A committee of SLFPers handed over a committee report, asking for the prices of essential commodities to be reduced. This was duly accommodated, with the result that the Budget speech was met with less criticism than usual in the halls of Parliament – though that did not stop some from pointing out shortcomings.

TNA MP M A Sumanthiran, who spoke on behalf of the Opposition, said too many allocations had been set aside for large-scale infrastructure projects, echoing the previous regime, and for digitisation and foreign direct investment, while allocations on health, education and agriculture had been cut.

Sumanthiran also tabled a new proposal on the controversial 65,000 housing project, detailing how these houses could be built at less than half the cost. Further, there were not enough allocations for the North and East; no details on the allocation of Rs. 180 million for “reconciliation” and mystifyingly, Rs. 1 billion for a vertical building and entertainment centre, when there were much more pressing issues in the sectors of agriculture, fisheries and animal husbandry that needed attention.

Responding to Sumanthiran’s charges, Minister of Public Enterprise Development Kabir Hashim who led the debate on behalf of the Government, said that in fact there had been an allocation of Rs. 3 billion for housing in the North and East, with Rs. 2 billion allocated for the rest of the country. He did not, however, comment on the bizarre addition of the building and entertainment centre highlighted by Sumanthiran – which alone amounted to Rs. 1 billion. Hashim maintained that it was incorrect that there was not enough emphasis on the North and East, particularly as there had also been duty-free concessions given to allow large companies to set up there, he said, speaking to Groundviews.

Wijesinha however pointed out that Sri Lanka had in the past attempted to use concessions in the form of tax holidays to entice investors. These tax holidays, effectively ensuring the investor did not need to pay tax for a period (say, 5 years) following which they would only be liable to tax at a concessionary rate, were a huge drain on finances. This year, Sri Lanka was moving towards implementing capital allowances (also known as accelerated depreciation) attempting to move away from the tax holiday system. Those investing in the Northern province would receive a 200% capital allowance, which would almost amount to a rebate, while those investing in the Eastern and Uva province would receive a 100% allowance, allowing them to write off expenses on capital in one year. While the tool used to encourage investment was different, similar methods had not yielded results in the past. Other conditions too needed to be loosened, as at present only the larger players would be able to invest. “This is a little reward which doesn’t fundamentally address the problem,” Wijesinha said.

Speaking further, Hashim acknowledged that he was unaware of the exact funding for reconciliation activities, but said that there was an ongoing programme that was seeing people from the North and East seeing their lands returned. “Their economy was destroyed, but there is also a human, ethical and social aspect to this. There are divisions on ethnicity, religion and class. The previous regime could have nipped these divisions in the bud,” Hashim said.

Speaking also on the cuts on the allocation for recurrent spending on education, which received widespread criticism when the Appropriation Bill was first presented in Parliament, Hashim said the UNP believed in social and human infrastructure development, rather than on physical infrastructure alone.

Hashim said the quality of education has not improved in the past 10 years, despite many people having received education courtesy the state.

“Government education has collapsed. There are buildings, with no quality improvement. In my electorate in Kegalle, there are schools equipped with computers, but no computer teachers. Those computers are gathering dust,” Hashim said.

There was also a shortage of teachers in English and Mathematics. This had wide-reaching repercussions as most jobs required a pass in those subjects. “There is a syndrome of the educated unemployed,” Hashim said. Thanks to the free education system, everyone has an Ordinary level qualification, and so they don’t go into labour jobs, he added. “We are moving into middle-income country status. If we want to avoid the middle income trap, we need to invest in skill sets, not concrete.”

Hashim further said that last year, the education allocation was 78% higher than during President Rajapaksa’s time, but 50% of it remained unused even in November.

Asked why the budget had no measures to cut on wastage of funds, Hashim said the Government was constrained by the IMF conditions. However he conceded that more could have been done to cut on wastage of public expenditure. However, he added, “we can’t do things at once. People are used to handouts. It will take a few years to increase income levels. When people’s income levels increase, they will shy away from handouts. We need to politically survive, to help the people who stood for change.”

Meanwhile, the President of the Lanka Private Bus Owner’s Association, Gemunu Wijeratne termed this year’s Budget “useless.” The LPBOA was planning strike action on the minimum spot fine, although the action was temporarily called off after discussion with Finance Minister Ravi Karunanayake.

“Under this Budget, if your tail-light isn’t working, they can fine Rs. 2,500. That is very unfair,” Wijeratne said. “If they are looking to reduce accidents, which is what they told us, that is a separate issue.”

Wijeratne said that in his opinion there was oversupply of vehicles and the roads were not wide enough to hold them. He added that the LPBOA had put forward many proposals which were yet to be implemented, including that of an adjoined time table for both private and CTB buses. “There is a Supreme Court decision on this, but still no action taken” Wijeratne said.

Another interesting proposal was made to allocate Rs. 1 million for a centre to stop gender-based violence and promote gender equality, in order to address ragging. Director of the Women and Media Collective Dr. Sepali Kottegoda commented that there was already a centre for gender studies in the University of Kelaniya. The medical faculty’s of most universities also had pamphlets on gender based violence across the island. “Do we need a centre to stop gender based violence in universities? I’m not sure. We need to invest much more in terms of curriculum, and ensure accountability” Kottegoda said. “There can be centres where men and women go to receive treatment, but there needs to be much stricter regulations to stop gender based violence.” However, Kottegoda said making such an allocation to try and promote equality was a positive thing, but it had to be tied into long-term goals of combating these issues.

There were also several proposals put forward to regulate three-wheeler use, and even a proposal to encourage drivers to switch from three wheelers to electric cars.

L D Vithanage, President of the All Island Three Wheeler Driver’s Union speaking about these proposals said in his opinion the Government’s approach to domestic industry was not progressive.

While the proposal to introduce electric vehicles was part of the proposed budget a few months ago, the tax on vehicles had also increased. The tax per cubic centimeter of engine capacity would increase from Rs 1,500 to Rs. 1,600, which was why three wheeler unions had increased their prices – estimating the increase in cost of owning a wheeler to be around Rs. 20,000.

Yet now, Vithanage said he heard the cost per cubic centimeter would increase by another Rs. 250.

In addition, finance companies could only fund for up to 25% of the vehicle value. Purchasing a new three wheeler would now cost  Rs. 500,000, Vithanage said. This is in line with the Government’s aim to reduce the number of three wheelers on the road, but is a move which Vithanage does not welcome.

Around 10 months ago, the Finance Minister had then spoken of introducing quadricycles. Now, he was promising electric cars. While Vithanage commended the initiative having actively campaigned to better regulate three wheelers, he says the Government has not enforced its own gazette notices.

For over two years, Vithanage says, he has been campaigning to introduce a programme to convert two stroke three wheelers to electric models. The new proposal to introduce electric cars he terms a “carrot” approach to solving the problem by giving a few people cars. “We have no hope. First it was the quadricycle, today it’s electric cars, who knows what it’ll be next time, and they have done nothing all this time,” Vithanage said.

“We are hesitant about these proposals. If they actually implement some of them, good. However with increases in tax, instead of relief, we have unease. We are prepared to listen to what the Government says, but we are not prepared to accept everything the government says at this time,” Vithanage said.

Overall, there was trepidation as key sectors looked to see whether the Government would implement the proposals it had put forward. There has already been a temporary reversal on the proposed water tariff hikes, and more may follow in the near future. This, coupled with the large number of proposals repeated from the previous year’s budget, means that the Government has an uphill task in terms of implementation.