Twenty-Eight Salient Provisions of Vital Importance in the Budget for 2018 Presented by Finance Minister Mangala Samaraweera.

( 28 Salient Provisions in the Budget for 2018 Presented by Finance Minister Mangala Samaraweera.)

1) Legislative Reforms:

The budget has identified the key legislative impediments to the ease of doing business and the efficient utilization of Sri Lanka’s assets. Access to land has been a major hindrance to growth of investment, as is the access to labour, and affordable capital. The legislation governing land, labour, and capital will therefore be amended or enacted to improve access to factors of production to facilitate new investments and expansions. Particularly important are the repeal of the Underperforming Enterprises Act, amendments to the Shop & Office employees Act, Land Restrictions and Alienations Act, and the introduction of new Bankruptcy Laws. These legislative amendments can go a long way towards enabling investment and economic expansion.

2) Vehicle Imports Duties:

Import taxes on vehicles have long been a source of manipulation and graft. This has been due to the complexity of the tax structure, and the significant levels of discretion in administration of taxation. This has resulted in large levels of revenue loss for the government and has led to an uneven playing field in the vehicle market. In this budget a new duty structure has been introduced where the tax is based only on the engine capacity of the vehicle. This eliminates all room for discretion and treats all vehicles on the same basis. The duty brackets are based on a transparent, objective formula. It is positive to note that in this budget there is a broad effort to shift from ad hoc subjective taxation to taxation based on transparent, objective, rule based criteria.

3) Vehicle Luxury Tax:

It is noted that in the process of shifting from an ad-hoc vehicle import tax structure to one based on a rules based criteria, there will be some initial price displacements. Furthermore, there may be some initial price declines for high end vehicles – therefore it is a positive move to include a luxury tax on the super-luxury vehicles in order to capture more government revenue while preserving social equity.

4) Tax declines on smaller vehicles:

The decline in tax of some of the smaller vehicles will be a boost to first time car buyers, young families etc. But at the same time it is essential that we ensure the quality of vehicles imported are maintained – in this context the introduction of minimum emission standards and minimum safety criteria are important.

5) Electric Vehicles:

The reduced duties for electric vehicles is a positive from an environmental perspective. By maintaining a significant tax differential between petrol/diesel vehicles and hybrids and electric vehicles will encourage people to switch to non-fossil fuel vehicles. The Budget ambition to convert Sri Lanka to a non-fossil fuel vehicle country by 2040 is commendable – the government will be taking the lead in this regard by converting to hybrid and electric by 2025.

6) Plastic Tax –

The budget complements HE the President’s pledge to reduce Sri Lanka’s plastic usage by introducing a tariff on plastic raw material imports. This will incentivize the economy to reduce the consumption of plastic based products over time. At the same time, the budget has provided concessionary loans and subsidized machinery/equipment for the development of alternative products such as packaging material using biodegradable material like palm leaves, coir, and bamboo – this will also be a boost to local cottage industries.

7) Water Management –

The budget provides a number of holistic supportive measures for water management. The Pavithra Ganga project will be a big boost to reducing waste disposal into our rivers. Similarly the measures to encourage rainwater harvesting and the de-silting of tanks will play a major role in water preservation, particularly in the context of the negative impacts of climate change. There are also proposals to protect and sustainably harness the potential of our lagoons, which can help create livelihoods whilst protecting our water resources. Finally, the proposals to enhance ground water monitoring will be very important to ensure our wells and other ground water supplies remain safe and usable for future generations.

8) Blue Economy & Fisheries

The budget gives a lot of emphasis to the sustainable utilization of Sri Lanka’s abundant ocean resources. There is significant support for the fisheries sector with subsidies for higher end fishing vessels including multi-day fishing boats and for the installation of modern on board cold storage technology. Almost 2 billion rupees has been set aside as new proposals for the development of fisheries harbours which would help reduce post-harvest losses and improve the supply side. These measures will help enhance Sri Lanka’s fish stock and will enable the country to take advantage of opportunities such as GSP +. It is also encouraging to note the shift to high value fisheries such as sea cucumber and aquaculture, which will ensure a better return on investments in this sector.

9) Agriculture: T

he farmer insurance scheme based on a transparent weather index will be a boost to the rural farmer of Sri Lanka. This contributory insurance scheme will help ensure buy-in of all stakeholders in a fair manner and will help protect farmers from the increasing ill-effects of climate change. The budget sets aside Rs. 3 billion in this regard. Another successful measure to help stabilize farmer incomes is being supported in this budget – that is the 3 warehouses in Polonnaruwa, Ratnapura, and Killinochchion trust receipt schemes. Farmers receive a “trust receipt” which they can cash in at a later date when prices are favourable. This financing structure is devised to avoid a situation where the farmer sells all his produce in one go when the market is flush with supply and prices unfavourable. It enables a farmer to smooth his or her income in spite of supply fluctuations.

