Rifka Ziyard
The Budget Speech 2021 was presented by Honourable Prime Minister Mahinda Rajapaksa in his capacity as the Finance Minister on 17th November 2020 just a few days after presenting the second reading of the Appropriation Bill 2020.Unravelling the Budget 2021 is no easy task since the proposals cover a broad spectrum of sectors and a much more broader set of needs. In my view, the key proposals in the Budget 2021 can be broadly categorized as follows:
· Proposals extending tax holidays & concessions to identified sectors
The Budget 2021 leads us to an incentive regime of tax holidays, partial tax holidays and concessions granted across different industries. The incentive regime based on tax holidays was discarded a few years ago and was replaced with providing concessions by way of enhanced capital allowance. The new proposals also refer to tax holdays under the Strategic Development Project Act (SDP). Under SDP concessions can be granted from many types of taxes and levies.
The Budget 2021 seeks to provide tax holidays in relation to dairy, recycling of construction material, local boat and shipbuilding, owner/ operator of telecommunication towers, approved startups by individuals who have completed vocational education, private sector vocational education institutions, renewable energy, listing on the Colombo Stock exchange (CSE), export oriented Multi-National Companies (MNCs), bonded warehouse and offshore warehouses etc.
· Proposals to protect domestic industries and encourage domestic value addition
Throughout the budget speech one can identify that there are indications that import taxes such as CESS, Customs Duty, Special Commodity Levy will be imposed on imports to provide required protection to domestic industries. Further in order to encourage domestic value addition it is also proposed to remove import taxes on the raw materials not available in the country, on import of machineries and equipment with modern technology and in turn to boost exports. This is where tax is used as a tool to protect and encourage domestic industries.
· Proposal to support those who temporarily loose livelihoods via contribution to new insurance scheme
The creation of a new insurance scheme to support those who temporarily loose livelihoods due to the quarantine process related to epidemics including COVID-19 has been proposed. Businesses and factories with more than 50 employees, are required to contribute 0.25 percent of the turnover to the proposed insurance fund. It is intended to use this insurance scheme to assist those employed at retail and wholesale shops with more than 5 employees and hotels.
This is similar to the Crop Insurance Levy (CIL) that was introduced in April 2013 where banks and financial institutions and insurance companies are expected to contribute 1% on the profit after tax. This was introduced under the Finance Act of 2013 and the preamble read “A levy imposed in a view to cover the damages suffered by the farmers of Sri Lanka due to natural disasters”. CIL is administered by the National Insurance Trust Fund Board. CIL collected over the last three years is Rs 1,780 mn in 2019, Rs 2,138 mn in 2018 and Rs, 1,878 mn in 2017.
It is interesting to see the mechanism adopted for introduction of the new COVID-19 insurance scheme, collection period and under which institute this will be administered.
· Simplification via introduction of a composite tax on certain industries
With the intention of improving the efficiency of tax collection, introduction of an online – managed single Special Goods and Service Tax is proposed on alcohol, cigarettes, telecommunication, betting and gaming and vehicles in place of the various indirect taxes and levies, imposed under multiple laws and collected by various institutions.
As per the annual report 2019 published by the Ministry of Finance, the revenue from Excise in year 2019 from the following is Rs 333,189 mn.
Excise Revenue on | 2019 (Rs Mn) |
Liquor | 115,443 |
Cigarette | 87,367 |
Motor Vehicle | 130,378 |
Total | 333,189 |
Telecommunication Levy | 18,261 |
Betting & Gaming Levy | 2,435 |
Total | 353,885 |
The total collection from excise revenue (on liquor, cigarette and motor vehicle) together with the telecommunication levy and betting and gaming levy amounts to 20.4% from the total tax revenue. In addition to the above, taxes such as VAT, Customs Duty, Port and Airport Development Levy is also applicable on certain aforementioned industries. As per the Budget Proposal the total tax collection from the 5 specified areas accounts for 50% of the income from taxes and levies. This proposal would not be easy to implement as the currently applicable taxes are imposed by different institutions. Furthermore, as the proposed tax will be “online managed”: the policy makers should ensure proper infrastructure is available to implement this proposal sans any disruption.
· Strengthen the tax administration
Several tax administration measures were proposed such as requiring all companies to file tax Returns via the “e-filing” system from the Year of Assessment 2021/2022, enable enhanced self-compliance and the establishment of a specific time frame to issue private rulings. For the settlement of appeals, it was proposed to establish a special Tax Appeals Court.
A concessionary payment plan will be introduced for the full and final settlement of outstanding NBT and ESC and steps to be taken to close such files.
