step in a long journey
Seminar organised by UoCMBAAA
collaboration with Daily FT
: 12:01 am November 24, 20
Uni. MBA Alumni Association joint seminar discusses the strong
challenges posed by Budget 2011 as well as opportunities for private
sector and stresses on the need to walk the talk by both sides
as a ‘development Budget,’ the analysis of this crucial policy
framework was discussed at length by a top panel of experts yesterday
at a seminar titled ‘Dismantle the Budget and Analyse the Direction
the Economy is Heading’. It was jointly organised by the MBA Alumni
Association of the University of Colombo and the Daily FT.
the seminar with a strong call for the private sector to live up to
the high expectation outlined in the Budget, Treasury Secretary Dr.
P.B. Jayasundera noted that 70% of the effort would have to come from
the private sector.
the onset of his keynote address, Dr. Jayasundera congratulated the
Daily FT on its anniversary and insisted that if the Budget had met
expectations, then it was up to the people to meet the said
“What we want more than seminars is
implementation. The enabling environment has been created. People
have to think differently and make the best of the opportunities
given. Governments are governments. Everywhere they are the same.
Even though people talk about reforms it is because the processors
need to be overhauled.”
insisted that unlike the Government, the private sector has the
capacity to be flexible and take full advantage of the chances that
have been given with the end of the war and now have every resource
to reach international standards and expedite economic
Calling the Budget a complex process, he recalled that the
President had spent a lot of time to see what the country needed.
“The President has travelled everywhere in the country and listened
to the people – ranging from the capital to microfinance, taxation
commission report and interaction with clusters and issues have been
addressed,” he stressed.
“Some of our conclusions may be
grossly wrong. Some may be spot on. But it is up to you to fall in
line. That is the point of the Government. Over 30% of the Budget
success depends on the Government; the remainder is up to the private
sector. Structural characteristics, stable political environment and
peace have been provided among other opportunities by the Government.
The rest is up to you.”
Since Dr. Jayasundera addresses a string
of post-Budget seminars, he quipped that the important part was not
about conferences but returning to work so that Sri Lanka could
achieve its missed growth as well as the ambitious targets that have
been set out for it.
“On the deficit Rs. 434 billion, our figure
is lower than the last two years. Even if you allow simple growth and
simple inflation, we can maintain this amount. Rs.53 billion basic
deficit revenue with grants and recurrent expenditure is included
here. My fundamental question is, is this composition bad? If these
investments include fundamental capital investments, then that needs
to be built in as well, if you recognise capital trends in the
Budget; for example agriculture and university salaries – I do not
consider these as recurrent. Taxes on banks have been reduced so that
private sector investment is encouraged. So the focus is on
developing the macroeconomic environment.”
vulnerability of this amount is less than in previous years, he
noted, insisting that as a person who has managed these things
before, he feels “comfortable” because the war is over. Earlier
there was a danger that the Budget amounts would be overspent due to
the conflict. Similarly the private sector can also make transaction
cost savings due to the end of the war. Therefore the element of risk
Comfort from the growing infrastructure development in
port, power and irrigation is spurring growth. But even as the
debates continue, the benefits are reaching the people at the same
time. Infrastructure is not for free, he emphasised, adding that the
provisions made were better than those in countries in similar
“The risk is in meeting expectations. Tax
reforms mean that the disposable income by way of lower tax gives the
chance for investment. The concessions that have been given by the
Government have to be internalised by business. Borrow at a lower
cost and invest at a lower cost; these points have to hang together
to prevent risk.”
On the other hand, commodity prices are all
uncertain. Recovery from the global recession is happening but there
are uncertainties. India and China are giving Sri Lanka comfort to
grow, however Dr. Jayasundera opined that he liked this risk because
it has given the Government the chance to make different
Changing from coal to fuel was one example that was
quoted in this instance. “These trends are compelling us to
expedite mini hydros and find diverse ways for environmental friendly
power generation.” He also urged the private sector to conserve
Key exports such as tea and rubber also need to have value
additions and branding so that the value chains are expanded and find
new markets. They must have the confidence to reach international
standards without concessions and bilateral or multilateral ties.
This aggression is important to spur economic growth.
noted that the wage bill would have been at least Rs. 50 billion and
instead the Government prioritised on what was needed for salaries.
“Revenue growth that we have built into the Budget is lower than
the GDP that we have built into our macroeconomic outlook. We are
conscious that things won’t happen in just one year. People will
take time to start spending- people might even start saving
initially. So the economy needs to move a bit in order to stabilise.
But some of these revenues are not coming from taxes. So you do what
you think is right and we will manage the macroeconomic situation.
Rs. 20 billion can be transferred if necessary – these are not
small numbers but we can arrange them as we wish.”
