Monetary Policy Review – November 2016 - Policy rates unchanged

As envisaged, the growth of credit extended to the private sector by commercial banks decelerated considerably during September 2016, in response to monetary policy measures adopted by the Central Bank since end 2015. Accordingly, the year-on-year growth of private sector credit by commercial banks was recorded at 25.6 per cent in the month of September 2016 compared to 27.3 per cent in the previous month. Despite the deceleration in credit extended to the private sector, broad money (M2b) growth accelerated to 18.4 per cent, year-on-year, in September 2016 in comparison to 17.3 per cent recorded in the previous month, as borrowings by the public sector from commercial banks expanded during the month. In the meantime, rupee liquidity conditions in the domestic money market have returned to a balanced level, which will help stabilise market interest rates at current levels. 

Headline inflation as measured by both the National Consumer Price Index (NCPI) and Colombo Consumers’ Price Index (CCPI) remained stable around mid-single digit levels in October 2016. Further, core inflation based on both NCPI and CCPI remained unchanged in the month of October 2016 compared to the previous month. The adjustments made to the tax structure by the government are expected to have a one-off impact on inflation from November 2016 while the overall impact of the Budget 2017 on inflation is estimated to be favourable. Aggregate demand pressures are expected to remain well contained supported by the pre-emptive monetary policy measures coupled with the continuation of the envisaged fiscal consolidation process, and as a result, inflation is expected to remain stable in mid-single digit level in the period ahead. 

 On the external front, the deficit in the trade balance contracted by 12.0 per cent, year-onyear, in the month of September 2016 as export earnings recorded a growth for the second consecutive month amidst the contraction in expenditure on imports. Earnings from tourism were estimated to have increased by around 14.6 per cent during the first ten months of 2016, while workers’ remittances recorded a growth of 3.5 per cent during the same period. The gross official reserve position was estimated at US dollars 6.1 billion at end October 2016, while the Sri Lankan rupee depreciated by 2.6 per cent against the US dollar thus far during 2016. Meanwhile, Sri Lanka received the second tranche of the Extended Fund Facility (EFF) Programme with the International Monetary Fund (IMF) in November 2016, after the successful completion of the first review of the Programme by the IMF. The continuation of the EFF Programme is expected to strengthen the economy by facilitating medium to long term financial inflows in the period ahead. 

Considering the above developments, the Monetary Board, at its meeting held on 28 November 2016, was of the view that the current monetary policy stance is appropriate, and decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 7.00 per cent and 8.50 per cent, respectively.

Colombo Stock Exchange Market Review – 28th Nov 2016

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Colombo Stock Exchange Trade Summary 28-Nov-2016

Colombo bourse turned red in week’s opening day as bearish investor sentiments continued to dominate the market direction. Benchmark index lost 13.25 index points or 0.21% to end the session at 6,238.87 while blue-chip constituent S&P SL20 index shed 16.68 index points (-0.48%) to end the day at 3,459.86. 

Index fell with banks where shares of National Development Bank (closed at LKR 151.30, -2.8%), Commercial Bank (closed at LKR 139.40, -1.0%), Hatton National Bank (closed at LKR 221.00, -0.9%) and DFCC Bank (closed at LKR 117.10, -0.9%) closed lower. 

Lanka Orix Leasing (closed at LKR 79.50, +3.9%) and Lion Brewery (closed at LKR 468.50, +3.9%) stood on the opposite side. 

Daily market turnover was LKR 386mn supported by negotiated deals in high caps. Off-the-floor dealings were recorded in DFCC Bank (1.35mn shares at LKR 117.70) and Central Finance (0.2mn shares at LKR 100.00). Aggregate value of crossings accounted for 47% of the turnover. 

Accordingly, DFCC Bank top the turnover list with LKR 184mn followed by Hemas Holdings (LKR 34mn), Central Finance (LKR 26mn) and John Keells Holdings (LKR 18mn) respectively. 

Market breadth was negative where out of 189 stocks traded, 45 advanced, 85 slipped while 59 remained unchanged. High investor activity was witnessed in DFCC Bank, John Keells Holdings and Access Engineering. 