10) Agriculture value addition:

In addition to the measures to support farmer income such as the farmer insurance scheme and the warehouses operating on trust receipt schemes, the budget encourages greater value addition in agriculture. The proposal to tax backward integrated agriculture activities at a concessionary rate of 14% will encourage further value addition in agriculture. Furthermore, the proposal to exempt selected advanced technology agricultural equipment from NBT will be a boost to technological infusion in the sector. Finally, the Ran Aswanna and GoviNavodasubsidized loan schemes, at 6.5% and 3.3% interest rates, under the Enterprise Sri Lanka Credit Scheme, will enable SME farmers to invest in storage technology to reduce post-harvest losses, and also in machinery and equipment to mechanize agriculture.

11) Enterprise Sri Lanka:

This budget aims to create a nation of entrepreneurs, where innovative business startups thrive in a competitive market economy. Access to affordable finance is a major impediment, and the Enterprise Sri Lanka Credit Scheme is a key initiative to address this problem. Rs. 15 billion has been ear marked for this credit scheme that provides interest subsidies of 50% to 100% for a range of ventures including value added agriculture (targeting investment in cold storage, warehousing technology, outgrower farming, and mechanization), renewable energy generation for households, tourist establishments and industry. This will help bring to life the business ideas of all Sri Lankans, catalyzing investment and job creation in all corners of the country.

12) Development Bank:

A Development Bank with an Exim window is also being set up with capital from the government and other financial entities. The bank will be dedicated to the provision of development capital in the form of long term loans, project lending, start up financing. There will be an Exim window as part of the Development Bank which will include key trade finance instruments and also provide in-house support on trade information and other supporting services for exporters and importers. This initiative will fill in a major void where Sri Lankan firms have lacked access to long term affordable capital to finance future growth.

13) Loans Without Collateral:

One of the biggest impediments to development in Sri Lanka has been the fact that our financial sector has not been conducive to financing ideas. A young person with a great idea is unable to obtain a loan without having some asset as collateral. In addition to the proposal to implement a development bank, another initiative is the SME guarantee fund of Rs. 500 mn. This fund is being set up to enable SMEs with sound business plans to access credit even without collateral since the government guarantee will mitigate the risk to the lending institution.

14) Gender Empowerment:

Sri Lanka’s economy has failed to create sufficient meaningful employment opportunities for women. The female labour force participation rate is around 34% whilst more than 50% of university graduates are women. During the period 2018-2020 the government will support the development of several majority women owned companies, with grants and concessionary loans, along with the provision of non-financial support such as expertise in business development and connectivity to markets. Government support will include provision of equipment, guarantees for equipment leases, technical support for business, and financial management through subsidized consultancy programmes. Women owned companies within the Enterprise Sri Lanka scheme will have a further 10% credit subsidy advantage viz. a 6.5% Jaya Isuru loan will be made available at 5.8%.

15) Child Care Facilities:

In addition to encouraging female entrepreneurship by helping set up several majority women owned companies and providing concessionary loan schemes to finance these ventures, the Budget also spells out measures to encourage broader measures to encourage women’s participation in the labour force. The importance of childcare facilities is another recognition of this need in the budget. Lack of child care facilities is a major factor since women tend to leave the labour force for extended periods during child care. By enabling child care facilities near the workplace, women can return to the work force sooner.

16) Start Ups & the IT Sector:

Technology based startups are a key driver of growth and employment in the global economy. The IT Initiative is the Government’s angel funding scheme for the IT industry will entail Rs. 3 billion over a 3 year period. This can be used to finance local startups and enable collaborations between the industry and universities. Similarly, the Innovators to Industry (I2I) Programme will match innovators with industry and business operations who could use and commercialise their innovations and technology. When hired by the identified company, the government will provide 50% of the innovator’s salary and the cost of patenting.

17) Technology & Innovation:

This budget will have a strong focus on creating an environment to foster innovation, technology and research, to drive a knowledge based economy. Product design engineering will support the development of new technology, and product innovations by supporting services in standards, training, and prototyping new inventions. This will be implemented through the Mechatronic Enabled Economic Development Initiative. Product development initiatives for the export sector will also have access to financing through the Export Market Access support programme. Funding will be increased to key R&D institutions such as COSTI which will be converted to NASTICA (National Science Technology and Innovation Coordinating Authority), the Centre for Robotics, and the National Intellectual Property Office.

