2021 Budget: Evenly poised | Sunday Observer

2021 Budget: Evenly poised

22 November, 2020

The 2021 Budget was hailed by economists, industry experts and the business community as an evenly poised budget but not without challenges as global uncertainty is expected to dampen economic prospects for a good part of 2021. However, cautious optimism was expressed from many quarters due to the potential the country has to achieve higher economic growth which is being supported by a budget which focuses on promoting manufacturing, export competitiveness and harnessing foreign investments for productive ventures to achieve the envisaged target of six and above economic growth rate in the years ahead.

The 2021 Budget is also considered a people-friendly budget providing tax relief across a wide spectrum of sectors and supporting the revival of Covid-19 affected SME businesses and the revitalisation of the rural economy.

The measures such as extending the period for repayment of refinancing loan facilities the tourism sector up to September 30 2021, increasing the daily wage of estate workers to Rs.1,000 from January next year, an insurance scheme for Covid-19 affected employees, amending the Employees’ Provident Fund Act to expand the retirement age for men and women up to 60, building 50,000 houses providing a 25-year loan with an interest rate of 6.25% granted for applicants of these state housing projects, migrant workers to be given Rs. 2 for every dollar remitted to boost foreign remittances, a contributory pension for migrant workers, annual intake of technical colleges to be increased to 200,000 per year, a five-year tax relief for private educational institutions, a new loan scheme for Samurdhi beneficiaries on 7% interest and Rs. 18,000 million additional provisions to combat Covid-19 are aimed at incentivising and creating a vibrant domestic economy that has been over-reliant of foreign aid and a few conventional export items which has stifled economic growth for decades.

However, the herculean task as expressed by think tanks and economists is that how would the government carry out development initiatives when the annual foreign debt servicing amounts to over USD 4,000 million in the next four years.

The country cannot as opined by experts cannot raise money from international markets as its sovereign rating has been downgraded and the debt to revenue approaching 100 percent.

Will ensure sustainable growth

State Minister of Money and Capital Market and State Enterprise Reforms, :Ajith Nivard Cabraal:

The government will stick to the overall objective of achieving prosperity in the country by ensuring steady and sustainable growth in the years to come with a focus on achieving over six percent growth through investments, public sector reforms, export competitiveness, capital market reforms and a vibrant manufacturing sector.

We first need to help the economy to recover first as helping a patient to recover and then take measures to sustain growth. The government has provided the stage for a steady economic through the incentives and concessions in the budget but it cannot achieve everything alone.

The role of the private sector is key to drive growth through investments.

Public sector collaboration will also be paramount in this regard and for that key reforms will be effected from 2021.

Govt has taken a calculated risk

Former Central Bank Deputy Governor : Dr. W.A. Wijewardena:

State Minister Ajith Nivard Cabraal at a recent Webinar on Budget 2021 said that it is an ‘evenly-poised budget’ meaning that all parties with diverse interests have been carefully balanced. I am inclined to agree with him.

The Budget has been presented at a time when Sri Lanka is going through the most difficult period in its history: on one side, the economy had been ailing since around 2013 and on the other side, that sick man has been completely crippled by the unexpected external shock of Covid-19 pandemic.

Hence, the mere fact of coming up with a budget is an achievement.

However, the success of the implementation of the promises will crucially depend on two projections made. One is the planned growth target of 6% after 2021 and the other is the increase in government revenue under the new low tax regime if the growth targets are realised.

These would be medium term attainments and hence in the short run, the budget suffers from the deficiency of running short of the needed resources.

This is a calculated risk which the government has taken and it will be able to mitigate it only if it could implement a proper economic management system in the country.

Hence, a lot of ifs have to be realised for the budget to become a success.

Works on assumption of 5% growth

Institute of Policy Studies, Executive Director : Dr. Dushni Weerakoon:

Budget 2021 has been arrived at under an exceptional level of uncertainty. The course of the Covid-19 pandemic may mean that certain public health measures will prevail for the next year. Even after these measures are withdrawn, it is unrealistic to assume that fiscal policy will revert to its pre-crisis setting, owing to different spending priorities and a slow-burn scenario for revenue generation. Underpinning the trajectory for fiscal ratios is the all-important underlying assumptions on growth recovery. Sri Lanka’s Budget 2021 works on the assumption of 5% growth in 2021, but the balance of risks to the country’s economic and fiscal outlook is tilted to the downside.

Domestic financing of an expanded deficit is set at a heavy 8.3% which can trigger a reversal of the current low interest rate regime, adding to interest costs and squeezing GDP growth.

However, with a high public investment target of over 6% of GDP, the government has retained sufficient flexibility to adjust numbers should downside risks dominate.

