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The Budgetary Proposals

Taxation

Mr. Speaker, there has been a steady decline in the tax revenue to GDP ratio during the past few years, while the complexity of the tax regime has increased considerably due to ad-hoc and inconsistent policy measures. Taxpayers are faced with a whole host of different taxes such as NSL, GST, Customs Duties and Stamp Duties, often on the same transaction. Moreover, the implementation of ad-hoc policy measures and the grant of unplanned concessions and exemptions have made the task of tax administration virtually impossible. The tax system has also failed to meet the revenue needs of the Government.

The tax reforms I present to you today are designed to eliminate the excessive use of ad-hoc tax incentives and distortionary multiple tax exemptions, broaden the tax-base, and streamline the tax administration system. These reforms will increase revenue significantly in 2002.

Mr. Speaker, it is time that we abolish a number of taxes that raise costs to consumers and unfairly penalise initiative. I propose that we abolish the following taxes:

• G.S.T.: which has been a disappointment in terms of raising revenue;

• N.S.L.: which causes prices to cascade and rise beyond the reach of the common man;

• Corporate Tax Surcharge of 20%: which impedes corporate expansion.

• Advance Company Taxation: which impedes the cash flow of our companies and makes corporate taxation unnecessarily complex;

• Tax on Capital Gains: which penalises investors and encourages citizens to conceal their income from the Government;

• Governmental Stamp Duty: a tax which is inconvenient to collect and ends-up hampering the purchase and sale of houses and lands and impedes development of capital markets.

• 100% Transfer Tax: purchase of immovable property by non-citizens, which is difficult to identify and is unproductive.

The revenue loss from the abolition of these taxes will be re-couped from the new tax regime we are introducing.

The main reform is the transformation of GST and NSL into a Value Added Tax. I also propose implementing a range of other revenue reforms for strengthening the revenue base. The new system will enhance tax compliance as well as ensure a sustained increase in revenue. It will also lead to a higher level of savings and investment than at present.

Government will recognise taxpayers who honour their tax commitments. Good citizen recognition cards, which can be used for priority treatment at selected Government institutions, will be provided to those taxpayers who pay their taxes in full and on time. The proposed new Revenue Authority will devise and implement the system.

Many different complications arise under the indirect tax system, causing inequity across sectors. The NSL, in particular, is a cascading tax which has no offsetting mechanism for input costs. It causes prices of consumer goods to rise the more they are subject to processing or handling. A modern VAT should tax value-added rather than output, be widely based and collected on a near-automatic basis.

VAT will be a two-rate tax system. The lower band (10%) will apply in general to essential goods and services. Power, petroleum, essential food stuffs, fertiliser, pharmaceuticals and medical equipment, industrial equipment, agricultural and fishing equipment will be charged at the lower VAT rate in order to stimulate investment and growth and contain the cost of living. A standard rate of 20% would be charged for other goods and services. Annex I presents a detailed description of the new VAT system. An awareness campaign on the working of the scheme of VAT will be launched to enable the public to understand the scheme.

The increase in Government revenues arising from the introduction of the VAT will be approximately Rs. 3.5 billion in 2002. The date of introduction of VAT will be June 1st 2002, the date on which GST and NSL will be abolished. The retail trade will be brought under the VAT system in 2003.

Numerous import duties, surcharges, licenses and administrative requirements have weakened our international competitiveness and threaten to undermine our enterprise access to capital, technology and raw material at affordable prices. With an eye towards establishing a more competitive customs regime, I propose to setup a permanent Tariff Commission as an institutional mechanism to examine tariffs, and address representations made by importers and industrialists. The Commission will include officials of the Ministry of Finance, Ministry of Enterprise Development, Industrial Policy and Investment Promotion, Ministry of Commerce and Consumer Affairs, Ministry of Agriculture and Livestock and trade chamber representatives.

I also propose to reduce the surcharge on import duty from 40 percent to 20 percent on April 15th 2002. It is intended to do away with it at the beginning of 2003. This should ease price pressures and reduce temptation for evasion.

High specific duties and import licences will be replaced by a rate of protection for the main agricultural goods (rice, chillies, onions, potatoes and edible oil) equal to about 60 percent of the landed cost of imports. This will enable us to balance the needs of the farm community for protection whilst also ensuring that the food supply is available at an affordable price for the poor and middle-income groups, who allocate nearly one-third of their domestic budgets to these items. A consistent rate of protection for agricultural produce will increase certainty for producers and traders and encourage both to invest more in agricultural development.