Government servants getting low salaries, their dependents are taken
care of. However, the private sector is more lucrative, perhaps to a
point beyond justification, he said. Dr. Jayasundera cautioned
that the wage structure of the private sector should be revamped to
assist the ageing population.
“These are challenges that will
come in 2020 and that is the biggest risk that we face now. There is
no pension scheme for the private sector; once you get the money is
it almost too late to have something for the future. Remittances are
growing. They are earning half of what all exporters earn. But when
these people return to the country, they must have a way to live. The
workforce that is not directly linked to the private and public
sector must have a process to save. No point reactivating a Samurdhi
for the old people.”
Taking these statistics into consideration
the Budget introduced a policy along with a host of benefits, such as
reduction of taxes, social levies and EPF concessions. “Save for
your own future,” he urged, adding that contributory pension fund
was a result of these sentiments. Withdrawals from the EPF are also
exempt from taxes.
The President dedicated several pages to the
difficulty of doing business in the Budget because of the inherent
complications in passing projects. This has presented far reaching
reforms including several key institutions, including the BOI and
Customs Department. Budget has given provisions for better
is another point that was addressed by the Budget. Dr. Jayasundera
stressed that cheap labour was endangered in Sri Lanka and the
emphasis was on skill development. Universities and other
institutions have to be equipped to provide labour skilled in new
industries for IT, BPO, research and value additions in a range of
will grow, structures will change and a knowledge economy will become
a reality. Tourism and EDB as well as the BOI must market Sri Lanka
differently so that sustainable investors are encouraged to come to
“Pioneers in the private sector must lead, not
follow. Now is the chance for the private sector to take this chance.
If you don’t act within the next three month, then some foreigner
will take the chance. I know because I interact with a range of
Moving onto the topic of tax Dr. Jayasundera insisted
that the banks have to think of the future and develop a long term
lending market. “Our people need long term loans. The private
sector has the right to ask for loans that will give them the chance
to make a long term investment. Through these Budget proposals we
have freed up at least Rs. 15 billion for long term lending and this
will be kept for three years because we know that the banks also need
time to build up revenue.”
Admitting to teething problems, he
remarked that there are other processes to take care of. The focus is
shifting to a low tax rather than concessions. The cess is to give
research and development a chance to counter uncertainty in the
of free trade zones was stressed by the Treasury Secretary, who
called on the BOI to “drive” investors to take advantage of the
infrastructure provided. The other point is to attract large
investment – with a fast tracked process so that it is presented to
Parliament with a 30-day grace period to raise objections. This will
give the chance for projects to be implemented faster.
requires risk. Strategic investment law is all about this. Tax law is
also geared to give accommodation to large investments. Tax holidays
have been reduced because we have assisted investors to fast track
the process. Small investments are not considered. These adjustments
have been made.”
Moving away from the preoccupation of the
conflict, the country has moved to focus exclusively on development.
“Now the time has come for you to give us the guarantee,” he
said, to laughter from the audience, insisting that the Government
has done its best to give the positive environment for
“Follow the apparel industry example. From a low value
product they have made value additions without destroying the
environment. Machinery has been taken off taxation to help factories.
Tourism taxes have been slashed to enable high end products into the
market. If you want more then you have to live up to expectation.”
slightly from the topic, Gajma and Company Partner N.R. Gajendran
urged the private sector to covert Sri Lanka into a financial hub, as
it would use little large scale investment and would be safe for the
Creativity is seen in the Budget, the President has
covered development tax structure, human resources social security,
agriculture, society, women and children, infrastructure, revenue
administration and SMEs amongst many other sectors were all covered
in the creative Budget.
“Different perspective – 70% depends
on the private sector. Look at your business models. We had a
consumption based business model before the financial instability as
we were able to cater to the West who consumed the products. After
the crisis a fear psychosis has hit the West and they have now
stopped consuming. It is now the emerging economies like China, India
and even Russia which are wage-led economies and they will not
consume as much as the West. They do not rely on imports.”
difficult dealing with these economies and Sri Lanka will have to
face huge challenges from them. The US, Germany and China and other
such big economies are blaming each other for their policies. Looking
at the domestic market, it must either export or consume. There is
huge potential in the tourism industry but no investments are coming
in. The step forward is a major issue when looking to
“Concessions have been made in this Budget and it is up
to the various sectors to look through it and find the concessions
that will prove to be advantageous to the specific sector in order to
be more competitive. Research and development is also a way forward
as shown by the Budget and this needs to be utilised by different
Speaking about CEPA, he pointed out that the main
opposition against it was through fear that the Indians would come
into Sri Lanka and wipe us out, so to speak.
