Sunday, 27 November 2016

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.

Saturday, 26 November 2016

Sri Lanka’s Com Bank opens money transfer unit in Rome, eyes other cities

ECONOMYNEXT – Commex Sri Lanka S.R.L., a fully-owned subsidiary of Commercial Bank of Ceylon has inaugurated its money transfer operation in Italy, following the grant of a Money Transfer Licence from the Bank of Italy.

Commex Sri Lanka S.R.L. of Via Giacomo Leopardi, Rome, incorporated and registered in Italy under the supervision of the Bank of Italy had received the necessary regulatory approvals from both countries to engage in fund transfers on its own.

Commercial Bank’s Managing Director Jegan Durairatnam said the bank plans to open branches in other Italian cities with high potential for money transfer services to Sri Lanka.

Italy is one of the biggest markets for Sri Lankan migrants with an estimated 150,000 Sri Lankans living and working there.

The market generates an estimated Rs3 billion in remittances to Sri Lanka a month, the bank said in a statement.

Commercial Bank is one of the first Sri Lankan banks to establish money transfer facilities in Italy.

It led to many Sri Lankans who had previously used informal channels to remit money to Sri Lanka using the Bank’s e-Exchange remittance service instead, and prompted the bank’s decision to incorporate its own subsidiary for money transfer services, the statement said.

Commercial Bank has also tied up with international money transfer services Ria and MoneyGram offering Sri Lankan expatriates additional ways of remitting their earnings to Sri Lanka, supplementing the services already offered through its own money transfer product e Exchange.

The tie up with MoneyGram and Ria permits remittances to all parts of the world through Commex.

Commercial Bank said it is one of the most active players in Sri Lanka in the field of remittances, offering customers a range of options.

“Remitters can send money even without having an account in the bank. The bank has its own Business Promotion Officers (BPOs) in key markets around the world where significant numbers of Sri Lankans are employed.”

Sri Lanka’s MTD Walkers real estate, marine business grows fast

ECONOMYNEXT – Sri Lankan construction group MTD Walkers made a net profit of Rs162 million in the September 2016 quarter from a loss of Rs70 million a year ago, helped by strong growth in its real estate and marine engineering businesses.

Sales rose 60 percent to Rs3.6 billion during the period, according to interim accounts filed with the stock exchange.

The firm reported earnings per share of 97 cents for the quarter compared with a loss per share of 41 cents the year before.

In the six months to September 2016, MTD Walkers’ loss per share narrowed to 38 cents from a loss per share of Rs1.25 the year before.

The group managed to increase its gross profit margin to 27% up from 20% in the second quarter last year “in what continues to be a tough year for the construction industry,” a statement said.

“The results for this quarter have been encouraging and we hope to capitalise on our upcoming projects to further improve our performance in the next quarter,” said Viraj de Silva, chief financial officer of MTD Walkers PLC.

The increased profitability of the goup during the quarter is greatly due to the performance of the real estate sector, which MTD Walkers PLC ventured into recently through its subsidiary Walkers CML Properties (Private) Limited, the statement said.

The group’s real estate business profits rose 90 percent to Rs52 million in the six month period, the accounts showed.

Marine engineering business, the smallest in the group, also saw profits growing sharply to Rs53 million from Rs7.4 million the previous year, while profits from the civil engineering business also rose markedly to Rs193 million from Rs2 million over the period.

The group’s engineering sector business losses narrowed to Rs23 million from Rs145 million and trading losses remained at Rs22 million, near last year’s level while power generation profit fell sharply to Rs3 million from Rs72 million.

Sri LankNDB to be headed by ex-Pan Asia, HSBC banker

ECONOMYNEXT - Sri Lanka's NDB Bank said Dimantha Seneviratne, who ran Colombo-based Pan Asia Bank for three year would be its chief executive.

Seneviratne is a 15-year veteran at HSBC, where he had worked in Thailand, Bangladesh and Saudi Arabia, NDB said in a stock exchange filing.

Seneviratne had started at Sri Lanka's Sampath Bank and worked at Overseas Trust Bank and Saudi British Bank before joining HSBC.

He counts 26 years in banking.