Sri Lanka being a signatory to the Convention on the Harmonized Commodity Description and Coding System (HS) will have to accommodate the most recent revision of the HS which became operative on 01st January, 2002. Gazettes will be published to accommodate these changes, which will also incorporate duty adjustments on a few items.

Import duties will be reduced in line with the arrangements struck in the Indo-Sri Lanka Free Trade Agreement. Import duties of selected raw materials will also be reduced.

The time has come to reduce reliance on imports of old, second-hand vehicles for commercial use. Therefore, I propose to reduce the depreciation by 2.5 percent for used motor cars of more than 2 1/2 years of age, and other types of vehicles which are more than 4 years old. The additional revenue resulting from this measure will be Rs. 225 million.

Duties, surcharges and other levies applicable to any imports with a value of less than Rs. 10,000/= sent through parcel post will be removed. This is intended to ease the clearance burden and to facilitate imports of samples and other non-commercial goods. A simplified customs procedure will be introduced in such cases.

A Debit Tax will be introduced as a temporary measure, with effect from May 1st 2002, at a rate of 0.1 percent on debits including cheque, credit cards, travellers’ cheques, drafts and bank debit transactions on accounts maintained with banks and other financial institutions. It is estimated that this will yield Rs. 2,300 million. The tax will also be imposed on withdrawal of Certificates of Deposits and finance company transactions.

I propose to convert the Stamp Duty on imports to a Port and Airport Development Levy. This Levy of 1 percent will be introduced and charged on the declared CIF value of all cargo imported into Sri Lanka. This measure will also take effect on 1st of May, 2002. This will yield an additional Rs. 4,200 million.

Governmental Stamp Duty will be abolished on 30th April, 2002.

Our excise duty structure at present suffers from several weaknesses. The existence of two tax statutes for the imposition and collection of excise duties from the same taxpayer, as in the case of hard liquor and beer, complicates tax administration and brings distortions to the tax system. I have already introduced earlier this month certain changes to excise duties on cigarettes in order to assist legally produced cigarettes as against illicit products, which are also a health hazard. I intend to introduce similar measures on beer and hard liquor. These excise measures are described in Annex 2. The excise tax reforms will come into effect from 23.03.2002 and will generate an additional revenue of Rs. 450 million for 2002. Clear legislative criteria will be enacted to govern the issue of liquor licenses.

Future power generation projects, subject to the exceptions I have earlier stated, will be open to the private sector. The tax concessions available for large infrastructure projects in the production, transmission and distribution of power are setout later on. Electricity tariffs will be revised, but concessionary rates will apply to consumers of less than 30 KWh per mensum.

In regard to petroleum, the Government has already introduced a pricing mechanism of petroleum products from an administered price structure to a formula based on world market prices and currency fluctuations. The loss recovery charge, currently imposed on consumers, by the Ceylon Petroleum Corporation will be taken over by the Government. A new excise duty structure will come into effect on 23rd March, 2002. These changes, whilst making available petroleum products to the public at market prices, will also arrest the heavy losses incurred by the Ceylon Petroleum Corporation through interference in pricing and management.

The importation and supply of petroleum will be liberalised and open to the private sector. It will no longer be a monopoly of the CPC.

Although the levy payable under the Betting and Gaming Levy Act No. 40 of 1988 was revised upward in the last Budget, the collection of the levy has been disappointing due to legal and administrative problems. The Betting and Gaming Levy Act will be amended as follows:

1) Gaming — an annual levy of Rs. 12 million to be paid up-front in four quarterly instalments at the commencement of each quarter will be imposed with effect from April 1st 2002. Each casino will be regarded as a separate entity for this purpose.

2) Betting — Off-course racing — an annual levy of Rs. 500,000/= to be paid up-front in four quarterly instalments at the commencement of each quarter. This levy will be reduced to Rs. 10,000/= per annum if such operator establishes that live telecast facilities are not used in his activity. This levy will be applicable with effect from April 1st 2002 to each place of such activity.

The levies may be paid to specified banks under identification numbers issued by the Inland Revenue Department. Those who default on such payments will be prevented from operating the relevant activity. The expected revenue, from these two measures in 2002 is Rs. 200 million.

Our direct tax system is complex and is characterized by high marginal tax rates. This discourages our taxpayers from declaring their income and drives businesses into the hidden economy. For many years, we have defined income for tax purposes in a way that is very different from the manner in which most businesses define it. As a result, companies have been discouraged from engaging in business practices that are in other jurisdictions deemed necessary to expand output and build wealth. Moreover, we have used high rates of direct taxation and in so doing, have discouraged the extent to which new investment could be financed from a company’s own profits.

