Mixed 2015 budget has attractive proposals to boost stock market

Investors will benefit from Unit Trusts and it will be marketed extensively next year with the budget proposal exempting profits and income arising or accruing to any Unit Trust from investments made, on or after 1 January 2015, in USD deposits or USD denominated securities listed in any foreign stock exchange, analysts say.

The budget has also proposed exemptions on the interest or discount accruing from the investment in any Corporate Debt Security issued by the Urban Development Authority, on or after 1 January 2015. According to a UDA source, the UDA is working with the People's Bank to launch their Rs. 10 billion debenture issue by mid November. "These will be very attractive with this budget proposal," an analyst said.

It is proposed to fix the tax-free threshold applicable for VAT and NBT on supermarket scale retail businesses at Rs. 100 million per quarter. The present threshold of value of supplies for a consecutive period of three months of any calendar year of any person or partnership carrying on a business of wholesale or retail trade for the chargeability to VAT will be reduced from Rs.250 million to Rs.100 million.

Accordingly, the value of supply of goods in a wholesale or retail trade activity where the value of good supplied, including exempt or excluded supplies, in any consecutive 3-month period with Rs.100 million or more is subjected to VAT. Further a request has been made to supermarkets to reduce prices by at least 10 per cent in view of the VAT reduction by 1 per cent to 11 per cent.

"Conglomerates which operate large scale supermarket chains such as Keells Super (John Keells Holdings PLC) and Arpico (Richard Pieris PLC), and Cargills Food City (Cargills Ceylon PLC) which were already under a previous Rs. 250 million threshold will have no impact with the reduction of the threshold level. But any price reductions (owing to the request) would adversely affect profitability margins," a Capital Trust Securities report said.

New airports

It is proposed to allocate Rs. 10 billion during 2015-17 to rehabilitate the national airports and set up new airports at Kandy and Nuwara-Eliya to promote domestic travel and tourism and to ease traffic congestion, which would create more opportunities to companies such as Access Engineering PLC, MTD Walkers PLC and Lankem Development PLC, the report added.

Improving irrigation systems, providing quality drinking water and the conservation of wild life are priorities in the 2015-17 medi- um term budget framework. It's proposed to increase the irrigation budget by further Rs. 15 billion for early completion and commencement of several reservoir development projects and development of downstream livelihood activities associated with 3 other reservoirs.

"Access Engineering PLC will directly benefit as the company specializes in water and irrigation sector," the report said.

The custom based taxes on all electric cars will be reduced to 25 per cent, which was an initiative taken to reduce future demand for fuel imports and might affect Lanka IOC. "However the impact will be very insignificant as only a few hundred electric cars are expected to be in the country in the next financial year. Furthermore with the drastic decline in oil prices in world markets, profitability of LIOC would improve significantly," a stockbroker said.

The concessionary income tax rate of 12 per cent applicable to export profits will be maintained while 100 per cent capital allowances on machinery and equipment, and exemption from income tax on dividend will be granted for export related businesses who undertake over US$2 million investments on machinery and equipment.

Export oriented companies such as Textured Jersey Lanka PLC, Dipped Products, Richard Pieris Exports PLC, Hayleys MGT, Orient Garments and any other export re- lated manufactures can benefit from all of the above proposals, according to analysts.

"It is proposed to grant an electricity tariff reduction of 15 per cent industries from November 2014 where many of the highly energy intensive businesses such Piramal Glass, Royal Ceramics, Lanka Tiles, Lanka Wall Tiles and Garments manufacturing would directly benefit from this," the analyst added.

Migrants to gas up

Concessionary duty permits will be granted to high income earning Sri Lankans working overseas for the importation of motor vehicles to the value of 60 per cent of foreign currency they remit to Sri Lankan Banks. All importers of motor vehicles will have more business and with 500 small buses and 2,000 large buses to be added to the Sri Lanka Transport Board's existing fleet, the Capital Trust report said.

"Lanka Ashok Leyland PLC and SMB leasing PLC being the authorized dealer for Leyland Busses would directly benefit from this proposal," it added.

To continue the Rs. 5000 per acre grant assistance to support land preparation towards water retention, soil conservation, the use of organic fertiliser for smallholder tea cultivation to increase production. The subsidized price of Rs. 1250 per 50/kg bag will also be con- tinued for all these crops. The prevailing high taxes on edible oil, coconut oil and palm oil at the point of customs will be maintained in the long-term interest of coconut plantation.

"The CESS applicable on the export of tea, rubber, coconut, cinnamon and pepper in primary form will be further strengthened to channel such revenue to encourage cultivation and related improvements of these crops. This will encourage value addition value addition to products locally and help companies such as Heladiv Tea and Expolanka Teas (Expolanka Holdings PLC),"the report said.

The replanting subsidy will be increased to tea small holders from Rs.142,000 to Rs. 200,000 per acre and the new planting subsidy from Rs. 100,000 to Rs. 160,000 from next year. Financial assistance will be extended to fully modernise smallholder tea factories with modern machinery and processing equipment.

CESS on rubber imports is to be increased by Rs. 10 per kilo while a guaranteed price will be Rs. 300 per kilo to encourage small rubber growers from November 2014. "This will guarantee stable prices for rubber manufacturers in the local markets and be supportive for local rubber manufacturers such as Watawala Plantations PLC, Horana Plantations PLC to maintain competitive prices," the analyst said.

Liquor taxes up

Increasing the guaranteed price of liquid milk to Rs. 60 per litre to increase local milk production and reduce the price of locally made milk powder by Rs. 100 per kilo and yoghurt by Rs. 5 per yoghurt, to popularise local products. "This will be supportive for local dairy producers such as Kotmale Holdings, Ambewala farms, Ceylon Cold stores, Cargills PLC and Lucky Lanka Milk Processing Company Limited, analysts said. "But companies which import milk powder such as Nestle PLC and Lanka Milk Foods (LMF) will have pressure in terms of competitiveness of pricing," the Capital Trust report said.

Excise Tax on cigarettes and liquor will be increased to raise Rs. 14,000 million of additional revenue in 2015. Ordinance duty will be charged on the manufacture of liquor and cigarettes while Excise (Special Provisions) duty will be charged on the manufacture or import of cigarettes. Analysts say that this will add pressure to the bottom lines of Distilleries Company PLC, Lion Brewery PLC Ceylon Brewery and Ceylon Tobacco Company PLC.

The pension scheme for employees in the apparel industry to improve job attraction and security will increase costs associated with employees of companies such as Textured Jersey, Orient Garments (Hayleys Knitting Mills) and Odel.