ECONOMYNEXT – Sri Lanka’s Finance Minister Basil Rajapaksa targeted big firms big firms, spectrum auctions and a cascading turnover tax to boost revenues as the economy struggles back from a Coronavirus pandemic.
Rajapaksa’s maiden budget is aiming to increase revenues by 333 billion Sri Lankan rupees (1.64 billion US dollars) for the cash-strapped government that is faced with both an external debt crisis and ballooning budget deficit.
Rajapaksa announced a retrospective “one-time tax surcharge of 25 percent” on persons or companies with taxable income over 2 billion rupees for the year of assessment 2020/2021 and 100 billion rupees is expected to be earned through this tax.
“There are 62 individuals and companies under this category,” Rajapaksa said.
The move, analysts said, is likely to hit at least 46 listed firms and the market is likely to see “bloodbath” on Monday when it opens for trading.
However, other analysts said Rajapaksa’s move was to have been expected.
“It’s a tight fiscal budget to balance. We understand the government’s options are limited,” Danushka Samarasinghe, Director at Nations Lanka Equities, told ECONOMYNEXT.
“Either they had to introduce an indirect tax, which would have been applied for a broader economy or adopted a more mixed system.
“At the outset, it is negative for large corporate. But at the same time, since the tax is retrospective and clearly mentioned one off, provides some sort of consolidation.”
It is however the second time, retrospective taxes were slammed. The last so-called Yahapalana administration did the same thing in 2015 and it is now showing signs of becoming a habit.
The island nation’s economy is facing foreign exchange shortages from liquidity injections, an external debt crisis, weakened foreign inflows and a government revenue shortfall all at the same time.
The 81 billion US dollar economy’s credit ratings have been downgraded to CCC, just above default, by global rating agencies mainly due to risks of external debt repayments.
Rajapaksa is expecting the most new revenues of 140 billion rupees from a new 2.5 percent turnover tax calling it a Social Security Contribution.
The proposal was to charge the fee from companies with a turnover of over 120 million rupees a year.
Rajapaksa also increased value added tax (VAT) to 18 percent from the current 15 percent on banks and financial service providers under supply of financial services by specified institutions with effect from Jan.1, 2022, targeting 14 billion rupees from the proposal.
“This tax should not be shifted to the customer,” Rajapaksa said in his over two-hour budget speech in which he was forced to sit and read at one point because he was tired.
However opposition legislators poured cold water on the budget.
Opposition legislator Harsha de Silva, a former economic development minister said the taxes will eventually fall on consumers.
With the deficit still at 1.6 trillion rupees (8.8 percent of projected GDP) the government had failed address the problem sufficiently to boost the near-default credit rating and there were no reforms get strong growh another critic said.
“It did not address the fundamental issues of budget deficit and foreign exchange shortage and it is a tough task,” former deputy finance minister Eran Wickremeratne said.
“There are no new measures at all. They could have taken a major leap in exports of agriculture, especially for the small and medium sector.”
The finance minister raised tax on cigarettes to raise 8 billion rupees and excise tax to earn 25 billion rupees, both with immediate effect, a standard tactic in Sri Lanka.
Sri Lanka high alcohol taxes have promoted a thriving bootleg sector and cigarette smuggling.
Meanwhile Rajapksa said treasury records indicate that due but uncollected tax revenue is over 200 billion rupees which is around 1.5 percent of the GDP.
“Taxpayers evade payment of due taxes resorting to various mechanisms,” he said in his budget speech.
“Further, although tax evaders are sent a notice of tax assessment by the Inland Revenue Department, there is a belief that the payment of due taxes can be evaded by paying a certain penalty to the Department.”
“In order to change these practices, I expect to establish legal provisions to apply technological processes to tax administration. As proposed by the 2021 budget, I propose to implement the Special Goods and Services Tax (GST), for which legal provisions are already drafted, with effect from January 2022 to cover all goods and services covered by the Act.”
The GST is expected to contribute 50 billion rupees to the government coffers.
Sri Lanka will also action spectrum and licenses for telecommunication services, including, fixed phone operations, mobile phone operations, internet service providers, and satellite broadcasting operations, Rajapaksa said.
The government expects to reduce its budget deficit to 8.8 percent of the GDP from last year’s 11.1 percent, the worst in 32 years.
Authorities expect to boost revenues to 12.3 percent of GDP from the forecast out-turn of 9.5 percent this year.
Though aggressive taxes have been proposed which seemed ambitious, the budget was weak in reforms and spending plans did not impress, a global fund manager said.
Rajapaksa proposed several micro level spending targeting rural people, the core vote base of ruling Sri Lanka Podujana Peramuna (SLPP).
He said the priority had been given to the “Discussion with village”, a programme in which President Gotabaya Rajapaksa is meeting the public at village level directly from time to time.
He said the government has allocated 3 million rupees for each 14,021 grama sevaka division.
Apart from that it also proposed spending on many rural projects including developing irrigation and roads especially in rural areas.
The budget comes at a time people are complaining against rising prices and import controls and a ban on chemical fertilizers and forex shortages after nearly two years of money printing.
Sri Lanka printed money to keep rates down despite the 11 percent deficit in 2021 and an over 13 percent deficit in 2020 and the country is paying price. (Colombo/Nov12/2021)