Our long-term objective is to gradually increase reliance on direct taxes at a reasonable level, while reducing reliance on indirect taxes that burden consumers. Towards this end, l am introducing a major reform program aimed at simplifying the direct tax system and expanding the direct tax base.

Our objective is to reduce the top rate of personal income tax to 20 percent by 2004. The top rate of personal income tax will be reduced from 35 percent to 25 percent in the 2003 Budget. This year, due to severe fiscal constraints, we are unable to reduce the top rate of personal income tax. However, to ease the burden on the middle income groups, we are revising the taxable slabs upwards and raising the exemption threshold. The marginal rate of tax will be changed from 10%, 15%, 25% and 35% to 10%, 20% and 35%. This will result in a saving on income tax payable by non-corporate taxpayers, such as wage-earners and self-employed individuals. The tax exemption threshold will also be raised from its present level of Rs. 144,000/- per annum to Rs. 240,000/= per annum, affording further relief to individual tax payers.

This new personal income tax structure which will come into effect from 01.04.2002, will be as follows:

Taxable Income Tax Rate

First Rs. 180,000 10%

Next Rs. 180,000 20%

Balance 35%

The total revenue loss will be Rs. 1,200 million this year.

The salaries of public officers derived from government employment will remain non-taxable. However, any income derived by them from other sources beyond the threshold of Rs. 240,000 per annum will continue to be liable for tax.

In line with our policy of lowering the tax burden and providing relief to wage-earners on their lifetime savings, I propose to double the value of the tax exemption threshold for retiring benefits from the existing level of Rs. 500,000 to Rs. 1,000,000. The proposed taxation structure for retirement benefits will be as follows:

Next Rs. 500,000 - 5%

Next Rs. 500,000 - 10%

Balance - 15%

This proposal will come into effect on 01.04.2002. The revenue loss will be Rs. 50 million in 2002.

Companies will be divided into two categories for corporate taxation. The line of division will be a taxable income of Rs. 5 million.

In regard to both categories, the present surcharge of 20% will not be extended. It will end on 31st March 2002. This will increase corporate revenue available for re-investment and modernisation.

With regard to companies which have a taxable income of over Rs. 5 million, it is not possible due to the severe fiscal constraints I have earlier referred to, to reduce the rates of corporate tax with effect from 1st April, 2002. However, commencing in 2003, the top rate of corporate taxation will be reduced to 30% For 2004, we will reduce this further to 20%. This will thereafter be the maximum rate. I trust that these measures will be a fillip to expansion of the corporate input into the economy. A defined proportion of the tax savings made by corporate bodies from these reductions will be required to be placed in a Human Resources Development Endowment Fund to be managed together by the private sector and Government to promote tertiary education to be job-oriented for the benefit of students and also train and upgrade skills and knowledge of employees.

I propose that those companies with a taxable income of less than Rs. 5 million be taxed at 20% from 1st April 2002. While this measure is estimated to result in a revenue loss of Rs. 200 million, we expect that it will stimulate investment in small and medium-scale, enterprises, especially in agriculture and agro-industry in the rural areas, and also increase the number of enterprises filing corporate tax returns.

The tax treatment of expenses and income will be revised to include research and development, staff training, entertainment and foreign travel subject to stipulated limits, and also the onetime cost of acquiring technology. Details on allowable expenses and exemptions are provided in Annex 3.

Rather than tax interest earnings at the same high rates as other sources of income, we will reward those who save by lowering the tax rate on interest received. Interest earned will be excluded from computation of assessable income. The tax rate will be only 10 percent. This will be deducted and withheld at the time of payment or crediting of the interest. Furthermore, interest income of Rs. 6,000/= or less per deposit per annum will not be liable to this tax. Specified interest exempted under Section 10 of the Inland Revenue Act will also not be subject to this tax.

Whilst stimulating additional savings, the expected revenue yield from this measure is Rs. 2,250 million. This measure will be brought into effect on 1st April 2002.

Income tax payable on dividends will also be restricted to 10 percent. This will be in the form of a final withholding tax. Dividend earnings will be excluded from the computation of income tax so as to make the 10 percent a once and for all final tax. This measure is intended to stimulate the capital market. This proposal will take effect from 1st April 2002.

Expected revenue yield from this measure is Rs. 150 million.

Non-residential rental income above Rs. 50,000/= per month per premise or Rs. 500,000/= per annum will be liable to a tax of 10 percent. This will be in the form of a withholding tax which can be credited against tax payable by the landlord. Revenue yield from this measure due to better compliance is estimated at Rs. 100 million.

The current withholding tax on specified fees will be restricted to any payment in excess of Rs. 50,000/= per month on regular monthly payments, or Rs. 500,000/= per annum. The rate will remain at 5 percent.

