With little over a week to go for the presentation of the 2019 Budget economists, tax experts and analysts say that given the enormous challenges and uncertainties of the economy in the coming year the Government should not present a comfortable budget until economic improvements with policy reforms take place.
Professor of Economics, University of Colombo, Sirimal Abeyratne said the 2019 Budget will be presented amidst many economic challenges and uncertainties. While the rate of economic growth has slowed down, the future growth forecasts for Sri Lanka remain lower than those of other countries in South Asia. He said, the country needs to consolidate its fiscal position and to strengthen its balance of payments position. In the midst of such fundamental challenges, there are immediate concerns which have contributed to future risks and uncertainties.
“All these challenges have a bearing impact on the forthcoming Budget 2019, while at the same time the budget itself being the short-term financial outlay of the Government can contribute to the overcoming of the long-term challenges.
“At a time when fiscal consolidation should receive utmost priority in short-term policy-making, there is no space for unproductive spending as well as handouts.
Besides, the complicated tax system has to be changed and simplified in order to improve the business environment and competitiveness. Both elements may not be politically correct, but the economy has come to a point that the country cannot afford to postpone its reforms further. He further explained, one of the positive developments that could be expected in the coming year is the increase in income tax revenue, easing the fiscal burden. However, the outcome depends on the efficient implementation of the direct tax system which is yet to be seen. In contrast, the Government’s indirect tax revenue is under pressure due to possible decline in import tax revenue after the new import controls. “Given these challenges, it is not possible for the Government to present a comfortable budget for the coming year until and unless there are economic improvements with policy reforms.
According to the Appropriation Bill the Government’s total expenditure for 2019 is estimated at Rs. 4,376 billion while revenue is Rs. 2,432 billion making a deficit of 4.1% or Rs. 644 billion for 2019.
However, according to Central Bank Governor Dr. Indrajit Coomaraswamy fiscal slippage will make things worse for Sri Lanka in its repayment of debt amounting to US $15 billion commencing next year. The budget deficit forecast for this year is 5.3% .
Principal- Tax and Regulatory KPMG Suresh Perera said in the previous budgets there was a trend to prune the list of exemptions in the VAT Act. Perhaps one may expect this trend to continue in this budget as well.
The policy makers may take cognisance of the Central Bank Governor’s recent statement where he called for strong deficit controls to ensure Sri Lanka can meet an estimated USD 15 billion debt repayment.
This requirement when coupled with the need to salvage the depreciating rupee, may compel the policy makers to hike the import duties of luxury items including motor vehicles, Perera said.
“Sometimes we may witness yet another proposal to impose tax on digital economy / online traders and online service providers. In the previous two budget speeches, similar proposals were made sans execution. ‘Taxing the Digital Economy’ is a trend witnessed not only in Sri Lanka but the world over.”
“There is news of a possible expansion of the tax on sugared beverages to encompass other items as well. Proposals pertaining to “Enterprise Sri Lanka” may also play a significant role in the budget.
With the elections being around the corner, the policy makers may have to appease the voters. How could one increase the disposable income - maybe a focus area in the budget.”
Perera added, policy makers may address some of the tales of woe stemming from the recently implemented new Inland Revenue Act. In order for exporters to enjoy the 14% Income Tax rate, 80% of their gross income must be by way of exports. Exporters would be expecting a change in the rule to enjoy the concessionary rate.
The recent introduction of withholding tax on service fees has caused ripples in the construction industry and perhaps this may also be addressed in the budget due to the significance of this industry to the economy. The is also a possibility that new Capital Gains Tax rules introduced recently may witness modifications.
Meanwhile two researchers who are professional engineers, Tilak Dissanayake and Hilmy Sally have said in a proposal paper, a minor change in regulation can bring the Government billions in tax money in a matter of a few months.
They say in a budget proposal paper, “the existing land law is such that in Sri Lanka, paddy lands cannot be used to cultivate any other kind of crop nor can the land be used for infrastructure development (not even small construction is allowed).”
“On surface level, it looks like a great regulation to help boost agricultural output, but this is entirely politically motivated and the reality is not the same. Increasingly, land is left to idle as cultivation is reducing. Hence, this archaic regulation has led to an unbelievable amount of land not being utilised as best it could be. This is one key factor pulling back agricultural modernisation in Sri Lanka as well. With our increasing debt burden and the depreciating rupee, regulations such as this need to be changed immediately.”
Presenting a simple solution Dissanayake and Sally said a minor change in the regulation can bring the Government billions in tax money in a matter of a few months.
The solution they propose is, if 20% of the paddy lands are allowed to be converted and sold to developers, then the Government will receive US$6 billion in taxes from the first round of sale in less than a month of passing a couple of simple regulations. The taxes are the usual 4% buyer Stamp Duty, and a proposed “Converted Bare Paddy Land Sales Tax” of 10% paid by the seller in lieu of the usual Capital Gains tax.” The duo has sent their proposal titled “Bottom Up Capital” Based Growth For Food, Water, Energy and Economic Security” to the authorities for their consideration.