Foreign investors were net sellers with a net foreign outflow of LKR 137mn. Foreign participation was 30%. Net foreign outflows were mainly seen in DFCC Bank (LKR 176mn), Hatton National Bank (LKR 5mn), Tokyo Cement (LKR 1mn) while net foreign inflow was mainly seen in Hemas Holdings (LKR 32mn).

Source: LSL

Sri Lanka shares hit near 8-mth low ahead of cenbank rate decision

Reuters: Sri Lankan shares fell on Monday to a near eight-month low, ahead of central bank policy rate announcement as investors kept to the sidelines amid concerns over budget tax proposals including revisions in corporate and withholding taxes.

Analysts said investors were awaiting the central bank's decision on interest rates on Tuesday. They expect the apex bank to leave rates unchanged for a fourth straight month.

The Colombo stock index ended 0.21 percent down at 6,238.87, its lowest close since April 7. The bourse lost 1.17 percent last week, marking its third straight weekly fall.

"Market is very sluggish as there is no positive direction for it to move up. Everybody is waiting, looking for a direction (in interest rates)," said Reshan Kurukulasuriya, chief operating officer, Richard Pieris Securities (Pvt) Ltd.

Analysts said the increase in various taxes and fees would reduce disposable income and challenge consumption-led growth.

The government aims to boost its 2017 tax revenue by 27 percent to 1.82 trillion rupees year-on-year and meet a commitment given to the International Monetary Fund in return for a $1.5 billion loan in May.

Turnover was 386.3 million rupees ($2.60 million), well below this year's daily average of 693.7 million rupees.

Foreign investors sold a net 137.2 million rupees worth of shares on Monday, extending the year-to-date net foreign selling to 1.39 billion rupees.

Shares of biggest listed lender Commercial Bank of Ceylon Plc fell 1 percent and Ceylon Cold Store Plc lost 7.35 percent, while National Development Bank Plc closed 2.76 percent lower.

($1 = 148.5000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Vyas Mohan)

MBSL posts Rs 257.3 mn nett profit for third quarter

The Merchant Bank of Sri Lanka & Finance PLC (MBSL) recorded an exceptional third quarter financial performance in 2016 with robust growth in revenues and profitability, following its unparalleled three-way merger of 2015.

MBSL finalized one of the most complex amalgamation processes witnessed in the country to date, in 2015, by merging with two of its subsidiaries, MCSL Financial Services and MBSL Savings Bank, to integrate three separate companies into a single consolidated financial services entity.

Commenting on the third quarter results, MBSL Chairman Dr Sujeewa Lokuhewa said the company’s growth strategy has been aligned with national development objectives. “We have aligned ourselves with the economic strategies of the government, which will be the guiding framework for the bank from 2016 onwards,”he said.

To support government economic development plans we are developing new products and services and implementing IT solutions for product and service delivery to reach into the far corners of the country, to cater to rural markets and in particular rural SMEs,” Dr. Lokuhewa said.

MBSL demonstrated an outstanding 1,539% cumulative bottom line growth year-on-year by the end of the third quarter 2016, with a profit after tax (PAT) of Rs 257.3 million, against Rs 15.7 million recorded in 2015. The PAT for the quarter had surged ahead of 2015, to reach Rs 122.3 million, compared to Rs 59.2 million in 2015.

This sustained robust performance by the Company resulted in reversing the negative bottom line of the Group for the third quarter of 2015, moving the MBSL Group out of the red and into profitability. The bottom line of the MBSL Group gained by 696% to reach a PAT of Rs 186.2 million, by end September 2016, from a loss of Rs 31.2 million in 2015. This cumulative growth in profitability was mainly due to the 296% growth in PAT in the third quarter of 2016, to Rs 108.6 million, compared to the Rs 27.4 million achieved in 2015.

Gains in profitability have been accompanied by improvements across most aspects of the financial dashboard with MBSL increasingly consolidating its post-merger market position.