Sir, as I mentioned earlier, an urgent need exists to improve tax administration. In the short-term, I propose that Government strengthens the Large Taxpayers Unit to improve collections from the most important taxpayers. Action has been initiated to strengthen the collection of arrears and registration of new taxpayers. Already around 30,000 files have been opened in the department during the last year. I intend to allocate Rs. 50 million for these activities to the Inland Revenue Department during this year. An additional revenue of Rs. 750 million is anticipated from this measure in 2002.

Prior to April 2003, the Government aims to transform the Customs Department and the Inland Revenue Service into a modern, efficient Revenue Authority. To prepare for this, a Committee is being appointed by me with full authority to develop the legal framework for a Revenue Authority and reforms necessary for the two services to function conjointly in an efficient and integrated manner.

In the past, tax give aways and preferential tax programmes were used by Governments to reward one investor over another. The tax incentive programmes escalated to such an extent that only the smallest and most vulnerable companies were subject to tax on their enterprise. I propose launching a special legislative programme to rationalise all tax incentives granted in Sri Lanka. Existing exemptions will be honoured. No new exemptions will be granted after 31.03.2002. This will apply across the board, inclusive of BOI registered companies, subject, however, to the under- noted two areas, the opening up and the development, of which I consider are essential to national economic progress.

New enterprises in the under-noted areas from and after 1st April, 2002 will have the following new tax regime:

The first group is export (non traditional), agriculture, information technology and allied services, electronics, industrial and machine tool manufacture, food processing, other designated enterprises, or investments in excess of Rs. 500 million in specified industrial and agricultural services.

Period Income tax rate

1st year 0%

2nd year 0%

3rd year 0%

4th year 10%

5th year 10%

Thereafter, investors will be charged the standard 20% rate except for eligible export and agricultural enterprises who will pay 15% tax. The qualifying criteria will be provided by Statute.

The next area considered essential to be opened-up to the private sector is pioneering investment in designated areas including power generation, transmission and distribution and the development of highways, sea-ports and airports, railways and water services. These investments will enjoy a tax holiday period of not less than 5 years, but not exceeding 10 years from the date of commencement of commercial operations, and will be taxed at 15% thereafter. The qualifying criteria here too will be specified by Statute. In view of the specialised nature of these projects, foreign companies investing in them will be free of exchange control restrictions.

The way in which taxes are collected constitutes an excessive burden for certain industries such as garment manufacture, which produce a large number and range of products primarily for export. The Department of Customs, Inland Revenue and BOI, devote a considerable amount of their administrative resources to tracking tax declarations by the garment industry, despite the fact that garments for export are already zero-rated. Mr. Speaker, I propose that fabric will be exempt from the GST from 1st April 2002, in order to permit the free-flow of fabric from factory to factory, or from a Zone to a non-Zone factory without cumbersome documentation.

I intend to continue with the measures to allow enterprises to depreciate their capital assets over a two year period. This accelerated depreciation facility will be reduced to one year for investment in information technology equipment and software.

It is estimated that large sums of money not declared for tax purposes exist in the hands of various sectors of society. In as much as this is a phenomenon which is not desirable to be continued, the Government desires to permit the absorption of this money into the formal economy.

I might explain that in doing so we are not placing a premium on tax evasion. Rather, our objective is to give such persons an opportunity of coming into the tax system in the future, without fear of their being penalised for the past misdemeanours provided they deploy this money into improving the economy. I do not propose doing this in the form of a tax amnesty. The method employed will be to secure these funds into development, so that there will be a benefit to the country also.

Accordingly, I propose introducing Law in order to achieve this in the following manner:

1) Such monies, if invested in specified areas of development of agriculture, industry or utility services by 31st March 2003 will not be taxed or penalised in any form for non-disclosure.

2) Such monies, if invested in Treasury Bonds prior to 31st March, 2003 will have the same concessions as above, subject however, to the payment of a tax of 10 percent on the value of investment income.

3) Such monies, if in the form of immovable property or other assets can be declared and will be treated in the manner indicated in (1) above.

4) Such persons will become taxpayers on their incomes from and after April 2003 under the new Revenue Authority.

There is a wide gap between the supply and demand for finance in the housing market. In keeping with the objective to provide nearly 500,000 additional housing units by the year 2005 it is necessary to give all encouragement to individuals, the private sector and specialised housing banks. For new construction or purchase of the first house on or after 1st April 2001, we shall grant a Qualifying Payment Allowance per year up to a limit of Rs. 100,000/= or 1/3 of the assessable income, whichever is lower. Investment restrictions on EPF, ETF and insurance companies will be relaxed to allow them to invest and lend to specialised housing finance institutions. In addition, specialised housing banks will be classified as a priority sector and will be subject to a 20 percent rate of corporate tax. The abolition of Stamp Duty, NSL and capital gains are also expected to improve incentives for investment in the housing sector.

