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What do industries expect from Budget 2022?

23 Oct 2021

By Imesh Ranasinghe The Sri Lankan economy as a whole is experiencing a downturn, particularly following the Easter Sunday attacks in April 2019. While most of the rest of the world started experiencing an economic downturn only following the Covid-19 pandemic that started in the early months of 2020, in Sri Lanka, the pandemic exaggerated the downturn of the country’s economy. As a result, we now have minimum tourism, dwindling foreign exchange reserves, and massive state expenditure to deal with. The Appropriation Bill presented to Parliament earlier this month details a total of Rs. 250.5 billion to be spent by ministries and departments while the highest allocation of Rs. 373.1 billion is made to the Ministry of Defence. Amidst price increases, money printing, and rising inflation, among other interconnected issues, the industries in Sri Lanka are expecting the upcoming budget to be the most important budget the country has presented after the end of the civil war in 2009. Banks expect a tax increase An official of the banking sector told us, on condition of anonymity, that the banks are expecting revenue-raising measures such as tax increases from the Budget 2022, while giving greater attention on domestic industry development and export promotion. The official also said the industry is expecting the budget to focus on attracting foreign direct investment (FDI), which is much-needed for the country at the moment. The banks are also expecting the Government to support the agriculture sector as a whole in order to address their issues and encourage farmers. Exporters want to allow their forex to export National Chamber of Exporters of Sri Lanka (NCE) Secretary General and Chief Executive Officer (CEO) Shiham Marikar said that the Chamber has put forward many proposals to cover different export sectors of the country to be considered in the upcoming budget. Speaking about a few important proposals, he said that in order to solve the biggest problem the Government has to sort out, where the exporters are not converting their earned foreign exchange, the budget should introduce a Convertible Rupee Account (CRA) scheme that would grant the facility to allow the importation of a vehicle using these funds. In addition, he said the Government should also allow companies with a deficiency in foreign currency to import raw materials to buy foreign currency from other companies with a foreign currency surplus. He said that this would create an incentive for the exporters to receive foreign exchange as well as utilise them in a manner that is profitable to both the country and the exporters themselves. Marikar also said the Government should look into providing a grant, rebate, or concessionary payment through the budget for each US dollar exchanged by exporters and expat workers to bridge the gap between the official rate and the unofficial rate, as a measure to ensure exporters and expat workers get the best income for their export earnings and US dollars are channelled through the banking system. He added that this is similar to a proposal in last year’s budget where a similar concession was given for expat remittances. This could be published daily by banks so that exporters will know the grant amount on a daily basis, he said, and suggested it to be a temporary measure until the foreign currency market stabilises. Moreover, he said that the proposed mechanism is likely to bring in significant US dollars into the banking channels, a rupee cost the Treasury would have to incur until the markets stabilise, and this measure is likely to assist with this stabilisation. However, he pointed out that the international effects, especially with trade agreements and the economic impact, would have to be looked into carefully before implementation. Further, he suggested encouraging exports to have their own brand (label), so that the brand can be established overseas and intellectual property (IP) rights can be established, which is, however, a costly exercise. The Head of the Chamber further suggested that the Export Development Board (EDB) assist this programme so that premium prices can be obtained from exports, and buyers cannot place orders elsewhere due to brand ownership. The same proposal, he added, was introduced before but was not made use of by many due to some reasons which need to be examined. Marikar said that all Sri Lankan missions in foreign countries should appoint commercial officers to promote exports and to generate a monthly report of the number of exports that have materialised with their intervention. “This report will be on the EDB website so that there will be internal competition among countries. The officers can be rewarded based on their efficiency, which can be monitored easily,” he explained. In terms of taxes, he suggested boosting exports, where all export profits are made tax-free for products that have a value addition of over 60%, as exports except agriculture are currently being taxed at 14%. He added that this will incentivise the exports sector to generate further profits through investments. He said that presently, many raw materials are exported without any value addition and sometimes there are no manufacturers for value addition. He explained: “For example, minerals such as graphite, ilmenite, etc. are exported in raw material form as there are no companies to do this conversion due to the lack of technology.” The Chamber, therefore, he said, proposes to take an approach to phase out raw material exports through the implementation of mechanisms to encourage joint ventures with a major share of Sri Lankans and allow long-term tax holidays similar to the Adani Group. “Also, the BOT (build-operate-transfer) system can be promoted, but the transfer needs to be less than five years – within a period of three to five years – and export CESS introduced for the export of raw materials,” he said. SME sector wants Govt. to recognise them The small and medium-scale enterprise (SME) sector is expecting the Government of Sri Lanka to finally recognise the importance of the sector which contributes about 60% of the GDP through the upcoming budget. Sri Lanka Chamber of Small and Medium Industries (SLCSMI) President Prof. Rohan De Silva said that they want the best for the SME sector in the country through the upcoming budget, as it is the backbone of the country’s economy. He said the SME sector was badly affected since the constitutional crisis that happened in 2018, as the sector took a hit from the instability of the country during that period, and this was followed by the Easter Sunday attacks and then Covid-19. Therefore, he