‘Surcharge tax will dampen investor confidence’

• Social security contribution scheme to impact low-margin businesses: CCC
• Recommends sourcing revenue through VAT or NBT
• Suggests policymakers to consult stakeholders

Expressing its views on the recently presented Budget 2022, the Ceylon Chamber of Commerce (CCC) issued a statement noting that the imposition of the one-off surcharge tax would dampen investor confidence given its retrospective implications.

It added that the proposed social security contribution will also have an adverse impact on low-margin businesses, including those subject to price controls and financial intermediaries while also having a cascading impact.

“As such, we recommend considering sourcing this revenue through established measures such as VAT or the previously abolished Nation Building Tax. The proposed multiple taxes could place a heavy burden on the banking sector, which is supporting the post-pandemic recovery of most sectors, potentially weakening the financial system in the country,” the statement added. 

It noted that the private sector understands the need to identify new revenue measures to bridge the budget deficit, given the impact of the pandemic on the economy,  in terms of maintaining mainstream corporate tax rates and investment incentives, continuing from end 2019, in Budget 2022. 

The CCC recommended that policymakers consult relevant stakeholders who would be willing to contribute to the development of specific strategies to achieve the desired outcomes.

It added that while the Budget recognised the need for fiscal consolidation and the rebuilding of Sri Lanka’s foreign exchange reserves, it fell short on addressing the key macroeconomic challenges of managing the shortage of foreign exchange in the market and refinancing of debt in the short to medium term. 

“The Budget would have been an ideal opportunity to reassure investors, provide clarity, and build confidence while further complementing some of the measures outlined in the Central Bank’s Six-Month Road Map. Similarly, the Government could have used the opportunity to signal its commitment to phase out the currently prevailing import restrictions that are not sustainable in the long term.”

Recent actions by the Government to move away from price controls on several essential products is greatly appreciated by the Chamber, as it has helped to overcome shortages and improve availability. The Budget could have also signalled the policy shift towards establishing a market-driven pricing formula for commodities like fuel and gas, as well as other essential commodities which were previously under price control. This would assist the Government in raising revenue while managing the foreign exchange situation.  

The CCC, in its capacity as the premier representative of the private sector, noted that it looks forward to an ongoing engagement with the Government, and for the opportunity to play a meaningful role, alongside the private sector at large, with respect to the implementation of the budget proposals. 

The Chamber also said that they welcome focus on digitisation, development of the hub concept, infrastructure development in investment promotion zones/small and medium enterprise (SME) development zones, removal of registration fees for startups, green economy, and targeted relief for vulnerable sections of the public impacted by the pandemic. 

While welcoming the steps announced to improve the financial management of public sector institutions, the CCC is concerned that these may be negated by the proposals to increase the retirement age to 65 years along with the cadre by 50,000 new recruits. 

“The recognition of the need to reform state-owned enterprises and optimise the use of underutilised state assets is noteworthy, and the Chamber looks forward to more opportunities being created in the near future for private sector participation in this process,” it added.

The Chamber, in its pre-Budget proposals, highlighted the importance of the Government maintaining the current tax laws and rates while maintaining macro stability and focusing on developing key areas of the economy. 

“We are pleased to note the alignment of policies with our budget submissions and past recommendations related to tax administration, trade facilitation (in particular, implementation of the national single window), improving the ease of doing business by specific export facilitation, improving backward linkages in the apparel sector, reskilling of workforce, acceleration of e-government, and improving land usage.”