“With the merger we have improved our operational efficiencies and we are currently focusing on providing a better experience for our customers. Overall, the merger has contributed towards growing the market and scope of business, and we are looking into further growth opportunities in new market segments,” MBSL CEO T. Mutugala said.

www.dailynews.lk

Vallibel Finance profits grow to Rs. 581 mn in first half

Vallibel Finance saw its half-yearly pre-tax profit for 2016 climbing to Rs. 581 mn, recording a growth of 58.1% percent over the same period the previous financial year, on the back of strong performances in core financial operations and its increasingly popular product portfolio.

Vallibel Finance consolidated its standing as a leading light in the competitive financial sphere and its half yearly report card affirms the company’s ability to sustain its ascendency, year after year.

Vallibel Finance, nurtured its loan book well, disbursing Rs. 8.5 bn during the first half of 2016, providing impetus for growth for people across the country. The total loan book of the company now stands at Rs. 21.73 bn

Deposits complimented the lending portfolio, growing exponentially by over Rs. 3.55 bn or 27.1% percent by the end of the financial period under review over the previous year with total deposits amassing to Rs. 16.7 bn, firmly entrenching public confidence in the company.

Net interest income grew by 19.2% percent to reach Rs. 936 mn with the total income growing by 43% reaching Rs. 2.27 bn as against the previous figure of Rs. 1.58 bn. Vallibel Finance took adequate measures to keep its Non-performing Loans in check with the figure 3.49% (Gross), 0.55% (Net) indicating an encouraging result considering the volatile market conditions prevalent in the finance sector.

Total assets continued its upward curve growing by 34.7% percent to Rs. 25.64 bn over the previous year’s figure.

Vallibel Finance Managing Director Jayantha Rangamuwa attributes his company’s track record to a far-sighted vision and prudent financial stewardship that ensures winning hearts and minds of people throughout the country through innovative financial tools while at the same time ensuring professionalism and accountability.

The increasing popularity of Vallibel Finance and the respect it commands in the market are evident in its performance which is clearly indicative of the increasing stature of the company.

Vallibel Finance derives its direction and inspiration from corporate leader Dhammika Perera.

www.dailynews.lk

Top brewer says regime change failed to offer sanity in policy making

The rashness demonstrated by the new regime in making tax policies has not only made the business of brewing tougher than ever but also pushed the people towards hard liquor, which is arguably more detrimental to health.

According to the country’s top brewer, Lion Brewery Ceylon PLC (LION), the alcohol industry has now been made liable for not just the higher excise duty, which was raised back in October 2014, but also for the higher value-added tax (VAT), which came into effect from November 1, 2016, making the total tax increase on beer up to 70 percent compared to the 25 percent increase in taxes on spirits.

“The beer industry – to a degree greater than the others in the alcohol sector – has been at the receiving end of this type of ad hoc and incomprehensible policymaking for many years.

With the advent of this government, we hoped things would change and that a more rational approach would prevail.

Unfortunately, this has not been the case and today Sri Lankans consume a significantly greater amount of hard alcohol than they did two years ago,” the company said in a note to its interim financial accounts released to the Colombo Stock Exchange recently.

This irrational tax policy by the government appears to have pushed the people to consume more spirits and toddy, while the consumption of beer has reduced by 39 percent. But the consumption of spirits has increased by 9 percent during the same period.

Alcohol consumption in a country could go up either if the population is extremely happy or they have been made extremely poor. While the former condition mostly drives the demand for formal liquor and a milder version of alcohol such as beer, the latter condition could drive the demand for illicit liquor or moonshine.

Therefore, excessive taxing of the formal alcohol industry could in fact boomerang on the government both economically and socially. But successive governments milked both the tobacco and alcohol industries whenever they found their exchequers depleted.

But analysts point out that this strategy could become futile as the demand will not remain inelastic forever.

“Whilst empirical evidence strongly indicates that there has been a very significant increase in the consumption of toddy, available records hide this fact since the quantities manufactured are not accurately disclosed by the producers,” LION said.

Toddy has now become an extremely unhealthy beverage made in the most unhygienic conditions and no longer of coconut sap but made now of a chemical concoction. The alcohol industry was exempted from VAT in October 2014 by the Rajapaksa administration to bring revenue neutrality, i.e., excise taxes were increased then to recover the loss from VAT.

However, with effect from November 1, 2016, the industry is now liable under higher excise duty and higher VAT.