said the Chamber has proposed a targeted post-Covid recovery package to be planned by the Government, with the support of the Central Bank of Sri Lanka (CBSL) and other banks, which should include cash grants, concessionary medium-to-long-term lending, tax incentives, and holidays for three to five years to help recovery and growth. He also said they have proposed methods to be implemented by the budget to maintain a favourable and stable exchange rate and industrial, trade, and imports policy aimed at favouring or supporting local micro SME (MSME) industries. He said a suitable method should be formulated with the involvement of all sectoral advisory committees and stakeholders, adding that it is vital to ensure a positive, enabling business environment and macroeconomic policy, which will help the country out of this abyss and onto a sustainable growth trajectory. Further, he said the Central Bank, together with the Controller of Exchange and the banks, should facilitate a mechanism for importers and exporters to settle their bills in the currency of the country with which they are trading (with India – INR vs. LKR, with China – yuan vs. LKR,  with Japan – yen vs. LKR), which will ease the demand for US dollars and facilitate the BOP position of the country. Moreover, he suggested that the Government should reduce the levies and duties on raw materials that are imported to be used for manufacturing products in local and export markets, where the SME sector can be competitive. Also, he suggested providing a solution to the high interest rates charged by private banks and leasing companies for credit facilities at this crisis time.  Stock market seeks extension of tax holiday The stock market is expecting a tax increase by introducing a similar tax to the Value-Added Tax (VAT) or the Nation Building Tax (NBT), which were taken off by the current administration when they took office, to cover the budget deficit. First Capital Holdings Head of Research Dimantha Mathew said the market is also expecting a potential extension of the 50% tax holiday announced by the previous budget for companies that will be listed before the end of 2021 to be extended further to the next year, as companies had only about eight months from the day it was implemented to get listed and enjoy the tax holiday. Further, he said that they do not expect a significant change in tax structure because it was changed a lot in 2019. Last hope for tile importers Among the importers, tile importers are positive that the Government will allow the importation of tiles and other sanitaryware products through the upcoming budget, as the construction industry is facing major difficulties in finishing their construction work. Tile and Sanitaryware Importers’ Association (TSIA) General Secretary Kamil Hussain said that the construction industry, which can be considered as an engine of growth for any country, has halted many projects currently due to the non-availability of building materials, especially tiles. “We have given many proposals to the Government respecting the government policy of promoting local manufacturers, but we feel that there has to be fair play, and in order to have fair play, we need to have supplies. There is a shortage of supplies, thus leading to higher prices,” he said. Therefore, he said that the Association requests the Government to open imports so that there will be competition, where local manufacturers will have to manufacture at optimum cost, best quality, and the correct price. “Formally, we have not been given any information, but we have got some positive information that they are looking at this in a favourable way,” Hussain said. He added that while understanding that in the absence of foreign exchange it is difficult for the Government to open up all imports, if nothing happens through this budget to their industry, many will have to shut down their businesses, causing people to lose their jobs. Vehicle importers expect nothing The vehicle importers are not keeping hopes in the upcoming budget to provide some sort of opportunity for them to import vehicles next year. Vehicle Importers’ Association of Sri Lanka (VIASL) President Sampath Merenchige said that although they do not expect any form of support from the upcoming budget, they have already submitted a proposal, along with exporters, to allow the opening of Letters of Credit (LCs) through the foreign exchange earnings by exporters to import vehicles. However, he said the Ministry of Finance is yet to give them a meeting to discuss it. What does the Treasury say? The upcoming Budget 2022 will not increase the tax rates for the upcoming year, despite revenue inflow being impacted this year and the previous year due to the prevailing Covid-19 pandemic, The Sunday Morning Business reliably learns. A reliable source from the Ministry of Finance told us early this month that there were no plans to increase the tax rate for the year 2022 via the upcoming national budget, which is scheduled to be announced next month. Speaking to us, Inland Revenue Department (IRD) Commissioner General H.M.W.C. Bandara too stated that the Government will not be increasing the tax rates for the upcoming year. Unfortunately, attempts to further clarify the information from Treasury Secretary S.R. Attygalle proved futile at the time of going to print. Meanwhile, speaking to us in June, IRD Commissioner General Bandara said that despite close to half of the tax revenue target being met by the IRD, it was still not possible to forecast the possibility of meeting the targeted annual tax revenue of Rs. 575.5 billion amidst the volatile local environment. “We do not know until when this condition will go on. It will depend on the Covid-19 situation. Sometimes, it could be difficult to achieve the set target if the prevailing situation extends by another two to three months or so,” he explained. The Committee on Public Finance (COPF), chaired by Anura Priyadarshana Yapa, in June appreciated the IRD’s achievement in the face of the present global crisis. However, the Committee stressed that the IRD should increase the number of taxpayers in Sri Lanka. In 2020, the revenue target given by the Government to the IRD was Rs. 613 billion, which was close to the total revenue collection of the year 2016. The target was reduced due to the various tax relief measures provided by the Government in the initial months after coming to power, to stimulate consumer spending and economic growth in the country. However, Bandara told us that out of this figure, only Rs. 495 billion was supposed to be raised by the IRD in 2020; only 86% of the target was met by the end of the year, he added.

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