18) The Export Sector:

The cabinet approved National Export Strategy (NES) has identified 6 potential export industries including boat building, electronics, health and wellness tourism, spices & concentrates, IT, food & beverages. These sectors have been identified after a stringent process and are earmarked as being the drivers of Sri Lanka’s export sector in the coming years. The 2018 budget will support the NES implementation with fund allocations for key initiatives in the identified sectors. Beyond the NES sectors, special proposals have been identified for the gem & jewelry industry, the rubber sector, and coconut products, amongst others. The Export Market Access Support Programme through the EDB will include financial support to fund pre-export processes such as insurance, marketing and promotion costs, intellectual property registration, and for product development and innovation. These will be crucial steps towards Sri Lanka’s ambitions of doubling its current exports of US$ 10 billion and moving to become an outward oriented trading economy as it has historically been.

19) Driving Investment:

A number of initiatives are being taken to improve the investment climate by facilitating the process of obtaining land, starting a business, construction permits, obtaining utilities etc. Several reforms are included, primarily relating to the infusion of digital technology in institutions such as the Registrar of Companies, the Land Registry etc. and integrating them to enable a seamless process for the investor. This will help Sri Lanka improve its position on the Doing Business Indicators as well.

One of the major impediments to FDI is access to suitable land in investment zones. A new zone is being developed as a new PPP model between the government and Thai company Rojana, where Rojana will invest US$ 500 million in developing the zone and bringing in investors and managing the zone, whilst Sri Lankan government will invest in the development of the infrastructure for the zone. The budget will support initial work on similar new zones as well.

20) Three Wheel Drivers:

There are more than 1 million three wheelers registered in Sri Lanka, many of which are engaged in the provision of transport services to the vast majority of the population. The government believes in empowering this important group of people and recognizing their contribution to the economy. Special concessions will be provided to encourage and incentivize the usage of electric three-wheelers, which would be a more environmentally friendly option. Regulations will be introduced that will ensure fair, transparent pricing, and safety from both the driver’s and consumer’s perspective.

An innovative proposal is included for three wheel drivers in tourist areas. The Sri Lanka Tourism Development Authority will initiate a programme where three wheel drivers will receive training in languages and basic local tour guiding skills. Successful drivers will then receive a “Tourist Friendly Tuk” sticker along with registration with the SLTDA.

21) 13 Years of Education:

An exam centric curriculum has resulted in a large number of students dropping out of school after Ordinary Levels. But this is because the education system has failed the students, not due to a failure of the students themselves. The education system has failed to recognize the fact that all students have unique skill sets. These skills may extend beyond the traditional academic skills and would likely be in creative skills, technical skills, digital capabilities, and so on. The 13 years of education policy recognizes the varied skill of students and ensures the opportunity for students to stay on in school after Ordinary Levels. Students can take up market oriented technical and vocational training programmes and skill development programmes, at the successful completion of which they will receive formal certification such as NVQ 4.

22) Improving Education Quality:

In this budget there is a shift in the previous focus on hard infrastructure such as buildings, to spending on qualitative improvements in education. These additional budget proposals amount to almost Rs. 8.5 billion on top of the regular allocation for education. The new proposals focused on qualitative improvements relate to areas such as curricular reform to encompass the need for greater Science, Technology, Engineering, Medicine (STEM) subjects, the need to combine science and arts to enable a more holistic and broadbased education at a young age, teacher training, and institutional reforms at the NIE to support these endeavours.

There is also a focus on using technology to enhance the delivery of education and to improve quality of education. The smart class room concept is a key proposal in this regard. E-Text book development will complement the distribution of Tabs to students. It is also important that we benchmark our performance in education beyond our own examination systems with international assessments such as PISA – this will inform us as to where further improvement and investment is needed.

23) Tertiary Education:

In tertiary education the focus of expenditure will be to increase both access to tertiary education and quality enhancements. Rs. 5 billion will be spent in the expansion of technology degree programmes as part of the vision of creating a knowledge based economy. ICT, Engineering, Bio system technology, will be introduced in 7 new technology faculties. Medical education will also be expanded by establishing state medical faculties at Wayamba, Sabaragamuwa, and Moratuwa Universities with proposed allocation of Rs. 1.25 billion. Access to higher education will also be further enhanced by easing the eligibility criteria for Mahapola scholarships which will benefit at least 3,000 additional students.

24) Sugar Tax:

In the 2018 budget the government proposes to impose a tax on sugar content in carbonated beverage products, following the Colour Code directives of the Health Ministry last year. The tax will be based on the number of grams of sugar in the product and thus directly targets actual sugar levels. Sri Lanka has high and increasing incidence of diabetes and other Non-Communicable Diseases. Childhood obesity is also emerging as a new health risk. The ministry of health, and international research, has identified the causative linkages between excessive sugar consumption and certain NCDs. As excess sugar consumption is a clear negative externality, the argument for a tax is justified as it will encourage the production and consumption of healthier beverages. Sri Lanka’s implementation of a tax on high sugar beverages follows similar direction by several other countries in their attempts to combat excessive consumption of high sugar beverages. Mexico is one such example, where the tax has resulted in a decline in consumption of such beverages and is expected to have positive health benefit. Hungary, France, Denmark, Mauritius, Chile, among others have implemented similar taxes on sweetened beverages.