The country’s belligerent finance minister pushed the VAT Amendment Bill through parliament to satisfy the International Monetary Fund (IMF), which gave a US $ 1.5 billion bailout package in June to arrest a possible balance of payment crisis.

“We hope however, that better sense will prevail sooner rather than later,” the company finally added.

Lion Brewery September in red due to flood-induced factory closure

Lion Brewery Ceylon PLC (LION) said its financial performance was badly affected by the floods in the month of May, which wrecked havoc, bringing the brewing in the facility into a complete standstill.

As a result, the company turned a net loss of Rs.477.2 million or a loss per share of Rs.5.97 during the quarter ended September 30, 2016 (2Q17), from a profit of Rs.695.4 million a year ago.

However, the company managed to continue its supplies to the market, albeit below potential capacity, through imports that came from four Carlsberg breweries in the Asian region.

“We placed our brewers in the locations that supplied us our own brands to ensure the quality and consistency consumers expect from us,” the company said in a statement. The government considered LION among “other similarly affected businesses” to import, “specified quantity”, at taxes limited to the value of the local excise duty for which the company expressed its deep appreciation.

Nevertheless, a case is pending at the courts contesting the relief granted on imported beer by the Trade and Investment Policy Department, with the concurrence of the finance minister and this case is coming up for hearing on December 15.

Despite the company trying to keep up with the demand through imports, the top line contracted by 55 percent year-on-year (YoY) to Rs.4.45 billion. For the six months ended September 30 (1H17), revenue fell 47 percent YoY to Rs.10.0 billion.

“Due to logistical reasons, the imports mentioned above were restricted to cans. Thus, our major SKU, bottles, were not available in the market – other than for relatively smaller quantities of Carlsberg and Carlsberg Special Brew – whilst the brewery was not in production. As a result, sales were hampered and our results impacted,” the company noted.

Meanwhile, for the 1H17, the company incurred a loss of Rs.954.2 million or Rs.11.93 a share, against the Rs.1.27 billion net profit earned during the same period last year. 

During this period, the company’s borrowings rose sharply by around Rs.6.5 billion to a total of Rs.11.3 billion as the company had to depend on bank borrowings until the insurance claims are finalized, which is expected to be concluded before the end of the ongoing financial year.

Based on the preliminary assessment of the damage caused to the investors and to some fixed assets due to flooding, an interim claim was submitted for which the company received an advance payment of Rs.300 million during the period.

The damaged facility however is now in commercial operation, the company said.
As of September 30, Ceylon Beverage Holdings PLC held a 52.25 percent stake, while 

Carlsberg Brewery Malaysia Berhad held a 25 percent stake.

Carson Cumberbatch PLC held another 5.13 percent stake being the third largest shareholder.
www.dailymirror.lk

Budget Proposals 2017, A Critical Evaluation of Taxes

By P.Guruge



‘Listing’ should be purely on economic considerations

Tax on online transactions - a complicated matter



In this article I am not dealing with the entire Budget speech, running into 140 pages with 529 paragraphs. My comments are limited to taxes.

Corporate Income Tax -

It has been proposed to have three different rates for different activities -

1. 40% - Liquor, tobacco, betting and gaming;

Why not lotteries? Already, lotteries enjoy this privilege. It is important to consider all aspects of these activities, especially, in relation to liquor and tobacco.

In addition to manufacturing or import transporting, stocking, wholesale and retail activities should also be considered.

The cultivation of tobacco should also be considered under this higher rate. Otherwise, it will not be different from the existing situation.

2. 14% - SMEs, exporters, agriculture and education.

How about deemed or indirect exporters of goods and services and Health Services? Agriculture may be covering all activities including horticulture, farming and fishing. Educational services may be limited only to pure educational services, excluding additional goods and services provided by them.

If Health services are to be considered it should be applicable to pure health care services only. In the last budget, the Minister proposed a 15% rate.

3. 28% - All other activities

This is not a new rate. Already 28% is applicable to companies. At present, a number of other rates are applicable to companies. 10%, 12% and certain BOI companies enjoy 5% and 2% of turnover etc. Integration of these cases under 14% or 28% has to be done using an acceptable method.

