Finance Minister Ravi Karunanayake yesterday presented the good governance administration’s third budget, which seemed to indicate more or less the minister was walking a tight rope, making a massive effort to balance the people’s expectations while raising funds to cap the country’s ever expanding budget deficit. 

For the year 2017, the government expects to raise a total revenue of Rs.2, 098 billion, inclusive of grants, compared to Rs.1, 658 billion in 2016, and the total expenditure is estimated at Rs.2, 723 billion as against Rs.2, 328 billion in 2016.
The budget deficit is estimated at Rs.625 billion, 4.6 percent of the gross domestic product (GDP), down from Rs.670 billion or 5.4 percent of GDP estimated for this year.  
In its efforts to achieve this revenue and deficit target, which appears to be a daunting task, the government expects to raise Rs.1, 821 billion through taxes. Despite the good governance administration’s pledge to reduce indirect taxes— which are regressive in nature— and increase direct taxes, the major component of tax revenue would still come from indirect taxes.
With the increase in Value Added Tax (VAT) from 12 percent to 15 percent, the government expects to collect Rs.1086 billion from taxes on goods and services. Only Rs.335 billion will be collected through income taxes. 

Meanwhile, the government yesterday introduced a new tax called Financial Transaction Levy (FTL) on transactions of banks and financial institutions. It will be introduced at 0.05 percent on the basis of the total transaction value by banks or financial institutions. 
“I propose to introduce a new levy called FTL as a contribution for social development at the rate of Rs.5 per Rs.10, 000 on the total cash transactions including easy cash by banks and other financial institutions.

FTL will be treated as expenditure for income tax purpose,” Finance Minister Ravi Karunanayake told Parliament. 
However, it is not yet clear as to from whom the FTL will be charged—from the customers or the banks. If the tax is charged from the banks, they are likely to somehow find a way to pass it on to the customers. The government expects to raise Rs.8 billion through FTL.
It has also been proposed to introduce Capital Gain Tax (CGT) at a rate of 10 percent on the profits realized from the disposal of immovable properties effective from April 01, 2017. 
“We consider this tax to be equitable as it bridges the income gap and assists the government initiatives in poverty alleviation,” Karunanayake said. The government expects to collect Rs.5 billion from the CGT. 
Also, the government has altered the thresholds of some of the existing taxes to collect more revenue and eliminate some of the tax exemptions.  
Accordingly, the withholding tax on bond interest has been raised from the current 10 percent to 14 percent and the tax exemption on profits from corporate debt securities has been removed. Taxes on pension funds such as the Employees’ Provident Fund and Employees Trust Fund will also be raised to 14 percent from the current 10 percent.
Unit Trust income will also be taxed for corporate and exemption on interest income of up to Rs.5, 000 a month has been removed.
The tax-free threshold for Pay-As-You-Earn (PAYE) tax has been raised from Rs.62, 500 to Rs.100, 000. Though on the surface, this move appears to leave more money at hand for people to spend, the higher VAT rate at 15 percent would eliminate such expectations.  

Meanwhile, the government has cut maximum retail price of several food items such as dhal, potatoes, sprats and the price of a 12.5 kg LP gas cylinder by Rs.25. 
On the whole, the budget 2017 appears to be aimed at getting the country’s fiscal house in order and has been evidently framed in accordance with the fiscal targets contained in the 3-year Extended Fund Facility arrangement agreed upon with the International Monetary Fund (IMF). 

Budget 2017 backs tea hub concept

Finance Minister Ravi Karunanayake reaffirmed his support for the tea hub concept in the 2017 budget as well, despite the opposition that continued to mount throughout this year.
“In order to promote CTC teas (Cut, Tear and Curl), which has a significantly large global market, I encourage the import of CTC teas for re-export with value addition,” Ravi Karunanayake said.

“Further, to support CTC tea imports which are faced with restrictions at the point of import, we will take action to ease regulations on the import of CTC teas,” he added.
The 2016 budget had also called for the allowance of tea imports for value-added re-exports, but had not placed a restriction on only allowing CTC tea imports.
However, despite support from the Tea Exporters Association, Plantation Industries Minister Navin Dissanayake had refused to allow the setting up of a tea hub, as he had said that both supporting and opposing parties had points, and called for the commissioning of an impartial report on the matter.
Tea producer Dilmah is against the importation of tea, as its Ceylon Tea Services PLC Director Dilhan Perera this week said that each kilogramme of imported tea restricts the exportation of a kilogramme of Sri Lankan tea.
CTC tea, which is widely used in tea bags, makes up around 5-6 percent of Sri Lanka’s tea production. Sri Lanka’s tea exports are mainly in bulk form.
Karunanayake also proposed to remove the Import and Export Control Fee of 1 percent on the CIF (cost, insurance, freight) price of tea, to remove the fee on packing of tea, and to remove the Rs. 5,000 annual licensing fee for displaying the Ceylon Tea logo.

Further, he said that the annual licensing fee for company registration with the Sri Lanka Tea Board will be reduced from 6 bands to 2 bands, with Rs. 500,000 for large companies, and Rs. 50,000 for small companies.

Car exports: Ravi K proposes novel way to protect environment 

Finance Minister Ravi Karunanayake has proposed a novel concept to contain environmental degradation by providing large scale used car exporters with tax cuts.
“There are over 6 million vehicles, in the country of which a considerable number are very old causing many environmental problems. Therefore I propose tax incentives on exporting vehicles which are more than 5 years old,” Karunanayake said.

He noted that entities that export over 20 used vehicles with a total value exceeding US$ 200,000 will be granted an excise duty waiver of 50 percent from the payable duty for importing a vehicle with a CIF (cost, insurance, freight) value not exceeding US$ 50,000.
Similar policies have been mulled in East Asian and South East Asian economies.
A sizable portion of vehicles being imported to Sri Lanka are already used, and the island is the world’s largest importer of used Japanese cars.