Budget Highlights

Budget boosts Co-op sector, milk production

[Tuesday, November 07, 2007 - 9.05 GMT]   

The Budget for the Year 2008 presented to Parliament today (7) by President Mahinda Rajapaksa as Minister of Finance and Planning has given a boost to the Co-operative sector. While Rs. 1 million has been earmarked for modernization of the island wide cooperative society network, they are also exempted from taxes.  Long standing loans and interest of co-operative societies will be written off.

In face of rising prices of milk foods in the international market, the Government has announced a series of measures to improve milk production in the country. They include the payment of a higher price of Rs. 40 per litre to milk producers, the development of 50, 000 livestock farms etc.

Here are some of the highlights of the Budget Proposals:

Fuel prices – No immediate increase

Refrain from revising fuel prices at least as a temporary measure.

As any revision of diesel and kerosene price would cause hardship to the public, no upward revision of fuel prices at least as a temporary measure. In order to maintain diesel and kerosene prices, on which VAT is already exempted, at present levels through a cross subsidy mechanism, the 15 percent VAT on petrol be reduced to 5 per cent from January 2008. If this measure becomes insufficient in the context of changing international crude oil prices, remove the Excise Duty on Petrol as well. In order to recoup the revenue forgone, change taxes on liquor, motor vehicles and non essential imports as well as only change the price of petrol, in an appropriate manner.

“If international price of crude oil remains continuously high, we have no choice but to face the hard reality. However, the price of kerosene will be maintained at the current level and provision has already been made to extend a Rs. 100/- kerosene subsidy per month to Samurdhi and other low income households who do not have electricity.

“It is proposed to give limited quantity of petrol at a discounted price to three wheelers with meters and also to introduce a loan scheme to enable the purchase of such meters.”
 

Strengthening the Co-operative System

It is proposed that over 300 Co-operative Societies which are scattered island wide will be linked with Lak Sathosa outlets. A grant up to a maximum of Rs. 1 million to all Co-operative Societies to modernize outlets to be able to distribute essential commodities to consumers. Further, the Lak Sathosa outlets will be expanded up to 200 on an urgent basis. Budget Shops will be setup in more populated areas for which it is proposed to allocate Rs. 650 million.

in order to revive Co-operative Movement, write-off all long term loans and interest due, and also to write-off all unpaid taxes of Co-operative Societies.

Essential Items

In order to promote the distribution of essential items at affordable prices, exempt Co-operative Societies from Income Tax, VAT, Debit Tax, including Withholding Tax on interest, for a period of 5 years. Since Co-operative Societies are also exempt from the Economic Service Charge and Provincial Council Turnover Tax, Co-operative Societies and associated Rural Banks will become tax free enterprises in terms of this Budget.
 

Essential Commodity Items at Concessionary Prices for Low Income Groups

Despite removing taxes on essential commodities since November 2006 at a cost of around Rs. 10 billion, the impact of such tax concessions did not seep down to consumers other than through Lak Sathosa outlets, Co-operative Societies and a limited number of other shops. As such, it is proposed to confine such tax concessions only to Lak Sathosa outlets, Co-operative Societies and Budget Shops and distribute a welfare pack containing essential commodities at tax free prices to low income groups through these outlets.
 

Rice Subsidy for the Plantation Sector and Neighbouring Communities

Allocate Rs. 200 million to introduce a program to make available rice at a concessionary price to the communities in plantation and neighbouring areas, in order to encourage them towards rice and rice flour consumption. Priority will be given to setup Lak Sathosa and Co-operative Societies in these areas in order to ensure the success of this program.
 

Domestic Textiles Industry
To encourage the domestic textile industry, a Cess of Rs. 50/ Kg. is proposed to be imposed on textiles imports for domestic consumption. Exempt importation of Yarn from VAT in order to encourage production of high quality fabrics.

Environment Conservation Levy
As the damage caused to the environment through air and water pollution and soil erosion is estimated to be in excess of 2 percent of the GDP, but the resources earmarked for environment conservation is grossly inadequate, it is proposed to introduce an Environment Conservation Levy Act ensuring environment conservation. Individuals, businesses or items considered as harmful to the environment will be subject to this levy.

A permanent household, with a vehicle and a telephone and electricity connections will be liable to this environment levy of Rs. 20 per month. The Central Environmental Authority will be empowered to register relevant Chief Occupants to enable the process of recovering of this levy. Further, provision will be made in the Act to enable the gazetting of any items or businesses considered as harmful to the environment as well as the relevant tax rates pertaining to which the gazette will be submitted to the Parliament. It is estimated to raise Rs.1, 000 million from this Environment Conservation Levy that will be introduced from 2008.

