Get Ready For More Taxes

• Unbridled Recurrent Expenditure

Unless government’s recurrent expenditure is controlled, get ready to pay more taxes, a tax consultant warned.
N.R. Gajendran speaking at a CIMA sponsored budget seminar on Monday said that recurrent expenditure outruns revenue.
Government expenditure grew by 20% last year over that of 2008.
“The most significant piece of expenditure this year is not defence, but salaries and pensions which will gobble up Rs. 400 billion,” said Gajendran.
In contrast defence expenditure is estimated at some Rs. 175-200 billion.
He said that 50% of revenue is spent on public sector salaries. “You must therefore demand that the public sector be efficient,” Gajendran told the audience.
Key performance indicators must be insisted upon, beginning with the ministers and downwards.
He further said that the second biggest expenditure basket last year were interest payments which amounted to Rs. 309 billion.
This year that expenditure is estimated at Rs. 337 billion or 7-8% of gross domestic product (GDP). Gajendran also said that this year’s capital expenditure at Rs.361 billion virtually matches the estimated interest payment figure of Rs. 337 billion.
He said that in 2005 the interest payment figure was Rs 100 billion, but in 4-5 years time that figure has ballooned by 3½ times, said Gajendran.
He also questioned the validity of government forecasts.
Budgetary revenue and grants target for the year at Rs. 841 billion is almost similar to last year’s target of Rs. 855 billion, but what was actually achieved in 2009, inclusive of grant aid was only Rs. 728.5 billion.
The government has also proposed to increase tax revenue by 17% year on year to Rs. 817.79 billion this year. “But has your revenue grown by 17%?”, he asked the audience. “There is no proposal to widen the tax base either,” said Gajendran. “We may therefore see more taxes,” he said.
The government also expects to keep the deficit down to 8%, but last year it was 9.8%, said Gajendran.
Though the growth target for last year was 8.2%, the economy in reality grew by 3.5%. Unemployment last year was 5.7%, mainly kept down by overseas recruitment and recruitment to the public sector.
The budget deficit at 8% or Rs. 438 billion may result in the private sector being crowded out, he said. But banks will start lending in the 4th quarter, predicted Gajendran.
He said that the hard option is to go to multilateral institutions for soft loans over a longer repayment period with conditions attached, whereas the soft option is to go to friendly countries and borrow, where the interest charged would be London Inter-Bank Offered Rate (LIBOR) plus 2-3%. But in the latter form of borrowing, there may be other conditions such as labour and equipment having also to be sourced from the creditor country.
Gajendran further said that the budget has a focus on tourism, targeting 2.5 million tourists by 2016 and a US $ 2.8 billion revenue as opposed to the current levels of 500,000 visitors and a tourism earnings figure of US $ 300 million. For that to happen 40,000 additional rooms will have to be built at a cost of Rs. 8 million per room, he said.

Investments

Former Central Bank Director Statistics Dr. (Mrs.) Anila Dias Bandaranaike in her speech spoke about the negative growth in intermediate and investment goods last year as being a disincentive for economic expansion. In contrast in 2002/03, investment goods grew by between 20-30%, she said.
The efficacy of the bureaucracy was also questioned, particularly in the context that the government wanted to increase investments from the current 24-26% levels of gdp to  30%.
Even at the height of the Mahaweli investments didn’t go beyond the 29%  gdp levels, said Bandaranaike. The 7.1% gdp growth in the first quarter has to be looked at in the context of  a lower base that operated in the same period last year, she said.
Shiromal Cooray, Managing Director Jetwing Travels, said that their hotel project in Sigiriya took some two years to get off the ground, with them having to get some 32 approvals before being available to kick start the project.
Gajendran said that what foreign investors need are certainty, predictability and the rule of law and not having to “kiss the powers that be” to obtain legitimate approvals.
It was also said at this seminar, the country’s gdp was expected to increase from Rs. 4.8 trillion last year to Rs. 5.5 trillion this year (1% of gdp = Rs. 55 billion).
Sri Lanka will have to move quickly to exploit its peace dividend or it may miss the bus, Gajendran warned.
As an example, he said that tourism’s loss in 1983 was Maldives’ gain.
When it was pointed out that the requirement that foreigners visiting the North have to first get defence ministry clearance may be a stumbling block in gaining diaspora investments, Gajendran said that such bottlenecks will have to be cleared quickly.
This reporter who visited Jaffna over the weekend asked an army officer why foreigners who wanted to visit the area had to first get Defence Ministry clearance. He said that this was because there were fears that some vested interests in foreign garb might try to foment trouble in the area.
Gajendran further said that the country’s markets are the consumption driven markets of the West which take 60% of the island’s exports and not India and China. “India and China may invest in the island, but those are not necessarily for the purpose of re-exporting those goods and services produced, back to their homelands,” he said.
Sri Lanka’s strength lies in catering to niche markets because of its high production costs.
Gajendran also questioned the rationality of giving Board of Investment (BoI) tax breaks to firms that cater to the local market. “The consumer here has to pay for such services while at the same time those companies remit the profits made to their home countries without having to pay a single cent as tax,” he said. He quoted the telecoms sector as an example in this connection.
Indications are that Sri Lanka is moving towards a low tax regime, but low income and corporate tax regimes should not be at the expense of increasing consumption taxes because that is not equity.
Bandaranaike said that the challenge before monetary authorities was to see that the exchange rate and prices don’t go out of hand because of envisaged high growth levels.
But the biggest constraining factor is fiscal profligacy of which the monetary authorities have no control, she said.
Bandaranaike also said that the government may be giving the wrong signals to the private sector when they were considering to acquire the stakes in SriLankan and Shell Lanka, now held by Emirates and Shell Global respectively and the investment of government controlled funds in stocks and shares.
She also said that though there were no power outages in the city, it was not so in the periphery, which would be detrimental to tourism development as power would be needed not only for electricity, but also for the operation of air conditioning plants in hotels. It was also brought to the notice of the audience the high cost of electricity in the island.
Business Editor’s Note: According to reports last week, the government has reacquired its stake in SriLankan by paying Emirates the necessary monies.