the tax revisions outlined in the Budget Ernst and Young Head of Tax
Lakmali Nanayakkara dwelt on the impact the various changes would
Overall, the tax proposals are large in number and have
affected different sectors, she noted. “Financial services and
banking sector bringing down their tax rates from 70% to 40%;
corporate tax rate going down to 28% from 35%. New proposal giving
these reductions in tax rates each institution has to contribute to a
new fund created by the CBSL that will be utilised for long term
“Telecommunications – the biggest change with more
than four or five indirect taxes being withdrawn and merged into one
tax at a 20% telecommunications levy; collective impact is high in
terms of decreasing the complexity and brining on a much needed
simplicity into the regime.”
turnover tax that was imposed on wholesale has been withdrawn and
instead the nation building tax has now been extended to the retail
level. It is a whole new culture for the wholesalers and retailers of
the country and signifies a cost structure change revenue sharing
agreement is a foundation for a better relationship between the
provincial and central Government.
Speaking of changes made in the
capital markets, she remarked that they had been largely unaffected
and the tax concessions continue as it did previously. “Income tax
has changed. The rate reduction has been significant with the 35% tax
reduced to 28% except for the tobacco and liquor industries. The
concessionary rate has further reduced from 15% to 12% and the rate
remains the same for venture capital, local software development and
“Certain anomalies in the income tax law have
been adjusted as well it is all a whole fairly low tax
Personal tax has now reached an all time low with the
maximum rate now adjusted at 24%. VAT being the key indirect tax in
Sri Lanka, has been reduced from 20% to 12%. The 85% input tax limit
has increased to 100%. There is now a VAT exemption on telecom,
software and other items and changes have been made to the VAT
suspension scheme. A key change for the financial services sector is
that the VATFS rate has reduced to 12%.”
“NBT rate has been
reduced from 3% to 2% and now extends to the wholesale and retail
sectors in lieu of the turnover tax that has been taken off which may
lead to pricing issues and have a cascading effect in the future.
Import and export changes are many and one important change is that a
cess has been levied on certain exports, that is, in the absence of
value addition, and motor vehicle tax has been revised as well. The
tax administration has been given a prominent position in the Budget
speech with the Board of Review being discontinued amongst many other
the rationale behind these changes was Finance Ministry Tax Advisor
Dhammika Gunatilleke: “Income tax amendment is to make it the final
tax. This will ease the process and assist people to make their
payments easy and there is no need to open files. As far as
Government employment is considered there is an idea that they don’t
pay taxes but it is done; however, now they are taxed under the
Interest income – the Government intention is
because there was a Rs. 200 000 income threshold and that has been
increased to Rs. 500,000 but the amount must be in Government banks.
The reason was given that this would increase safety of investment.
Administrative provision will be made to cancel files.
machinery tax cuts are given special allowance so that within three
years capital costs can be recovered. New buildings constructed on or
before 1 April within 10 years the entire cost can be absorbed. Total
research and development expenditure as well as capital expenditure
are included in the provisions. The 15% concessional rate has been
reduced to 12% effective from 1 April.
“New investment fund
account rationale is that with the tax deductions on banks to
accommodate that amount the tax savings have to be invested in a
special account established by the Central Bank. Off-shore and
on-shore companies are the same but there are changes in certain
provisions. This is seen as an investment for lending at a lower
rate. Income from foreign sources has been expanded on professional
sources with a gazette notice and this will be extended.”
VAT, vehicle tax reduction will be effective immediately. SME sector
write offs have been introduced to bring them into the tax system and
certain areas have been taken to the NBT sector as well.
Lanka CEO Ashroff Omar giving his viewpoints noted that Rs. 50
billion investment for infrastructure and human resource has to
deliver. He admitted that any Government which has focused on such
large amounts has much to achieve.
However, moving onto the
industry, he noted that there was much labour still to be mopped up
and with the hub concept, there is potential. Increasing income and
increasing productivity was focused on, but he opined that migrant
workers would be better employed here with better
“E-economy focus is good,” he noted, adding that
double deduction on research and development was positive and
universities must push for more grants. “We as a business community
must deliver. In 1977 when the predecessor to the BOI started, we had
a group of very powerful apparel industrialists in the country.
the laws came in and things were opened up and that power crowd was
not happy with the new regulations. After 1987 those companies were
not around that main table. If you look at Singapore, its exports
amount to US$ 254 billion. If we aren’t bold enough to grab this,
then someone else will be pushing on our behalf.”
a large trade deficit so there is a large market in South Asia if we
want to use it as a labour market and those assets can only be won if
the agreements can be used to Sri Lanka’s advantage. “The
challenge is scary but enticing and a year from now we’ll know
whether we walked the talk or let someone else do our job.”
his ideas, Colombo University Senior Lecturer in Economics Prof.
Srimal Abeyratne recalled the suggestions that were made when the
Budget proposals were being formulated and insisted that this was the
time for bold changes. Striving to be realistic, the proposals took
into account the targets set out by the Government but also
considered the prevailing atmosphere.