The provision of these generous housing-incentives should also provide an impetus to the development of the construction industry.

Development of the livestock sector especially the poultry industry, needs emphasis because of its potential for generating rural employment. I intend to reduce the Customs duty on maize to assist feed manufacturers and also propose that the Export Development Board considers inclusion of poultry meat and eggs on their rebate scheme to promote exports. The Tariff Commission will review the current tariff levels on milk, poultry feed and other items that impact on the cost of feed in the livestock industry so that further measures to promote poultry and dairy industry could be considered.

The on going Samurdhi Programme is urgently in need of restructuring. Eligibility criteria is not clearly set out and complaints of politicisation and discrimination continue. In view of the large expenditure incurred on such schemes and to ensure that benefits are properly targeted and yield the results expected from such expenditure, it is necessary to make statutory provisions controlling social benefit schemes. Accordingly, a Welfare Benefit Law will be enacted. This Law will specify eligibility and exit criteria and also management procedures in the Samurdhi programme. A total of Rs. 10 billion is being provided for this programme.

The National Youth Corp envisaged in the Election Manifesto of the United National Front will also be established. Its objective will be training educated youth in self-employment avenues and providing them with the initial capital requirements rather than distribute unproductive doles. This important venture will be provided with Rs. 1 billion from the Budget as a start-up measure.

Agricultural subsidies will also be regulated by this Law. I propose establishing a subsidised Farm Input Support Scheme. Farmers who register under this scheme in terms of the eligibility criteria stipulated in the Law will be granted a Subsidy Coupon for a specified amount per Acre of land. This will permit them to make their choice in obtaining fertiliser or seed or planting materials or farm implements at subsidised rates to the value of the Coupon. The total quantum of expenditure for this scheme will be Rs. 2 billion.

In order to resuscitate the rural economy, I propose to provide funds for a number of small-scale projects:

A Capital Goods Entitlement Credit Scheme will be established to endow capital assets to marginalised persons with

entrepreneurial skills. This Scheme will be implemented with the assistance of the rural and other Development Banks and other financial institutions. A sum of Rs. 80 million has been allocated from the Budget for this proposal.

A Rural Economy Resuscitation Fund will be established for the purpose of providing assistance to entrepreneurs engaged in the provision of small and medium-scale economic and social infrastructure facilities in the rural sector. A sum of Rs. 10 million will be allocated from the Budget for this purpose. This will be enhanced with foreign loans and grants.

Village-based industries have, particularly with the increase in tourism, become small-scale production units in areas such as handicrafts, batiks, coir-based products and foliage plants providing employment largely for rural women. The Government will provide greater facilities for marketing of these products and also will set up display and sales centres. A provision of Rs. 30 million is being made for this in 2002.

I propose to allocate Rs. 30 million to provide seed capital in the form of infrastructure and technical support for a cluster of private sector enterprises to accelerate rural industrialisation.

Long-term investment is required to reconstruct the economy, specifically in the Northern and Eastern provinces. Towards this end, the Government will issue Reconstruction Bonds, denominated in Sri Lanka Rupees and in US Dollars. The Sri Lanka Rupee Bond will be targeted for citizens of Sri Lanka, whilst the U.S. Dollar Bond is for those residing abroad. Interest earned on the Dollar Bonds will be tax-free. Interest earned on the Sri Lanka Rupee Bonds will be subject only to the 10% tax referred to earlier. The Bonds will be issued for a five-year maturity and will be priced competitively.

Duty Free Allowance to Migrant Workers

As a recognition of their hard work and remittances of foreign exchange into Sri Lanka, the duty free allowance granted to this category of Sri Lankans employed abroad will be-increased from the present figure of US$ 1,250 to US$ 1,500 for those who work overseas for over one year. This proposal will be effective from 1st April, 2002.

Pension costs are rising rapidly and ,are crowding-out other essential expenditure requirements. The value of public pensions has been eroded by inflation. To ensure that the cost of public pensions is manageable and to protect the value of pension payments, I propose that all future public officers recruited will contribute 8 percent of their salaries to a contributory pension scheme and Government will contribute 12 percent. Their salaries will be adjusted accordingly.

The North-East conflict has imposed enormous fiscal constraints on the economy and depressed GDP growth. With the cessation of hostilities, defence spending could be reduced by Rs. 1,000 million this year. In 2002, capital expenditure of Rs. 300 million will be allocated to overcome bottlenecks in mobility of people, goods and services in regions in which transport has hitherto been restricted.