· Proposals to attract foreign currency earnings/remittances
There are many proposals that indicate attracting foreign currency is a key objective of the policymaker such as concessions for export-oriented companies, allowing foreigners to use foreign currency to purchase condominium properties even if foreign currency is earned in sri Lanka, paying Rs. 2 per dollar above the normal exchange rate for the foreign exchange remittances sent by foreign workers to banks in Sri Lanka etc.
Further it is proposed to grant an amnesty for entrepreneurs who bring in funds which were previously undisclosed (locally or retained in foreign jurisdictions), if a 1% tax is paid.
· Tax relief measures to facilitate post COVID 19 business revival
Administrative relief is proposed to SMEs, where Income Tax on the Assessments issued up to the Year of Assessment 2018/2019 by the Commissioner General of Inland Revenue (CGIR) (if no fraud or willful neglect) would be waived. Further the Income Tax return furnished by the SMEs for the Year of Assessment 2019/2020 is proposed to be accepted and an additional assessment not to be issued.
A grace period is proposed to be granted to settle the taxes in arrears/default, as agreed with the Legacy Unit, Default Tax Recovery Unit and the Revenue Administration Management Information System (RAMIS) Unit of the Department of Inland Revenue.
The payment or/and submission of the returns of any tax administered by the CGIR, which is due for the period from March 1, 2020 to June 30, 2020, is proposed to be treated as paid or/and submitted on the due date if such payment/submission is made on or before December 31, 2020.
In addition to the above, there are other proposals which is of interest and few repeated from the past as well. However, the objective in this article is to unravel the crux and understand the tone of the Budget. The proposals related to banking, finance and capital markets and Information Technology and BPO can be referred here
The Budget 2021 has received mixed reviews across different sector leaders but overall many acknowledge that this is a brave budget given all the negative experience due to the COVID 19 pandemic. The overall objective of the Budget is no doubt the revival of businesses and enhancement of economic activities which will cause a positive ripple effect on the economy as a whole.
Colombo Times spoke to business leaders across several industries seeking insights on the Budget 2021
Roshan Silva, Managing Director of CL Synergy and Chairman of Sri Lanka Logistics and Freight Forwarders Association (SLLFFA) shared his outlook on Budget 2021. “ Given that the budget has focused strongly on the areas of developing local production and exports, it is clear that the logistics and freight forwarding industry will have a key role to play. The proposal to improve the efficiency of processes related to imports and exports is commendable; introducing a single window for processing is the approach to take and it will considerably increase the competitive advantage of the Colombo port”.
Chamila Cooray, VP / General Manager – Operations at WNS Global Services shared her views on the Budget 2021 “A well thought through budget with greater focus been drawn in uplifting home-grown industries. Employee welfare, Education, Entrepreneurship has been carefully analyzed considering the current context and continuity. Concessions on infrastructure specially on the technological advancements & communication is commendable. The Vision on making Srilanka an information technology and outsourcing hub is also well thought through.
Thamesh Fernando, Chief Financial Officer of Expolanka Holdings Plc referred to Budget 2021 as a bold and visionary budget. He said “I would like to tag this Budget 2021 as a bold and a visionary budget showcasing consistency. In my view there are three key challenges the Government has to overcome. The large borrowings /debt, the reduced tax revenue resulting from the negative impact on the economic activities and tax policy changes done at the start of the year and now the third challenge of having to navigate through the economic crisis caused by COVID 19 pandemic while safe guarding livelihoods. The Government despite the extreme challenges faced has taken a bold step to maintain its fiscal policies depicting policy consistency which is a key attribute for an economy.
Thamesh further explained in his view the prominent areas of the Budget 2021 “the budget aims to empower businesses to turnaround and enhance productivity by introducing tax holidays, tax concessions and policies to protect and develop domestic industries. A visionary approach to spur economic activity instead of a knee jerk reaction with ad hoc taxes and rate changes is commendable. There are also many incentives to encourage foreign direct investments, amnesty scheme in order to attract inflow of foreign currency. Further the fact that the tax holidays concessions are granted for a period of 2 to 3 years is a positive feature and it reflects that the Government is mindful that revival of businesses takes time. The policy consistency depicted in the Budget sends positive signs to businesses and investors and also the budget speech reflects that a lot of thought has gone into the proposals impacting different sectors for example making offshore service businesses more attractive is one such measure”
The views expressed in this article are in their own personal capacity. The above only considers certain budget proposals and is not an exhaustive list of proposals. Please refer link for the full budget speech Ministry of Finance – Sri lanka )Sources :
Annual Report 2019 published by the Ministry of Finance
Budget Speech 2020 and 2021 – refer MOF website