CSE welcomes capital market proposals

Colombo Stock Exchange Chairman: Dumith Fernando:

The Colombo Stock Exchange (CSE) welcomes the progressive capital market related proposals presented in the 2021 Budget Proposals.Long-term sustainable measures have been proposed to encourage companies to list on the CSE, encourage savings and investments among Sri Lankan citizens and improve the attractiveness of Real Estate Investment Trusts (REITs) through tax concessions. As a measure of promoting new listings on CSE a 50% tax concession for the years 2021/2022 has been proposed to be granted for companies listing on the CSE before December 31, 2021 and to maintain a corporate tax rate of 14 percent for the subsequent three years upon listing.Stock market investment will continue to be exempted from Capital Gains Tax and as an additional measure to encourage stock market investment, the Government has proposed to include investments made in shares of listed companies incurred up to Rs.100,000 per month as deductible expenditures in the calculation of personal income tax.In a measure that would largely improve the attractiveness of REITs investment, the government has proposed to exempt such investments from capital gains tax and dividends free from income tax. The proposal further seeks to reduce the Stamp Duty applicable to real estate transactions associated with REITs to 0.75 percent (from the currently applicable 4% for property transactions).

The CSE, working with the Securities and Exchange Commission of Sri Lanka, introduced REITs as a new investment product on the CSE earlier this year.

Success lies in implementing proposals

Senior Tax Consultant and Senior Partner Gajma and Company,: N.R. Gajendran:

The success of any budget lies in the implementation of its proposals and achieving targets. “Any government through the Budget makes certain assumptions which can go right or wrong based on the external conditions,” he said. According to Verite Research its only around 42 percent of the budget proposals of the 2019 Budget had been implemented.

Success lies in implementing proposals...

However, according to Gajendran many will be exempted from the VAT threshold which has been increased from Rs. 12 million to Rs. 300 million and the increase of the tax-free allowance from Rs. 500,000 to Rs. 3 million.

The SMEs fall into the category of an annual turnover of less than Rs. 500 million.

Tax experts said prices of goods are yet to come down even though the VAT rate had been reduced from 15 to 8 percent.

The Government targets Rs. 1 trillion in public investment next year which it hopes to raise from the domestic non-bank market.

The move is good in one way as it will prevent borrowing at higher interest rates from international markets. It could cause stress to the local market if the business environment does not improve.

However, according to Gajendran many will be exempted from the VAT threshold which has been increased from Rs. 12 million to Rs. 300 million and the increase of the tax-free allowance from Rs. 500,000 to Rs. 3 million.The SMEs fall into the category of an annual turnover of less than Rs. 500 million.

Tax experts said prices of goods are yet to come down even though the VAT rate had been reduced from 15 to 8 percent. The Government targets Rs. 1 trillion in public investment next year which it hopes to raise from the domestic non-bank market.

The move is good in one way as it will prevent borrowing at higher interest rates from international markets.

It could cause stress to the local market if the business environment does not improve.

VAT reduction will benefit trading community

Former Assistant Commissioner, Department of Inland Revenue, : A. A. Thilakarathne:

A prominent feature of the Budget proposals is the reduction of the VAT rate from 15 to 8 percent. The VAT threshold has been increased to Rs. 300 million per annum from 12 million.

The Nation Building Tax (NBT) which was charged at two percent was abolished from 1/1/ 2019 and VAT rate was reduced to eight percent. The benefit of the reduction of these two taxes should go to the end-consumer.

Due to the reduction of the taxes, and increase of the VAT threshold, a considerable amount of traders will be exempted since they are below the threshold. Empirical evidence shows that when the VAT and NBT threshold was 12 million per annum, traders were artificially manipulating the threshold not to reach the VAT threshold. As a result, the government was deprived of the VAT and NBT income and as well as the income from income tax.

Therefore, the trading community will benefit and they can show their real turnover and pay their due taxes. Since the VAT is an indirect tax, the burden is passed on to the end-consumer. The prices of many consumer items should go down.

If it does not, it is up to authorities to look into the matter.

The personal income tax threshold has gone up and as a result, a large number of public and private sector employees will be exempted from paying income tax.

The PAYE scheme has been done away with. But it should be noted that individuals who receive Rs. 250,000 per month (remuneration, interest) are allowed to pay the due taxes through their employer on a written request.

Under tax relief measures to facilitate post Covid-19, several tax relief measures have been granted to Small and Medium Enterprises (SME). Waiver of income tax in arrears payable by the SMEs is proposed on the assessments issued up to the year of assessment 2018/2019 by the CGIR, where he is satisfied that there is no fraud involved. This step is commendable in disposing the huge arrears of tax in default of the Department of Inland Revenue.

A grace period has been granted for the taxpayers to settle their taxes having come to an agreement with the Legacy branch of the Department of Inland Revenue. 

Tourism sector welcomes financial relief

Social scientist and tourism promoter, : Dr. Dietmar Doering:

The Budget proposal on the extension of Repayment of Refinancing Loan facilities until September 30, 2021 is welcomed by the tourism sector as some kind of a relief, though borrowings one day have to be settled with the banks and are subjected to accumulated interest however.