Carbon Fund

It is also proposed to allocate Rs. 150 million for Piyakaru Purawara and Haritha Gammana Environmental Programs. It is proposed to reduce around 3 million tons of Carbon emission per year in Sri Lanka. The associated foreign exchange earnings in line with the relevant international conventions are estimated to be around Rs. 3,000 million. Set up Sri Lanka Carbon Fund with the participation of Banks and private investors as shareholders to facilitate this process.
 

Income Tax – No concessions to foreign professionals
No  rationale in extending special concessions to foreign professionals working in Sri Lanka, since Sri Lankan professionals with domain expertise are sufficiently available and also in view of double tax agreements which are in place with many countries. As such, it is proposed that tax computation on income with regard to both foreign and local persons employed in Sri Lanka would be done in an equal basis.

 
Simplification of the Tax System

The simplification of certain taxes is helpful for the tax administration as well as tax payers. As such, it is proposed to exempt those paying Economic Service Charge from having to pay Withholding Tax and Income Tax. Aiming at greater convenience with regard to Stamp Duty payable on Leases or Mortgages, it is proposed that either stamps representing the relevant amount could either be affixed or a receipt proving the payment of such amount to a Bank could be affixed, to a lease or a mortgage instrument and legal safeguards will be introduced in this regard.  It is proposed to exempt all key development projects from VAT and the service providers will be entitled to claim their input; it is also proposed to simplify the prevailing system relating to taxing salaries and allowances of public servants.
 

Collection of Tax Arrears
With the repeal of the tax amnesty legislation, many taxes to which the amnesty applied are now recoverable. Although the amount as tax arrears reflected in the books of the Inland Revenue Department is substantial, we have confronted difficulties in ascertaining the amounts that is in fact recoverable. It is propose to introduce a Special Act in this regard. This proposed Act will have provision pertaining to resolving related issues and will enable the recovery of such taxes in an expeditious manner. It is proposed that this Act will make specific provision to appoint an Independent Committee consisting of 3 members, to be chaired by a Retired member of the Judiciary and provide a mechanism through which tax arrears up to 31st March 2007, of state institutions or those who are legally declared bankrupt, could be written off as may be approved by the Committee. It is also proposed to refer to a special judicial process to recover arrears relating to Turnover Tax, National Security Levy and the Goods and Services Tax. It is also proposed, to amend the Inland Revenue Act and VAT Act to require the Commissioner General of Inland Revenue to ensure, that commencing from 1st April 2007, tax arrears in any tax year cannot exceed 3 percent of the tax revenue of the previous tax year. It is expected to set up a special unit directly under a Deputy Commissioner General of Inland Revenue which will be in charge of collecting tax arrears. It is expected that the Inland Revenue Department under the supervision of the above mentioned Committee will be able to collect at least Rs. 5,000 million in 2008 through this measure.

Tax Holidays

Continuous provision of tax holidays to promote investment has caused distortion in our Tax system. Time has come to eliminate these distortions and get everybody into the tax system. It appears more appropriate that tax holidays already granted will not be extended, and to give only three year tax holidays other than for flagship investments, or to those engaged in development activities in lagging regions or building housing facilities for lower income groups. I consider this is a practical beginning to ensure that the high tax rates that are prevailing to be reduced over the next 5 years to ensure that tax rates could be aligned with those prevailing in other countries in the region. As such, I propose that grant of tax holidays from 2008 will be restricted as aforesaid and that, such companies will be permitted to graduate through a lower tax rate during the 3 years next ensuing. I expect an additional Rs. 500 million could be raised in 2008 by broadening the tax base. Further, I propose that the approval of the Ministry of Finance will be mandatory prior to availing a tax holiday under any statute and to make for which required statutory amendments put in place.
 

Development of Small and Medium Scale Industries
It is proposed to extend the tax free period that was availed to those importing high tech machinery and equipment to enhance the production capacity of local enterprises, till December 2009; grant concessionary loans subject to a maximum of Rs. 15 million, at an interest rate of 10 percent, for garment factories situated outside the Colombo district to enable the modernization. I propose to extend financial assistance at concessionary rates from the National Co-operative Fund, pertaining to project proposals submitted by Co-operative Societies for production purposes in diary, fishery, livestock, textile and small and medium industries.

Local Milk Production

In order to encourage local milk production, I propose to increase the guaranteed price being paid to milk producers of milk, to Rs. 30 - - 40 range per Ltr In addition, credit facilities will be provided at concessionary rates for the importation of milking cows, development of animal husbandry and to set up small and medium milk processing centres. I also propose to exempt milk and dairy products from VAT. I have allocated funds to grant concessionary loans to develop over 50,000 livestock farms in Northern, North Central, Southern and Uva Provinces. It is proposed to strengthen the legal framework to prevent the slaughter of milking cows and to increase the associated fine from Rs. 250 to Rs. 50,000. It is also proposed to allocate Rs. 100 million to set up cold storage facilities and milk collection centres at provincial level.