NCE lists out pros and cons of proposed cess withdrawals

NCE, in a press release expressed concern over the proposal to withdraw the current ‘Cess’ applicable to certain imported products, without proper consultation with the private sector.   

The Chamber has been particularly concerned regarding the adverse impact, the move will have on certain local enterprises related to their future sustainability.

The Chamber states that ‘Cess’ is a tool that most countries use for the protection of their domestic industries, since it has not been governed by the rules of the World Trade Organization (WTO) until recently.   

Further, when restrictions regarding the imposition of ‘Cess’ began to manifest in respect of various trade agreements that were negotiated by certain countries they began adopting other para tariff measures such as anti-dumping laws, quality controls, labeling requirements,  sanitary and phyto-sanitary measures etc. 

Protectionist measures

The Chamber also notes that in the current depressed trading environment of the world many countries, including developed countries, have begun to adopt various protectionist measures to safeguard their local enterprises from external competition.  In this regard, Rice cannot be exported to Japan even at present as there are many restrictions including duty; and many countries use ‘Cess’ to control the import of food items which are seasonal to protect their farmers.

The Chamber further notes that many developed as well as developing countries including India adopted a closed door policy until recently, with strict restrictions on imports, to give breathing space to their domestic industry to develop and also encourage them to export by giving them various tax incentives and rebates including rebates for investment.   

On the other hand, Sri Lanka openedthe economy in 1977 without proper safeguards which resulted in the collapse of certain industries, while India opened the economy in stages giving sufficient time for domestic industries to develop during a smooth transition period.

In the above context, it is also important to note that a large majority of local enterprises were unable to enter into exports from their inception, particularly in view of the small domestic market.  Many of them including enterprises in the garment industry had the privilege to market their products in the domestic market as they were well protected with duties and licensing requirements that were imposed on imported products.     

The importance of protecting local enterprises through measures such as ‘Cess’, cannot be more emphasized, to enable local industries to graduate themselves as exporters.  The examples of well-known local companies  such as Munchee, Maliban Biscuit Manufactories, Kelani Cables,  Siddhalepa, Damro,  as well as many enterprises  in the Agricultural sector and the Garment Industry highlights this point. 

In the above background the NCE as the ‘voice of the exporter’ is of the view  that it has a moral responsibility to ensure that the current protective measures such as the ‘Cess’ on imported products are in place to enable local enterprises in specific sectors to sustain themselves, and become potential exporters by reducing their cost of production through economies of scale, in view of  the small domestic market  of 21 million, unlike India.  

Developing local enterprises

The objective of the imposition of ‘Cess’ on imports has been for the government to collect the much needed revenue, and to plough back some of the revenue for the developmentof particular sectors.   However, this objective was not realized during the period of the civil war as the revenue collected was utilized by the treasury for other purposes.   The opportunity now exists to utilize the collected revenue to develop local enterprises in relevant sectors. In this regard the Chamber does not understand the rationale of the government depriving itself of much needed revenue, under the guide of economic reforms, since it is the world bodies such as the IMF that stresses the need for the Government to increase direct taxes to enhance revenue.

Also importantly import ‘Cesses’ that are in place serve to protect domestic industry from dumping of stock lots and production over runs of countries which have large and excess production capacities, particularly in the background that Sri Lanka has still failed to implement protective measures such as anti-dumping laws, and other protectionist measures. 

Some of the Sri Lankan products that have been safeguarded with import ‘Cess’ are tea, gems, rubber products including footwear, rice, and other agri products, should be continued to be protected for theirdevelopment.   In this context it is also most important to understand that ‘every dollar saved by import substitution is equally good as every dollar earned through exports’, the Chamber states.
The chamber is also of the view that the CESS could be stipulated to a time frame allowing specific sectors which need protection to develop to be able to complete.

Proposed withdrawal of export ‘Cess’ on basic raw-materials

With regard to the above proposal, the Chamber emphasizes the need to discourage the export of basic raw-materials or raw products that have the potential for value-addition.  The rationale being that if someone else could add value to exported basic materials in another country, Sri Lanka should be able to carry out the value addition locally to earn more foreign exchange, as well as provide employment to Sri Lankans with other benefits for the development of the country. 

The Chamber cites the example of the ‘Cess’ that was imposed on the export of bulk tea which encouraged value addition in Sri Lanka, and resulted in the creation of brands such as ‘Dilma’ and ‘Melsna’ resulting in very successful export enterprises.

The Chamber also cites another example related to waste paper where waste paper was recycled by the Valachchenei paper factory prior to its closure.  However, after entering into the Free Trade Agreement with India waste paper was exported by Sri Lanka in the raw form, until an export ‘Cess’ was imposed due to protests by patriotic citizens.  As a result the paper industry developed, with a drastic reduction of imported paper, especially for the corrugated box industry. 

Other examples cited are in respect of the Glass Products Manufacturing Industry, Coconut Fibre Industry, and the recycling of used tyres and waste paper. 

Therefore, the Chamber is strongly of the view that export of basic raw-material should be discouraged by way of ‘Export Cess’ to promote Value Addition domestically.  Else countries which have other advantages related to cheaper energy etc., will be able to compete with Sri Lankan products by importing basic raw-materials at very low cost.