The Head of State in his inaugural speech stated the need to focus on developing tourism based on innovative and new aspects, with an emphasis on sports and health tourism. And to develop new types of tourism venues which explicitly could attract foreign high end clientele.

These suitable aspirations for the betterment of Sri Lanka Tourism falls directly under the responsibility of the Sri Lanka Tourism Development Authority being the competent authority for tourism Development in Sri Lanka.

Nautical Tourism could be one avenue for Sri Lanka with it’s 1.200 km pristine coastal lines.Attracting foreign luxury yacht owners as the would be target requires Yacht harbours, tailor-made for these affluent clients which are commonly known as Marina’s.

A panel of experts from shipbuilders to dockyard operators and even Navy representatives in numerous letters approached the SLTDA to consider the developing of nautical tourism as a new segment for Sri Lanka’s tourism, but so far the appeal has fallen on deaf ears. Request letters had not been answered and invitations for presentations had been ignored by the SLTDA.

Encourages entrepreneurship for women

Women’s Chamber Chief: Mrs. Indrani Fernando:

The Women’s Chamber congratulates the Government for presenting a budget which has focused significantly on improving the local businesses, education and skill development and promoting environment-friendly business practices. “We are happy to note that some of our suggestions too have been considered by the government”

We applaud the government on its proposals to encourage entrepreneurship including the focus on women under the Samurdhi scheme and young men and women who have completed vocational training. This appears a well thought of scheme which includes setting us a process and preferential financing schemes.

We see the initiative to encourage entrepreneurship for 25,000 women chosen from Samudhri families as an initiative that will contribute to them moving from being ‘dependent on the state’ to ‘contributors to the economy’. We are also encouraged to note that these network of shops will function under government sponsorship with a Rs. 1,000 million as government contribution to provide credit facilities and that priority will be given to sell local products.

We hope this initiative will benefit many courageous females who have micro-cottage industries to grow and scale their businesses. One of the focus areas of WCIC is to build the capacity of women in the micro sector to grow and scale and obtain financing for progress.

We commend the proposal to encourage individuals who have completed vocational education to become entrepreneurs. We believe that this will be an initiative that will assist the country to develop high skilled entrepreneurs who can build successful businesses.

We are also encouraged by the initiatives to support villages engaged in traditional industries to expand their production and to facilitate access to markets.

There is definitely an abundance of high skilled traditional crafts that we should preserve and promote and brand as Sri Lankan products thereby also increasing the Sri Lankan Brand.

We also believe that the proposal to allocate Rs 1,500 mn to purchase raw material for Thriposha will also encourage the SME sector to increase its focus on agriculture while also ensuring we provide the much required Thriposha to pregnant mothers and infants.

The measures to promote Small and Medium Scale exports (TIEP scheme) backed by a contributor insurance scheme to assist in working capital requirements to export high quality goods through high value addition to local inputs will also certainly assist the SME exporters.

Achieving targets, an uphill task

Economic analysts:

Economic analysts said that the 2021 Budget is the most challenging budget in Sri Lankan history and achieving the targets of the budget will be an uphill task. They said that Covid-19 pandemic has halted most of the economic activities and it was pointed out as the main obstacle the government has faced. All sectors of the economy are performing slower than its potential and lockdowns, curfew and other pandemic prevention measures have crippled economic activities. The second wave started in the industrial sector severely affecting main industrial zones and it is still not under control. Nobody can forecast how this crisis will end and therefore the budget forecast too is vague, they said.

The Government expects a 5.5 economic growth in the next year and this is far from the reality projected by the governmnet. According to the IMF the Asian economy will contract -2.2% in 2020 while the Central Bank predicts -1.7% contraction of Sri Lankan economy in the same year and expects recovery from mid-2020. Economic analysts say that now we are at the end of 2020 and the second wave of Covid-19 is still serious and there is no sign of recovery.

The Prime Minister said the Government’s medium-term vision is to reduce the budget gap by increasing the economic growth up to 6 percent and increasing government revenue from 9.7 percent to 14.1 percent. However, analysts said that government’s revenue targets are also unrealistic, because of slow economic activities and import restrictions.

The outlook of the external sector, which is largely driven by the trade deficit, will depend on the global economic impact of the Covid-19 pandemic and the domestic policy responses. Expatriate workers too have been affected by the pandemic and there will be a drop in foreign remittances.

Government expects its import restriction policy will boost domestic production and ease the pressure on the external sector of the economy on a sustained basis. Lot of incentives have been offered by the budget to attract foreign remittance and black money into the economy.

Opposition political parties alleged that the budget is totally aimed at borrowing. National People’s Power (NPP) MP Vijitha Herath said “The Government intends borrowing Rs. 3,000 billion (Rs. 3 trillion) in 2021. It had borrowed Rs. 2,000 billion (Rs. 2 trillion) in 2020. Sri Lanka’s total debt services are Rs 13.2 trillion.

With the borrowings of 2020 and 2021, it will be increased to Rs 17. 2 trillion. The burden is on the people. This is what the budget 2021 is all about, he said.