Cess Less

The Tariff Advisory Council (TAC) says that the import cess charged on luxury goods, should not be channelled towards the Export Development Board (EDB).

The government charges duties over 45 percent on liquor, cigarettes and cars, but the monies are mainly used to meet the EDBs running expenses.rn

“The cess is an indirect tax on exporters. The future role and funding of export development should be a matter for independent review,” notes Sandy Cuthbersone, Consultant to the TAC and author of a draft report on Future Trade & Tariff Policies for Sri Lanka.rn

The EDB was started over 23 years ago, when Sri Lanka was shaking itself free from a closed economy. The export promotion bureau has since played a key role to organise overseas trade fairs and promote value addition among local exporters.

“The cess which was introduced in 1981 has long been a contrary way of supporting exports. This is because a tax on imports is at the sametime a tax on exports,” says Cuthbersone.

2002, EDB got Rs. 209 mn as cess revenue, plus a grant of Rs. 80 mn from the Treasury.

But, the EDB has had to adjust its budget to lower revenues from cess, reduced grants from the Treasury and backlogs in the transfer of cess funds from the Treasury, explained Ratna Sivaratnam, EDBs Chairman.

EDBs expenditure on development and promotional activities has also fallen from Rs. 305 mn in 1999 to Rs. 91 mn in 2002, due to its shrinking budget, says Sivaratnam.

Administrative expenses of the EDB increased to Rs. 188 mn in 2002, which is now 67 percent of the total revenues.

However, to the extent that EDB activities are cost shared with the private sector, the share of administrative costs of total expenditures should be less than 67 percent, says Cuthbersone.

To test whether such a tax is good value, Cuthbersone says it would be necessary to answer three core questions.

“First how large is the tax and how does it impact on exporters? Second, what activities does it support? Third, what would have happened if the tax had not been collected?” he said.

By collecting a tax on liquor, cars and so on, the cess does not impact directly on exporters.

“While it is true that the cess does not appear to impact on exporter input costs endash though exporters drive cars and some of them may even take a drink endash a tax on any imported good will ultimately come back to hit exporters, if only because in the end the rationale for exporting is to be able to import,” he said.

To make any import item more expensive by way of a tax, is to reduce the incentives to export.

“By now, how much is a good question. Its important that the authorities sit down and decided which way to drive the EDB and how the cess funds should be used,” he said.

The TAC has suggested that EDB be restructured to suit the future needs of exporters.

Sivaratnam says the board has decided to downsize staff levels to 210 from 300. “We were on track with our VRS programme, until the Treasury last week withdrew the voluntary severance package it offered to government servants.”

“The new Treasury circular says that we can go ahead and offer a VRS, but with our own funds, the question is that the funds are not enough even for our promotional activities,” he said.

He added that the EDBs current structure leaves it with no alternative but depend on public and Treasury handouts for its survival.