Sri Lanka to bring new foreign exchange controls

ECONOMYNEXT - Sri Lanka will bring a new foreign exchange law 'to protect foreign reserves from irregular transactions' a budget for 2017 has said moving sideways from an earlier stance that foreign exchange controls will be abolished.

The budget however said the existing Exchange Control Act will be repealed.

Sri Lanka brought draconian foreign exchange controls after a money printing central was set up in 1951, generating dollar shortages and pressure on the currency.

Before 1951, Sri Lanka had a currency board where the exchange rate was fixed to the Indian rupee (silver).

The rupee did not move from 1885 until the creation of the central bank as money printing was legally prohibited.

The current administration also imposed exchange controls on exporters after printing money to finance a deficit and keep rates low.

Sri Lanka is trying to make Colombo a financial centre, but analysts say without a complete overhaul or abolition of the central bank, the idea will be a pipe dream.

Sri Lanka has held Dubai, Singapore and Hong Kong as examples.

But Hong Kong has an orthodox currency board, Singapore a modified one, and Dubai mimics US interest rates and operates almost like a currency board.

Market momentum decelerate over budget concerns: Acuity

Market momentum continued to decelerate last week as concerns surrounding certain Budget 2017 proposals weighed on investor sentiment, Acuity Stockbrokers said in their Share Market Weekly.

"The broad-share ASPI fell a further 73.9 points last week as retailers continued to look for direction and institutional/high net worth investors remained on the sidelines. Turnover levels meanwhile, continued to dwindle, with daily average turnover levels remaining in the LKR 0.32-0.39Bn range for the fifth consecutive week," the report said.

It noted that turnover levels which have averaged ~LKR 0.75Bn over the first nine months of the year have fallen to ~LKR 0.4Bn over the months of October and November.

Corporate earnings from the recently concluded earnings season however, indicated stronger performance over the September quarter, with ~95% of the market recording earnings totalling LKR 60Bn.

"The increase of ~25% Y-o-Y was helped largely by strong performance by Banks, Insurance, Manufacturing, Telecos, F&B and Hotels & Travels," Acuity said. "The Diversified sector however lost 27% Y-o-Y to LKR4.3Bn (cf. LKR 5.9Bn in Sept’15) while the Construction sector lost 15% Y-o-Y over the quarter to LKR 0.7Bn (cf. LKR 0.8Bn in Sept’15).

The report projected that markets in the week ahead are likely to remain dull, with investor’s looking for direction from this week’s monetary policy decisions.

www.island.lk

Distilleries – Melstacorp ‘Arrangement’ still in limbo

May happen this week according to informed sources

Several inquiries have been made by shareholders of the Distilleries Company of Sri Lanka regarding the swap of Distilleries shares for those of Melstacorp Ltd. finalized by an ‘Arrangement’ approved both by shareholders and the Commercial High Court of Colombo.

Under this arrangement, the swap had been concluded from Oct. 1 and Melstacorp has become the holding company of Distilleries, according to a Stock Exchange filing by Distilleries earlier this month.

However, the physical transfer of shares to and from shareholders has not yet taken place. In its Nov. 1 Stock Exchange filing, Distilleries said that this would take place when approvals are received from the Colombo Stock Exchange and the Securities and Exchange Commission of Sri Lanka to transfer Distilleries shares from shareholder accounts to Melstacorp as a private transfer and Melstacorp shares are listed.

Well informed sources said yesterday that the arrangements would be concluded possibly this week with Melstacorp listed. Regulatory approval for private transfer of shares must be obtained from the SEC and this too is likely within days.

"The depositing of Melstacorp Ltd. (shares) to the CDS accounts of the shareholders will take place once the above approvals are received," Distilleries said in the filing.

It further said that company has made an application to the SEC for the transfer outside the trading floor of the CSE (private transfer) of 300 million Distilleries shares in consideration for the allotment of 1,200 million new shares of Melstacorp to shareholders of Distilleries as at Sept. 30.

"The board of Distilleries and Melstacorp with the support of officers of the SEC and CSE is taking their best endeavors to ensure that the planned transfer of shares would soon take place," the filing published on the CSE website said.

However, there has been no further information on the subject with Melstacorp still unlisted and Distilleries shares remaining in the CDS accounts of shareholders who have agreed to the swap.

www.island.lk