Some thoughts on the Budget 2019 | Daily News


Some thoughts on the Budget 2019

Not much may be expected from an unpopular administration in an election year. This budget is better than what may have been expected. It does have a lot of giveaways, some irresponsible designed to garner votes. It is not liberal or free market budget by any means although some have termed it such but there a few liberalising measures and some statements that promise further liberalisation in the future.

The ‘sweeteners’-Gamperaliya, Ran Aswenna, etc are the problem: the government giving away money without having any; resorting to taxing or borrowing to collect it.

Government expenditure continues to rise, partly due to giveaways and they seem to hope that taxes on alcohol, tobacco (Rs 37 billion), vehicles (Rs.48 billion), fees (number plates, expressways peak hours toll fee, Tourism Development Levy) – Rs.18 billion, custom duty revisions (20 billion) will pay for this. This may not be realistic, particularly the alcohol and tourism revenues so the budget deficit may expand.

The Positives:

1. General reduction in CESS (by 30%) on construction materials. This is very welcome since it will reduce house building cost.

Phasing out these taxes will lead to increased competition and lower prices for consumers. By some estimates construction costs in Sri Lanka are 60% higher than Thailand and Malaysia, making housing an unaffordable luxury for all but the rich. Saving to build a house is the most oft cited reason to migrate for overseas jobs. The problem is entirely due to the prohibitive taxes on all key construction materials. A proper policy on sand-one of the causes of high cost of concrete is also needed- to prevent environmental degradation that arises from current practice and address the corruption that results from ministerial control of sand mining permits. The import of sand, as practiced by Singapore and more recently India can lower prices and should be permitted.

2. Lowering construction costs for large projects by exempting duty, PAL, CESS, NBT for negative list items. This will significantly reduce the cost of construction for new investments-but restricted to large investments. The exemption is limited to a) large foreign investment over US$50m b) only during the construction stage (ie not after commercial operations). A step in the right direction.

3. It is proposed to phase out all para-tariffs over a period of 5 years starting from the para-tariffs removal in November 2017 for 1200 items. 10% of all HS codes considered to be sensitive items will not be subject to a compete para-tariffs phase out. • Sectors such as construction, tourism and manufacturing are identified for accelerated Cess reduction program. Any intermediate goods in these sectors will have Cess reduction phased out over a period of 3 years. Sets a good direction to policy but only a statement, with no immediate impact.

4. Removal of cess on fruit, nuts (banana’s pineapples,guava’s mango’s affected) is positive that may translate to lower fruit prices.(Taxes reduce from 101% to 62%). Is it cost effective to sell imported fruit with the reduced tax structure – we will have to wait and see if there is an actual impact. Apples and grapes are not affected.

5. Reduction of PAL from 7.5% to 2.5% on dried vegetables, onions, mushrooms, garlic. OK but again may not have much impact. May benefit hotels.

6. ITO levy on telcos supported a grey market dominated by politicos. Removing this will help the telco industry.

7. Taxing vanity items like personalised number plates is a good step. So is the VAT on apartments. The government needs to move to a structure that has fewer taxes, low rates and uniform in application. VAT is a standard tax used the everywhere but it should be the only consumption tax, not a tax added on to a host of other taxes (PAL, NBT, CESS, Duty surcharges, etc). The only exemptions should be for food and essentials.

8. Financial assistance to established daycare centers for children of working mothers in order to encourage women in the workforce. This is positive step but need to see how it will be implemented.

9. Tax concessions for companies that grant 3 months of maternity leave. Another good move but implementation is unclear.

10. Providing financial assistance for higher education in non-state universities; - Private sector is encouraged to provide courses for nurses where a stipend will be paid by the government. This is a giveaway but a good scheme because it promotes choice – instead of providing low-quality university education, give scholarships and allow students to choose where to receive education.

The Negatives

Corporate Welfare

1. No foreign construction company can bid for government projects unless they are fully foreign funded or there is a joint venture with a local company.

This is a sop to the local construction industry lobby which will restrict competition. Who benefits from this? Not the government, which should be aiming to get the lowest possible cost on a project, or taxpayers who will eventually pay for this, but only the local industry.

This may not mean that Chinese and other contractors will not be working – they may still do the actual work but as subcontractors to local players.

2. From 01st April 2020 online booking of lodging with more than 5 rooms allowed only if same are registered with SLTDA.

This will affect small hostels and hotels which generally offer cheaper accommodation. Larger hotels have been lobbying for restrictions on the unorganised sector – to restrict competition thus enabling them to charge higher prices. The growth of the unorganised sector has been one of the great successes of the tourist industry. The system of online ratings means that customers get a good regular rating on quality, which means the industry is essentially self regulating. There is no benefit to the consumer that can come from regulation but will cause unnecessary hassle, increasing administrative costs for smaller businesses. The government hopes to charge a registration fee from the hotels.

How the government intends to enforce this regulation is unclear.

3. Tax exemption on Go-Karts and Tyres – Bad policy that violates the principle of uniform treatment. Why exempt only Go-Kart tyres what about other tyres which are heavily taxed?

The Confused

Production tax on hard liquor (750ml bottle) will be increased by Rs. 63 and on can of beer (330ml) by Rs. 9.

Businesses complain of a lack of consistency in policy this is an example. Excessively high alcohol taxes promote black markets, which the politicos have a hand in. In a welcome move last year the government indicated that soft alcohol would be taxed lightly and reduced taxes last year.

This year taxes have increased again on both hard and soft alcohol. Which way is policy going? We would have liked to have seen progressive reductions in taxes which would have improved government revenue and given a clear signal as to direction.

Last year, the poor citizen, reeling under the burden of currency depreciation and taxes could have drowned his sorrows in glass of cold beer. This year even that will not be as cheap.

Similar policy confusion with taxes on cars, ad-hoc changes year to year but nothing to address the fundamental problems of public transport and congestion.

The giveaways

1. Public sector salary increases should be a part of an annual standardised process. It should not be used as an electioneering tool, which is the case here. Public sector salaries and pensions are a fiscal time bomb, they already consume 50% of tax receipts. This is the most problematic giveaway since it creates long term problems.

As per the World Bank:

“The Public Servants Pension Scheme (PSPS) provides a relatively generous defined-benefit pension for Government employees with an estimated replacement rate of 83-88 percent but the costs of the scheme are projected to increase in the coming years from the current cost of about 1.4 percent of GDP thereby making it increasingly difficult for the authorities to afford the benefit promises over the long-term”

2. Interest subsidies and other giveaways.

1. Support the primary school children’s nutrition effort by giving a free glass of milk for primary school children across the country. This is a poorly though out policy that will be very expensive to implement. Delivering milk to some 4m schoolchildren all over the country is a logistical nightmare. Ensuring milk actually reaches the students will be even more difficult. Why not simply cut the taxes on milk and milk products instead?

The sting in the tail-how do we pay for this?

1. ESC on all imports (0.5%) will increase import prices.

2. Piece rate tax on garments increased from 75/- to 100/- per piece affects the cost of clothing. (Cheap T shirts and trousers – especially for children retail in the range of 300/- to 500/- A tax of Rs100/- is not small)

3. Credit card tax increase from 2.5% to 3.5% on overseas transactions.

4. Taxes on alcohol, tobacco.

5. Embarkation levy from US$50 to US$60 per ticket (increases cost of air travel).

6. Passport fees, toll charges,

7. Vehicle taxes.

We may conclude that overall, a better budget than could be expected under the circumstances, all credit to the Finance Ministry for not resorting to an outright vote-buying exercise.

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