Not Our Budget

Budget 2006 goes to Parliament next week, but Sri Lankan businesses are not showing the interest usually reserved for a national budget. Budget 2006 goes to Parliament next week, but Sri Lankan businesses are not showing the interest usually reserved for a national budget. Given Sri Lanka’s practice of sudden policy changes and surprise taxes, the local private sector usually keeps the national budget process firmly in its sights.

Speculation on budget features, by threshing out how the government is most likely to finance its revenue shortfall, begins at least one month ahead.

The fever spreads over to the cocktail circuit and the trade associations work overtime pushing private sector offensive and defensive agenda’s into the national budget.

“But this time there is a marked lack of enthusiasm over the budget,” says Rajan Asirwatham, a senior partner from the local office of the international audit and tax advisor, KPMG Ford Rhodes, Thornton and Co.

Budget 2006, notes Asirwatham, is met with next to no constructive speculation, or investment adjustments to overcome tax changes, and with a positively careless attitude to tax planning.

Even for Sri Lanka’s politically jaded private sector, this is unusual behaviour – particularly given the long list of grievances over the government’s taxation habits.

Local car importers for instance, have still not got over it.

Taxing Times

Taxes on vehicles with engine capacity of 1,500 cc and above – what the government calls luxury items, together with refrigerators and cookers – are now at 204 percent of CIF value.

But car importers are not complaining about the taxes – the problem is the heart attack suddenness of their appearance.

“You just wake up one morning to find taxes on your imports increased,” says Tharanga Gunawardena, Manager for Chrysler and Jeep at DIMO, a leading local importer of motor vehicles.

“First they increased Customs duty from 97 percent, to 197 percent in October last year. This year, the VAT was increased by two percent – that had a ripple effect of around seven percent duty increase. Both times we found out only when we went to clear the vehicles,” says Gunawardena.

Purchases of luxury vehicles plummeted by nearly 70 percent with the repeated price increases.

“Both were tax increases that were not in the budget. So we have no faith in the budget,” says Gunawardena.

These outside-the-budget tax increases, is just one example of abusing the tax regime.

Bad Tinkering Job

The government still has not sorted out the mess it created by tinkering with the VAT system.

There is no relief for genuinely loss making companies and low profit industries from the Economic Service Charge.

People are still trying to work out the thinking behind the 2.5 percent Social Responsibility Levy that could have been collected just as well and more easily, by increasing the charges to file tax returns.

Meanwhile, the debit tax (0.1 percent) on cashing a cheque, is helping to push people away from the banking system.

While all of these taxes help the government balance its accounts, for everybody else, they just put up the cost of living.

“When the tax system is inconsistent the public is caught unaware and people incur losses because the changes have not been built into their costs,” says Asirwatham.

“So two things we would like to see, is for all taxes to come from the budget and no retrospective taxes,” says Asirwatham.

Had Enough

But this year, even the self interest of the local private sector seems to have hit rock bottom.

Local trade chambers, the traditional interface between the tax paying private sector and the policymakers, report a message of indifference from their members towards the budget.

“There is a lack of interest. They are not taking the budget very seriously this time,” says Duminda Hulangamuwa, a committee member of the Ceylon Chamber of Commerce.

The fact is, Sri Lanka’s national budget has deteriorated into a political manifesto stuffed with subsidies.

And local businesses realise full well that budget proposals on the eve of a change of executive head of State, if not an outright change of regime, are a bluff – so they are not bothered.

Sri Lanka’s private sector is sitting back and waiting for a more realistic budget.

-Dilshani Samaraweera: dilshanis@vanguardlanka.com