The removal of the National Security Levy on imports of wheat grain and wheat flour has reduced the cost of wheat flour. In addition, as a result of the Hon. Prime Minister’s recent visit to India, the country will receive a large amount of Indian wheat at a concessionary price. Hence, the entire budgetary provision on account of this will not be necessary for this year. This will result in a saving on wheat flour subsidy to the tune of Rs. 800 million.

I propose that a hiring freeze will remain in place for all Government Departments and Agencies except for recruitment of technical staff and certain professional categories. Recruitment of other categories will be decided on a case by case basis. Every Department and Agency will be rationalised over the next three years. Departments and Agencies will also be required to submit proposals for consolidation of functions within and between relevant agencies. A pool of Rs. 500 million will be established to finance one-off expenses arising from the consolidation and rationalisation of functions within Government.

To meet the deficit target, a reduction of Rs. 2.8 billion will be imposed for miscellaneous expenditures allocated in the Budget. Moreover, an under expenditure of Rs. 1,400 million is anticipated from the domestic capital budget.

I plan to open up restricted sectors to foreign investors to increase competition in the domestic economy, which will in turn benefit consumers. I therefore propose to exempt foreign investment from exchange control regulations in the following spheres: construction of residential buildings, roads; supply of water, mass transportation, telecommunications, professional services, banking, finance, insurance, stock-brokering, production and distribution of energy and power and the establishment of branch or liaison office of companies incorporated outside Sri Lanka. Such investment, however, will be subject to rules of the relevant regulatory authorities.

To improve collections and abolish harmful taxes, I further plan to -

• Eliminate the enhanced Resident Visa Tax introduced in the last Budget and revert back to the previous tax;

• Increase rent on Government-owned houses since these rents are presently very low.;

• Charge a modest fee on import and export licences for registration purposes;

• Introduce a flat fee of Rs. 25/= per garment for duty free garments that are sold in the local market by BOI enterprises in place of existing complex tracking mechanisms;

• Removal of the 100% transfer tax on purchase of immovable property by non-citizens from April 1st 2002.

These revenue measures are expected to yield Rs. 800 million. The details are presented in Annex 4.

Mr. Speaker, if the measures presented above are enacted fully and forcefully, we can restore positive economic growth, inspire productive investment and boost the quality of life in Sri Lanka. Annexure 5 provides me budgetary out-turns for the years 2001 and 2002 in an economic format basis in tables 1 and 2 respectively. Table 3 gives the budget out-turn in the accounting format for 2002 incorporating the proposals put forward today. Based on the measures outlined above, the fiscal deficit for 2002 is estimated at Rs. 135 billion or 8.5 percent of the projected gross domestic product.

Accordingly, the gross borrowing requirement for the year 2002 is estimated at Rs. 329 billion. A sum of Rs. 70 billion is envisaged by way of foreign loans. The balance sum of Rs. 259 billion is expected to be raised from market sources. However, as a means of strengthening fiscal discipline, I propose to impose a ceiling on domestic borrowings of the Government. The proposed borrowing limit will encompass all borrowings made by the Government through the mobilisation of instruments such as Treasury Bonds, Treasury Bills and Rupee Loans as well as other financing done through the banking system.

This measure will help in reducing the debt burden. I propose to further rationalize debt management by regularising the government’s overdraft position at the two state banks on which the government incurs a large sum of money as interest cost. Savings from this measure will be about Rs. 2,150 million.

In order to provide flexibility to the Government in maintaining a well-distributed debt portfolio, I wish to increase the statutory limit applied to borrowings made through Treasury Bills from Rs. 175,000 million in 2001 to Rs. 250,000 million in 2002.

The deficit will be fully financed from non-bank sources, foreign grants and loans, and privatisation proceeds, easing borrowing pressure on the domestic banks. This will reduce inflation and, in so doing, make essential goods more affordable for all Sri Lankans. By reducing Government borrowing from the domestic banks, interest rates should decline, providing an impetus to our enterprises.

Mr. Speaker, may I say this in conclusion. Many of those present in the House today would have noticed a departure in the presentation of my Budget from the traditional budget format. I wish to state, Mr. Speaker, that I have done this after deliberation and with a particular objective in mind. A country’s budget deals with the future use and mobilisation of public finances. Public finance as the term itself denotes, belongs to the public domain. Every citizen has a stake in it and is entitled to know how and in what manner public finances are intended to be used. I have therefore endeavoured to keep my speech free of perplexing figures and economic terminology and cast it in simple terms. This I am confident will enable all persons, financiers and non-financiers, economists and non economists, in other words, layman to understand what the Government’s Budget holds for him and the future of our nation.

