• Clarify that tax rate is 2.5%, and not 3.0% as mentioned elsewhere in the budget 
• Caution low margin businesses such as distributors could be forced out of business 
• Warn this tax could be a disaster for exports given astronomical freight rates & low competitiveness
• Want govt. to take payment ability into consideration when enforcing

Experts in tax and businesses on Monday attempted to come into grips with the proposed Social Security Contribution in the budget presented last week as the broad-based application could lead to enormous damage to several crucial sections of businesses and industries such as retail and exports, which are already grappling with low margins and competitiveness. 
The budget presented last week proposed to impose a 2.5 percent tax on companies with an annual turnover exceeding Rs.120 million, titled, ‘Social Security Contribution,’ effective from April next year with the aim of raking in Rs.140 billion. 

The tax in the style of a turnover tax will have cascading effects where the tax-on-tax is paid on every step of the sale of a good or service making the end consumer to pay a load of taxes and thereby creating potential inflationary pressures during the process. Industrialists and businessmen balked at the idea this week saying that it could bring the curtains down on those businesses which operate with thin margins and could spell disaster on exports, which everyone makes an effort to bolster.  

“This would be an additional burden because all retail products manufactured are price marked. 

So this 2.5 percent is definitely going out of the profits,” said  Dr. Kulatunga Rajapaksa, Emeritus Managing Director, DSI Group of Companies speaking at a post budget forum organised by the Institute of Chartered Management Accountants of Sri Lanka. 

“And also if it is applied at each layer, and the distributor gets a margin of about 4-5 percent, then if you charge 2.5 percent of that, I don’t think they can exist,” Dr. Rajapaksa cautioned. 
Meanwhile clarifying confusion in the tax rate mentioned in the budget speech and the technical notes which had 3.0 percent, Duminda Hulangamuwa, the Head of Tax and Partner at Ernst & Young confirmed the rate as 2.5 percent and not 3.0 percent. 

Joining in the discussion Athula Ranaweera, Managing Partner at Ranaweera Associates, a professional accountancy firm said, given the divergent nature of businesses and the margins they enjoy, the government must take into consideration the payment ability of different tax subjects prior to application. 

He proposed either to come up with different rates of tax under the Social Security Contribution or to apply the tax on a section of the turnover than the entire turnover considering the margins enjoyed by each business sector to minimise the potential damage. 

“There has to be rationality in the payment ability. Therefore we have to think about the profit margin of each business. In distribution business, the profit margin is very less. In fuel stations and cigarette agencies, the profit margin is less”, Ranaweera said citing a few areas where margins remain small. 

Hulangamuwa speaking on the same subject at an earlier webinar during the weekend asked if there will be relief on the businesses which engage in trading of price controlled products and others who fetch only nominal margins. 

He also sought clarity if this tax would be applied on financial intermediaries such as banks and financial institutions which are already facing a huge effective tax rate close to 70 percent next year if the proposed surcharge tax comes into force. 

Due to these conditions, the Ceylon Chamber of Commerce, where Hulangamuwa is the Deputy Vice Chairperson recommended the government to consider sourcing this revenues through established measures such as Value Added Tax or the previously abolished Nation Building Tax, an idea which also echoed by Rajapaksa at DSI on Monday. 

Speaking further Rajapaksa warned that the new tax, if applied to the export sector could spell disaster given the tax’s large nature for them. 

“And also it is not clear if it is applied to exports as well. If it is applied to the export sector, definitely it is going to be a disaster because 2.5 percent is a huge margin for exports. I don’t think any exporter can afford to forgo 2.5 percent by way of turnover tax because they can’t sustain”, he stressed. 

Weighing in on the same matter, Ranaweera said the application of the tax on exporters cannot be more ill-timed than this given the exorbitant freight rates and other material costs they contend with, all of which have threatened their competitiveness in the international markets. 

“When you think about the exports business, the freight charges have gone up by at least five times. Now with that situation, our products are not much competitive in the international market. In a situation like that, if you charge more tax on exports, our products may not be competitive enough in the international market,” said Ranaweera. 

Despite some back and forth arguments against the one-time taxes such as the 25 percent surcharge tax on companies and individuals with taxable income above Rs.2.0 billion in financial year ended in 2020/21 and the social security contribution, the businesses broadly commended the government for maintaining a stable and consistent tax policy since 2019 end which has provided them with much needed predictability.