25) Alcohol Taxation:

The Budget has proposed a new holistic policy on the taxation of alcohol products in Sri Lanka. Sri Lanka’s distorted alcohol taxation policies have resulted in unusual and dangerous alcohol consumption patterns. 85% of Sri Lanka’s alcohol consumers consume hard liquor and only 15% consume soft liqueur. In other countries this ratio is reversed. According to the most recent WHO Global Status Report on Alcohol and Health, the unrecorded (illicit) consumption of alcohol increased from 18% to 40% between the period 2005 and 2010.

The proposed new tax structure for alcohol will apply taxes progressively based on alcohol content. This is in line with most global best practices. Accordingly, a beverage with a high alcohol percentage will be taxed at a higher rate than a beverage with a lower alcohol content – thereby discouraging the consumption of high alcohol beverages compared to milder alcohol products.

Sri Lanka’s recent policy which has discouraged the issuance of alcohol licenses has led to further growth of the informal sector.Therefore it is important to liberalise the licensing regime for alcohol sales and distribution along with the rationalisation of pricing. This will enable greater formalisation of the industry which will in turn ensure proper regulation and safety in alcohol consumption.

26) Para-tariff Liberalisation:

Sri Lanka has become one of the most high trade protection economies with a steady increase in para-tariffs in recent years. Many of these take the form of blanket ad-hoc para-tariffs based on industry lobbying, and it is necessary to shift to targeted protection for genuinely sensitive sectors, based on a clear, objective basis. These tariffs have led to increases in the cost of living, they erode business competitiveness, and they create an anti-export bias. A lot of this protection is beneficial primarily to large, mature business interests, and is at the expense of the poor who face higher costs of goods and services as a result.

Considering these factors, the government has committed to a unilateral removal of para tariffs over a three year period. In this year’s budget an “early harvest” of 1,200 non-sensitive HS codes will be have para-tariffs liberalised, whilst excluding sensitive sectors such as agriculture and SME/rural industries. Furthermore, new legislation for anti-dumping, countervailing, and safeguards will provide protection against unfair competition.

27) Debt Management:

The government has developed a multi-pronged strategy to address the upcoming debt repayments. First and foremost in this effort is the revenue based fiscal consolidation which will continue in this budget. In the last decade the Sri Lankan government’s revenue has collapsed amidst a proliferation of tax exemptions and tax holidays which have not translated into a concomitant growth in investment, FDI in particular. The passage of the new Inland Revenue Act in September was a major step in addressing this as it closes up a number of tax leakages and provides targeted investment incentives. With this new legislation the government hopes to see direct taxes increase to 40% of revenue from the current 18%, thus reaching a more equitable revenue balance. This increase in direct taxes will not occur overnight, and in the interim the government is compelled to introduce temporary measures such as the Debt Repayment levy, which we expect to support revenues until we see strong contributions for corporate and personal income taxes.

Even with the anticipated growth in government revenue, more needs to be done to address the debt repayments that cluster in the 2019-2021 period. Towards this end, a Liability Management Bill will soon be brought to parliament to enable prudent liability management in a transparent and predictable manner. This will enable the government to build up a buffer whilst markets remain favourable.

It must be kept in mind that a lot of the accumulated debt is due to previous governments borrowing from off-shore sources to invest in assets that have not yielded the expected returns. In such cases, it becomes necessary to divest some of these so called assets in order to meet the large liabilities that have now come for repayment.A combination of the above measures will enable us to meet the upcoming debt repayments without disruption to our development trajectory.

28) Expenditure Management –

The government is highly focused on the management of its expenditure. Given the fiscal constraints faced by the government, there is a strong emphasis on the control of government spending. Almost the entirety of recurrent expenditure of the government is fixed and cannot be reduced – this includes salaries, pensions, interest payments, and welfare expenditure. Furthermore, capital expenditure must also continue in order to drive Sri Lanka’s development ambitions. However savings can be made by ensuring smarter spending. Technology plays an important role in this.

The government will soon be implementing e-Procurement which will result in significant savings in its procurement processes by increasing transparency of the process and also driving efficiency. The Integrated Treasury Management Information System (ITMIS) will also be implemented shortly and this will help the Treasury manage its expenditure more effectively control its disbursements to ensure money goes to where it is best utilized.

Technology is also being very effectively deployed in revenue collection. RAMIS has had very good results thus far in the Inland Revenue Department since this system identifies discrepancies and thereby incentivises greater compliance. Similar applications of technology are occurring at the Department of Customs and Department of Excise. With these improvements it will be possible to generate greater revenue through administrative processes that identify tax evasion, without having to continue increasing the burdens on those who do comply.