The National Security Levy (NSL) will be abolished with effect from 1st June, 2002.

The Goods and Services Tax (GST) will be converted into a Value Added Tax (VAT) with effect from 1st June, 2002, with the following changes to the existing law -

(a) Instead of a single positive tax rate there will be two positive tax rates — a lower rate @ 10% and the standard rate @ 20%.

(b) The following supplies and imports (if applicable) will be liable to the lower tax rate -

Electricity (exceeding 30 kwh) construction contractors and sub-contractors, hotels, guest houses and restaurants, travel agents (inbound tours), film production/importation of films and exhibition, liable educational services, coconut poonac, prawn feed, tea, spices, eggs, coconut oil, potatoes, onions, chillies, basic rubber, vegetable seeds and planting materials, magazines and journals, lentils, powdered milk other than infants milk powder, condensed milk, pharmaceutical products and raw materials, ayurvedic, unani or homeopathic preparations and raw materials, dried fish, Maldives fish, sugar and substitutes, diesel, petrol, aviation fuel and bunker fuel, LP Gas upto 15 kg., fertilizer, motor coaches and chassis or bodies with 28 or more seating capacity, agricultural tractors, agricultural machinery, foreign employment bureau, water, photovoltaic and solar batteries and industrial machinery.

(c) The following supplies and imports (if applicable) will be exempted -

Unprocessed agricultural, horticultural, forestry or fishing produce, unprocessed farm or poultry products other than all varieties of meat and eggs, desiccated coconut, rice, rice flour, wheat, wheat flour, bread, liquid milk, books other than cheque books, postage & revenue stamps, public library services, specified financial services including life insurance, crop & livestock insurance and "Agrahara" insurance, crude petroleum oil, public passenger transport services (land) other than tourist transport, excursion tours and taxi services, leasing of motor coaches (28 seaters or more) used for public passenger transport services, electricity not exceeding 30 kwh. per month, diplomatic missions, UNO and its agencies and officials, duty free shops (imported goods), services consumed outside Sri Lanka, residential accommodation (other than by large companies), all health-care services (other than by large companies), pearls, diamonds, precious stones etc. and gold coins, goods and services provided beyond immigration point, burials & cremations, free meals provided to employees, personal baggage under Customs ordinance, Duty free re-importation, ex-bond clearance of ships stores, project related imports by GST exempt BOI projects for a limited period of 02 years, medical machinery and other equipment, artificial limbs and other items, import of donated goods by approved organizations, infants milk powder, ships, aircrafts, helicopters, temporary import of plant machinery etc. for a period not exceeding 12 months, kerosene, non-business imports less than Rs. 10,000/- and supply of services by an agent or freight forwarder for payment in foreign currency.

(d) All other supplies and imports other than, zero rated supplies will be liable to tax at the standard rate.

(e) In addition to the existing zero rated supplies any supply of services for the consumption outside Sri Lanka for which the payment has been credited to a bank in Sri Lanka in foreign exchange will also be zero rated.

Other Measures

(a) Invoicing — Non-registered persons (consumers) will be issued with an invoice showing tax inclusive consideration and the time period to issue invoices to registered persons will be specified.

(b) Deferment facility on importation of goods will be extended to the importation of plant, machinery etc., imported for large scale infrastructure projects funded by foreign organizations and temporary imports (during the one year period) of high value plant, machinery etc.

(c) other simplifications — any other areas that should be simplified or clarified will be provided under the new VAT Act.

(1) Presently, the Excise (Special Provisions) Unit of the Customs Department and the Excise Department administers excise duties on hard and soft liquor. To simplify administration Excise (Special Provisions) duty of 10% on beer and 30% on hard liquor will be removed thereby making the Excise Department solely responsible for administering this tax. In order to recoup the revenue loss due to removal of duty on hard liquor, Excise Duty on locally manufactured hard liquor and Customs Duty on imported hard liquor will be adjusted.

(2) Excise tax on coconut arrack will be reduced to the level of molasses. This measure, will benefit coconut arrack producers and provide a level playing field for domestic liquor producers.

(3) The present excise duty structure of wine manufactured locally has been fixed as far back as 1945 on the basis of per proof gallon. The basis of this tax will be changed to per litre basis and the excise duty will be increased to Rs. 149 per proof litre or Rs. 25 per bottle. In order to protect and encourage the local industry, the customs duty on wine will be increased from Rs. 140 per litre to Rs. 175 per litre.