It is clear that the
connectivity to the rest of the world cannot be forgotten and it must
also be a competitive one. To double per capita income, Sri Lanka
must be competent in at least Asia. This year the Budget is
pro-development and this has been impressed, describing the document
as a “small step in a long journey,” he said, noting that the
changes could have been greater.
“We have seen the report about
the reduction in tax rates. But to my understanding the problems are
not limited to high rates and I expected the tax net to be expanded.
This has been done in this Budget, a measure that has been delayed
for many years. Yet the challenge is on the collection of taxes and
the administration as well as the refund processors.
has not been paying the taxes but the other interlinked issues that
are hindering investment promotion.”
These issues need to be
addressed within the next few years, he insisted, adding that the
investment level has to be around 35% but to raise it to this level
the private sector has to play the major role. The Government is
already doing public investment; nonetheless the question is how
strong the private sector is and if it is capable of making this
The business community has to increase investment by
at least 15% but in the short term this cannot be expected.
this means that we have to depend on foreign direct investment and in
this we have always performed poorly. Traditionally these investments
have never been too keen on South Asia. International investors have
a massive amount of choice and we have to compete at a high level and
policies have to be consistent.” He noted that the first step has
been taken but much remains to be done.
Declining to argue on the
economic principles on which the Budget was based, he opined that
this was a bigger argument that should not be ventured into during
the seminar. Expenditure side has shown changes with the provincial
council tax reforms which instigated a need to decide the fate of
“We need to get them to work but with
accountability and they must compete among themselves to promote
This has nothing to do with taxes but there are
fundamental changes that need to be made to address these issues.”
Trade is more important than remittances, Dr. Abeyratne observed, as
his concluding remarks.
Alumni Association Jude Fernando noted that the Budget was of
interest to all stakeholders and that deeper analysis through
seminars was necessary to understand the ramifications for the
All stakeholders are keen to find out what opportunities
have been presented by the Budget, he noted in his welcome address.
The Government has announced that this will be a landmark Budget with
more focus on stability and growth.
With this in focus, Sri Lanka
has been projected to achieve 5% growth but others think that nothing
less than 7% is acceptable with the post-war opportunities, but most
of this is based on the implementation of the policies outlined in
“We are happy to have this discussion this year and
are happy to have it with the Daily FT. With this association we have
taken our relationship with Wijeya Newspapers to a higher level,”
he noted. He welcomed Keynote Speaker Treasury Secretary Dr. P.B.
Jayasundera and the other resource personnel.
Q and A session proved to be interesting, with a range of topics
raised for discussion. The session was moderated by Daily FT Editor
Nisthar Cassim. Given below is a synopsis of the opinions
Access to credit for farmers is not an issue in Sri
Lanka, stressed Dr. Jayasundera, responding to an extensive comment
from the audience. Pointing out that the microfinance sector might
need some assistance but it was not a great need of changing
regulations pertaining to collateral, he insisted that the State
banks had taken care of this in the rural areas.
question from the moderator on how the market dipped on the day of
the Budget, the Treasury Secretary noted that if interpreting the
market response to the Budget was a guideline for success, then the
country would not have reached US$ 2,000 per capita income. He
insisted that the other sectors were doing well and therefore the
stock market sometimes worked in “reverse gear”.
an appreciating rupee, a question was raised as to what policy would
be followed in this regard. “I don’t believe that the exchange
rate is important to increasing trade. It is more to do with value
additions and that is what we have incorporated in the Budget. This
is what we have focused on and deviated from the traditional thinking
patterns,” Dr. Jayasundera maintained.
Lack of liquidity in the
stock market was the basis of another question from investor K.
Vignarajah and without the public float issue being addressed, rapid
and stable growth would not be possible, he stated. “If we had the
mechanism of capital expenditure from companies though rights issues
following a good dividend to investors? I request Dr. Jayasundera to
take this into consideration,” he said.
Careem Yusuf, an
importer of essential commodities, raised the point that the change
in taxes would have a cascading effect and increase prices of basic
goods so it would be better charged at one point. “This tax should
not be charged at the point of sale and keep it to the point of
purchase,” he said, giving food for thought.
and development taxes, a question was raised by a service industry
professional on what defines this requirement. To this, the Treasury
Secretary advised companies to present a definition of research and
development to be implemented into law.
Repayment mechanisms have
to be upgraded, Dr. Jayasundera admitted, but insisted that the
refund procedure had been streamlined but broader tax issues have to
follow accepted procedures. Dispute settlement should be taken out
and companies are compelled to come to more acceptable measures.
“Roughly the refunds are an industry in itself. It should be a
manageable procedure and has to deal with the challenges.”