It is good that depreciation rates are to be aligned with economic depreciation, instead of economically misleading accelerated depreciation. Incentives for listing may not work since this has been tried several times earlier. Let the ‘listing’ take place purely on economic considerations. Additional revenue estimated - Rs. 32,000 m. Proposals for 2016 were not implemented and legal provisions for 2015 were applied to 2016 also.

When compared with the estimated company tax revenue for 2016, the additional revenue estimate may be unrealistic.


Personal Income Tax -

Certain proposals are not clear. What is the exemption limit for individuals? For PAYE it is Rs. 1.2 m. per year. How about other individuals liable to pay income tax? Is it the current exemption limit, i.e. Rs. 500,000 or some other amount?

All employees whether professionals, or not will be considered in the same way and current tax rates, i.e. 4%, 8%, 12%, 16%, 20% and 24% will be applicable? To prepare PAYE Tax tables such rates will be used. Tax slabs will be Rs. 600,000 each. PAYE - Exemptions - It is proposed to remove all exemptions in relation to benefits applicable to employment income. This removal of exemption should be applicable to non- PAYE employees as well.

However, there may not be a reduction in revenue due to the increase of the exemption limit to Rs. 1.2 m. per year, and some employees now getting taxable remuneration just above the exemption limit may not get a big relief.

Further, non-PAYE employees, and other individuals should be treated in the same manner as ‘corporate citizens’.

For example, if an individual is engaged in agriculture he should get 14% rate on such income which should be the maximum rate on such income.

This treatment should be applicable to all sources where 14% is applicable for a company. However, the maximum rate applicable to such individuals also should be 24%. At the same time, if any activity where 40% is applicable was carried on by any individual 40% rate will be applicable to him as well.

Therefore, these 14%, and 40% rates should not be considered as company tax rates only, but special rates under the 5th Schedule to the Inland Revenue Act, which are applicable to all entities and individuals.

The rate applicable to partnerships has not been given.

Value Added Tax (VAT) -

It is proposed to abolish ‘S-VAT Scheme’, introduced by the previous regime, which is against VAT refunds.

They wanted a VAT system without refunds, which is impossible under our VAT system. Instead of strengthening the VAT refund system after the massive VAT fraud they went on the reverse gear.

No one knows what happened under this S-VAT system and no audit has been done on this activity. I feel the Minister should be commended for this bold decision.

Refunds for tourists - A separate section was incorporated in 2006, under the VAT Act (section 58A), but this section was also repealed by the previous regime.

This is a must to encourage tourists to purchase certain goods in Sri Lanka and to take such goods out of Sri Lanka. The systems and procedures should be introduced after careful consideration.

Other VAT refunds - The entitlement to refunds should be limited in relation to excess input tax of exporters, deemed exporters and registered new projects.

All other registered persons should carry forward their excess input tax and no refunds. It would be ideal if a guarantee system can be adopted to issue a refund within a short period.

Economic Service Charge (ESC) -

The ESC is a tax on persons and partnerships carrying on any trade, business, profession or vocation. The ESC is creditable against the relevant person’s income tax liability. If the person has no income tax liability, ESC charged will not be refunded. It will be the minimum tax payable by such person. By reducing the turnover threshold applicable to Rs. 12.5m from the current level of Rs. 50m many persons carrying on trade, business, etc. may be liable to this minimum tax even if there is no income tax liability.

Tax administration

It has been proposed to make certain changes in the Inland Revenue Department (IRD) administration. Reduction of time-bar for making assessments where return of income has been furnished on or before the due date for six months from the current 18 months may not be advisable.

After all how many working days are there in a six-month period. It may be reduced to 12 months and where the returns have not been furnished by the due date, the current 48-month period should not be changed.  

Period for the determination of an appeal by the Commissioner General of Inland Revenue (CGIR) which is currently two years, may not be reduced to six-months as proposed.

Then, the CGIR may confirm all absurd assessments! Even now with the two-year period, the CGIR confirms about 90% of assessments are under appeal. This period may be reduced to 12 months. In relation to appeals before the Tax Appeals Commission (TAC), the current period is nine months or 270 days. This period may be justified. The two-year period is applicable to the ‘old appeals’ transferred from the Board of Review (BOR), most of which are now over.

