Ceylon Chamber’s mixed view on the budget

Budget 2017 has signalled continuity in the economic policy priorities of the government, following from Budget 2016, and the Prime Minister’s economic policy statements of November 2015 and October 2016, the Ceylon Chamber of Commerce (CCC) said in a media statement.

The CCC observed that Budget 2017 seeks to continue the government’s focus on modernizing the economy, inclusive growth, strengthening the middle class, and rebalancing towards an exports and private investment driven economic trajectory. The CCC welcomes the proposals to strengthen education and skills, especially the proposal to enable students who do not get into state universities to study in UGCapproved private higher education institutions. This is much needed to ensure greater inclusion in tertiary education access and build a competitive workforce.

“Given that persistently high budget deficits have been a root cause of macroeconomic instability in Sri Lanka, the efforts of the 2017 Budget to cut the deficit to 4.6 per cent in 2017 and raise the tax to GDP ratio to 13.5 per cent are laudable, albeit ambitious. We believe that many of the tax revenue measures outlined in the Budget are attainable, if implementation is carried out successfully. The measures to enhance direct tax revenue collection, by ending some tax exemptions will help fiscal consolidation and rebalance tax collection towards a greater direct tax contribution. Especially as Sri Lanka is now more exposed to international capital markets, and is also under an IMF Extended Fund Facility programme, it is important that pronouncements on Budget deficits and tax revenues are met, in order to build credibility in the country’s fiscal management. Yet, the government must be cautious of what a tighter fiscal policy could do to aggregate demand, in the midst of tighter monetary policy as well. In the absence of robust growth, and poor performance on exports and FDI, tighter fiscal policy could douse out demand in the system,” it said.

A key recommendation in the chamber’s Budget proposals this year, also conveyed in discussions with the Ministry of Development Strategies and International Trade, was the reforming of the investment incentives regime. “To this end, we are pleased with the announced shift towards expenditure- based incentives like capital allowances/ accelerated depreciation, and away from profit- based incentives like blanket tax holidays. The former has the characteristic of incentivising and rewarding new capital infusion and new investment. Clarity on the new incentives regime would give a fillip to prospective investors, as many investors are concerned about policy consistency,” it said.

“Clarifications are needed on implementation of several of the new tax measures, for instance new taxation of institutional unit trust investors, the removal of the National Tax Credit, and the move back to VAT refunds from the SVAT scheme. The CCC urges the Ministry of Finance to consult with relevant stakeholders fully before implementing these measures, to avoid negative fallouts. The proposal to limit the Regional Plantation Companies ( RPCs) to 5,000 acres needs careful re- consideration, as many are CSE- listed entities and this proposal will have strong implications on their business structure,” it said.