NCE analyses impact of Budget 2015 proposals on export sector

The National Chamber of Commerce (NCE) in a statement has analysed the impact of 2015 Budget on
the export sector. Following
is its analysis:
The overall export target of the Government to be achieved by 2020 is $ 20 b. All sectors related to exports were expected to work towards achieving this export target. In this context the Budget proposals have focused on sectors such as apparel, (which is the highest foreign exchange earner at present) as well as plantation sectors such as tea and rubber as well as spices to contribute $ 15 m by 2020 through value-added products.
The knowledge services sector comprising Information Technology and tourism which are projected to earn $ 5 b each by 2022 have also received special attention. However, in regard to the ICT sector, a key issue related to relaxation of labour regulations to enable night work for female employees in the IT BPO sector including call centres remains to be addressed. Attention was invited to this both by SLASSCOM and NCE. Incentives have also been provided to other export sectors which could contribute to the achievement of the overall export target. These are outlined separately.
During the preparatory stages of the Budget, the Chamber made proposals in regard to areas which have an impact across all sectors. The Chamber is glad to note that some of these have received attention and support, at least to some extent through the Budget.
a) Cost of energy
Since the cost of electricity generation was expected to come down with the commissioning of new coal power plants and other renewable energy projects, the Chamber proposed that the benefits of the reduced cost of generation be passed down to export enterprises to enable compete with enterprises in other countries in the region which enjoy low energy costs.
The Budget proposals envisage a reduction of 15% in cost of electricity for all industries from November 2014. The Chamber welcomes this proposal as it will provide some relief to export enterprises.
b) Support for R&D
and innovation
The Chamber pointed out that the rapid growth of exports from Sri Lanka lies in her ability to differentiate and innovate export of products and services to overcome competition, since Sri Lanka lags far behind countries such as South Korea, Taiwan, and the Philippines, and even neighboring countries such as India and Pakistan in the export of high-tech products as a percentage of total exports.
The Government earlier allowed triple deduction of expenditure incurred on R&D activities for tax purposes. The Chamber is pleased to note that this facility has been extended to expenditure incurred on innovation and brand promotion of industries, which will facilitate the development of high-tech products as well as branding to enhance foreign exchange earnings. However, availability of venture capital financing to implement innovative product ideas and commercialisation of R&D work remains a constraint.
c) Assistance for skills development
The Chamber pointed out the difficulties encountered by many export sectors in sourcing skilled workers and requested assistance to support the efforts made by export enterprises to source their needs of skilled workers.
The Chamber is glad to note the vision of the Government announced in the Budget proposals to engage students in vocational education to drive the economy with a skilled work force; and the measures announced to fast-track skills development through technical colleges and Government technical training institutes.
However, assistance for private sector institutions to develop skills required in the short term remains to be addressed.
Sector-related proposals
1. Garment sector

• The apparel sector which is the largest export sector is expected to generate $ 5 billion export earnings this year. The Budget proposal to implement a pension scheme for employees in the apparel industry to improve job attraction and security is a boost for the sector which will address the shortage of workers as well. However the cost of the pension scheme and the increase in the EPF contribution by employers will increase the cost of production and will have a bearing on competitiveness of the industry.

2. Tea sector
The following proposals will have a major positive impact on the sector:

• Use of 50% of the special cess collected by the Tea Board to promote high value tea in global markets, with Sri Lanka identity and country image.

• Increase of the replanting, and new planting subsidy to tea smallholders will increase production.

• Financial assistance to fully modernise smallholder tea factories with modern machinery and equipment will improve the quality of output.

• The fertiliser subsidy for tea smallholders and the grant per acre for land development, and use of organic fertiliser will boost production.

3. Rubber sector

• Increase of the cess on raw rubber imports by Rs. 10 per kg and implementation of a guaranteed price of Rs. 300 per kg for local raw rubber will encourage small rubber growers to increase production. However, the increased cost of raw rubber will increase the cost of production of rubber products eroding margins.

• Provision of rain guard instruments to small rubber growers in the wet zone, and lands in other areas to grow rubber, will also increase production, to reduce import of raw rubber.

4. Coconut-based product sector

• Increase of the new and replanting subsidy for coconut and the subsidy for the rehabilitation of coconut land per acre will boost production.

• Maintaining the prevailing high taxes on edible oil, coconut oil and palm oil at the point of import will support the long term interests of coconut plantations.

• Increase of the Kapruka investment loan up to Rs. 3,000,000 to cover soil improvement and water retention in coconut lands will support production.

• Financial and technical assistance for the development of palmyrah and kitul plantations will enable development of these associated industries.

 5. Agriculture sector
The following proposals will boost production:

• Increase of the planting subsidy for minor export crops by 25%.

• Increase of the subsidy granted for the cultivation of fruits and vegetables by 50%.

6. Gems and jewellery sector

• Reduction of duty on importation of gold by exporters using foreign currency accounts for the purpose of exports to 3.5%, by way of a 50% duty waiver, will encourage jewellery exports.

• nReduction of the service fee imposed by the Gem and Jewellery Authority to 0.25% of the FOB value of exports will encourage development of the sector.

• nSetting up of a Gem and Jewellery Processing Zone and a Gem Trading Centre in Ratnapura as a global attraction will boost foreign exchange earnings.

7. Minerals-based export sector

• Sri Lanka has the potential to export high value-added products from minerals such as graphite, ilmenite, silica quartz, etc. Exports with full value addition adhering to stringent environmental compliances to secured high export income have been encouraged.

8. Wood-based products sector

• Easing the process of importation of advanced machinery and equipment will facilitate production for exports.

9. Fisheries sector

• Financial provision to boost aquaculture, inland fisheries, and expansion of ornamental fish production for export.

• Financial provision to rehabilitate cold room facilities and reduction of import duties on equipment required for expansion of marketing facilities will boost production.

10. IT/BPO sector

• Exemption from income tax for a period of two years from commencement of an IT/BPO company of profits and income accruing to an entity outside Sri Lanka by way of royalty payments will boost investments in the sector.

The following measures, proposed in the Budget will have a positive impact on all export sectors:

• The proposal for the Inland Revenue and Customs Department to go online to simplify income tax registration, and export and import transaction payments with immediate effect.

• The establishment at the Customs a ‘one-stop service centre’ providing banking, quarantine, quality standards and other trade services through a computer network.

• Grant of accelerated depreciation provision, and exemption from income tax on dividends, provided exporters undertake investments over $ 2 million on machinery equipment.

• Reduction of import taxes on packaging material required for export products without affecting local industries that manufacture such material.

• The Free Trade Agreement with China expected to be operational by the middle of 2015, provided the final agreement that is negotiated addresses is issues for the export of Sri Lankan export products and services, free of non-tariff barriers.

In an overall sense the Budget proposals focus on boosting production, to ensure adequate product supplies, especially in agriculture based products; and value addition through processing, innovation and brand promotion.
However, delivery by the private sector to effectively contribute achievement of export targets would depend on the availability and delivery of financial products especially for innovation and brand promotion which is costly.
The Chamber will continue to interact with the relevant State authorities to address issues related to member exporters.