The problem with the TAC Act is that the consequences of not adhering to the time limit have not been spelt out. Therefore, the TAC takes up the position that the requirement is not ‘mandatory’. As in the case of CGIR’s hearing of appeals, TAC determination within the time limit should be made mandatory and provisions should be included to discharge the assessment in such situations.

Carbon Tax -

This may create some practical problems in implementation. Once a person paid this tax and obtained the Revenue Licence, he may not obtain an emission test certificate. Sometimes the relevant institution may not perform the test properly. If the collection of tax can be done through Divisional Secretariats and the revenue licence issued after the submission of emission test report, these problems may be avoided. In relation to this it is better to tell the truth rather than confuse the public.

Taxation of E commerce or online transactions -

This creates a lot of practical problems since it is difficult to establish the trade or business carried out in Sri Lanka by the relevant foreign national. A tax may be recovered from the local recipient of goods but that may also create problems. Many countries still watch the situation since it is a complicated matter.

Financial transactions levy -

If this levy is charged on the institution and not on customers, it may not create a problem. But, collecting it from customers by the relevant institutions may be prohibited. If you collect this as a surcharge on Financial VAT, this problem may be avoided. However, this will not discourage cash only transactions by criminal persons etc.

Tax on ethanol - Why no VAT on ethanol?

Withholding Taxes (WHT) -

Specified Fees - This WHT (section 151 of the Inland Revenue Act) was abolished by the previous regime w.e.f. 1.4.2011, for obvious reasons. At that time the rate was 10%. Since this is not a final WHT, instead of 5%, a 10% may be introduced.

Commercial Rent - The WHT (section 155 of the Inland Revenue Act) on commercial rent was also abolished by the previous regime w.e.f. 1.4.2011. Why not this also be revived? It may be extended to residential rent where the landlord is an institution. 

There are some doubts on the 2017 Income Tax and external trade revenue estimates.

As regards income tax, the estimate shows an increase of Rs. 99 billion over 2016. Even with the new proposals it may not be possible to collect this additional revenue in 2017, under the existing self assessment payment system. In the 1st quarter of 2017, the new proposals are not applicable, which will come into effect only from 1.4.2017.

Therefore, the maximum Income Tax Revenue one can expect for 1Q2017 will be ¼ of the previous year’s amount (236 x ¼) i.e Rs. 59 billion. In the other 3 quarters also they can pay ¼ of the previous year’s tax for each quarter, ignoring tax rate changes and other changes in law.

Accordingly, 2Q, 2017 (April to June) revenue from income tax may not be more than Rs. 59 billion. In 3Q,2017 (July to Sept) and. 4Q, 2017 (Oct - Dec) too the income tax revenue may be the same.

Any excess income tax due to rate or other changes can be paid on or before September 30, 2018. For 2017, there may not be additional Income Tax revenue.

However, there may be some additional revenue from 1April, 2017 due to the changes in withholding taxes and the dividend tax rate, but it is doubtful whether such additional revenue will be as high as Rs. 99 billion.

The other problem is with the so-called taxes on external trade. These are really import duties and Port and Airport development Levy (PAL). Many import cesses are to be abolished and import duties on motor vehicles may be very much less. Accordingly, collection of Rs. 400 billion in 2017 from Customs Duties and PAL may not be achieved. The Minister has given an undertaking not to incur expenses over the estimates without Parliamentary approval in 2017. This is the norm. What is important is to see that the expenditure will not spill over the estimates which will affect the Budget deficit, severely.

Practical inclusion -

Some proposals in the Budget will help to develop the North and East. So far, it has been only rhetoric. Additional capital allowances and proportionate exemption on income earned may be good incentives for investment. However, in the North and East, priority should have been given to improve their traditional way of life i.e - agriculture and fishery.

I request the Joint Opposition parliamentarians and others to please read the statistics and charts etc given in the Budget speech, which speak about the progress made by the ‘Yahapalanaya Government’. For easy reference, I, quote some statistics (In Rs. billion).
The writer is a senior Tax and Investment Consultant. He was a former Fiscal Policy Advisor to the Ministry of Finance.