(4) The present regulations with respect to all activities on distilleries/warehouses are governed by the Excise Notification No. 151 of 05.02.1926. These regulations, it is needless to mention, are out dated. In terms of these regulations, a maximum of 2% as an allowance is granted for loss in transit for leakages and evaporation. Technology in this industry, has improved significantly. This allowance will be reduced to maximum of 1%.

(5) Excise (Special provisions) Duty of Rs. 4/- per litre will be imposed on all aerated water.

(6) The pricing mechanism of petroleum products was changed from an administered price structure to a formula based price mechanism in last December. This formula reflects the international petroleum product prices as well as the exchange rate movements. It also contains an element to recover the past debt incurred by the CPC when the government administers the petroleum product prices. The government is of the view that the General Treasury should administer the debt recovery process. Therefore, it is proposed to amalgamate the debt recovery element in the formula with the present excise tax. Hence the excise tax on petrol will be raised to Rs. 30 per litre and on diesel Rs. 6.50 per litre on revenue neutral basis.

(7) A ‘fool proof’ sticker for liqour to prevent the present malpractices in the sale of liquor will be introduced. Excise and Customs Departments will be directed to enforce this proposal.

(8) A simple and transparent Excise (Special Provisions) Duty base will be introduced with the next Budget.

Allowable Expenses & Exemptions

The following costs will be made deductible, in the computation of income for income tax purposes.

(a) Cost of intangible assets

1/4 of cost of acquisition of intangible assets or licensing payments up to 100% for any trade or business.

(b) Repairs to Premises

Repairs to buildings given on rent/lease by a company for commercial purposes up to 1/4 of gross rent. Other repairs will be allowed.

(c) Research and Development

Total amount spent on research and development including expenses on any trade or business.

(d) Staff Training

Expenditure on staff training irrespective of the period of training.

(e) Business Travelling

Business travelling out side Sri Lanka directly related to promotion of trade, subject to specifications imposed by the CGIR.

(f) Entertainment Expenses

Entertainment directly related to any sales, receipts or purchases as specified by the CGIR.

(g) Expenses based on payable amounts

Any expenditure allowed on the basis of payable amount will be disallowed unless such amount is paid within three years.

Computation of Assessable Income

The following measures for simplification of payment of taxes will be enacted.

(a) Annuity, ground rent, royalty or interest will be allowed only if such amounts have been paid.

(b) Any interest will be allowed if paid to a bank, financial institution or any other recognized institution.

(c) Interest and dividend subject to 10% final withholding tax will be removed from the assessable income.

Exemptions under the Inland Revenue Act

The following amendments to the Wand revenue Act will be introduced with effect from 1.4.2002.

• Exemptions under Section 8 will be limited to international orgarnizations. All other institutions will be liable to final withholding tax on interest and dividends. Any other exemptions will be decided by the Commissioner General of on a case by case basis.

• Section 10 on Interest income will be limited to foreign exchange deposits and approved loans granted by foreign organizations.

• Section 17 to 20 — No new exemptions on business profits will be granted after 31.03.2002 other than on qualified business.

Residence Visa Tax

The Budget of 2001 imposed a Resident Visa Tax of Rs. 20,000 on all categories of foreigners except staff of diplomatic missions. Consequently, some countries reciprocated by increasing visa fees on Sri Lankans. Sri Lankans, especially students and businessmen, have been adversely affected by this measure. As the number of Sri Lankans travelling to countries with exorbitant visa fees outnumbers those liable to the resident visa tax, the resident visa tax imposed in the 2001 budget will be abolished.

Rent on Government Housing and Revision of Administrative Fees and Charges -

The rent on Government houses and bungalows, at present, is low compared to the average rent in the private sector. The present rent has been determined on the basis of valuations done some time back. Those houses will be valued by the Chief Valuer and rent will be imposed accordingly. All other administrative fees and charges will be increased by 15 per cent. These increases will be effective from 01.04.2002.

Import and Export Licences

The policy of our government is to limit these items subject to licensing requirements to quarantine, health and security reasons in the medium term. In the meantime there will be

(1) a fee of 0.1% levied on the import licenses subject to a minimum of charge of Rs. 100/- and

(2) a levy of Rs. 100 on Export Control licenses.

Fee on apparels sold to the local market

The country exports over 400 million pieces of apparel products. About 4% are factory-seconds — 16 million units. These are disposed at low prices by manufacturers to avoid complex procedural formalities on GST and custom duty. A flat rate fee of Rs. 25 per piece will be charged for disposal in to local market.

Transfer Tax

The present 100% transfer tax on purchase of immovable property by non residents will be abolished with effect from 01.04.2002.


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