VAT a necessity - Dr. Jayasundera

by Elmo Leonard

Value Added Tax, should preferably not be in existence, but VAT is there through necessity, Secretary to the Treasury Dr P B Jayasundera said.

President Mahinda Rajapaksa had queried why VAT had to be charged and then in some instances, refunded, and why in other instances, VAT went through a three-time repeat? As a lawyer, President Rajapaksa thought that tax should be paid once. But, Dr Jayasundera had told the President, that as things stand, VAT had in some instances to be paid and refunded.

Dr. Jayasundera was addressing a seminar on 'Taxation and the 2007 budget' hosted by the taxation committee of The Institute of Chartered Accountants of Sri Lanka (ICASL).

Why was the banking sector making handsome profits, while the SME sector is stagnant in low growth? Bank lending was often of poor quality, not accessing the credit worthiness of the borrower. Also in answer, Dr. Jayasundera said that he could not understand the rationale of industrialists borrowing from banks to pay VAT, and EPF to its employees.

When factories run at a loss, the legislature of this country enables banks to acquire the industry and recover their dues.

But instead, in such instances, SMEs should give some relief and banks should be flexible with small-timers SMEs being a borrowing sector. Under the prevailing bank-credit structure, seven garment factories in Moneragala remained closed, corresponding to a dangerous situation.

President Rajapaksa had assumed office a year ago, and presented his budget, in the belief that oil prices would not go up above the $55 per barrel mark, but within months it had soared to $70 per barrel and the nation's budget deficit widened.

Oil prices could continue to soar. The country is also facing the challenge of global competition in the post-MFA era. Pre-MFA, the country enjoyed a 7-8 percent apparel export growth in dollar terms, and after that, is still struggling with a growth rate, half of what it was.

Sri Lanka, a heavily open economy has to exercise some restraint in allowing sub-standard products enter the country. China, the United States and the European Union protects its industries, Dr Jayasundera said.

Since January this year the country has witnessed a high degree of violence in the north and east and violence continues. Nobody should be ashamed of fighting terrorists and thus defence spending would rise, but, risks have to be managed, he said.

President Rajapaksa's performance must be viewed in the long term, of the next 10 years. The current per capita income of $1,300 is envisaged to reach $3000 in 10 years, Dr. Jayasundera said. Development and investment had to grow out of the western province, backed by the country being a knowledge based economy.

Sri Lanka cannot emulate the development strategies of any other country.

The nation cannot continue purchasing sugar, because it was lower in price than the sugar in the world market and forget the Pelwatte sugar plantations. The indigenous industries must continue producing a home driven strategy for development must be followed, Dr. Jayasundera said.

In preparing the budget, 700 requests from the private sector had been taken into consideration. All trade chambers had made comprehensive requests. Having post-budget seminars was insufficient.

The private sector, the small-timers and the people could organise seminars mid-year and three-fourth-way through the year to tell the government and bureaucrats where things stand. The Treasury Secretary, welcomed such dialogue.

Rise in inflation is not good and inflation should be allowed as long as it sustained growth.

This too has to be seen in a long term, and a balance, struck, while Sri Lanka is a growth listed country. The control of inflation also needs a plan and while some economists wanted inflation to be down to a single digit, 7 percent for the next year would be optimum, Dr Jayasundera said.

Companies are urged to pay dividends of 50 percent from their profits and any company which pays out a dividend of less than a third of its profits will be taxed 15 percent of the difference. Dr Jayasundera said that he did not know how the dividend could be taxed. Singer chairman Hemaka Amarasuriya said that corporates should be allowed to decide when and how much a dividend to declare. Some companies hold back profits for expansion.

N. R. Gajendran, alternate chairman, faculty of taxation, Gajma and Co, speaking on the suggestions made by ICASL for the 2007 budget, said that Sri Lanka's growth rate could be 12 to 14 percent if some of the dormant sectors of the economy are made use of.

For instance, if the north and east of the island are opened another 2 percent growth could be added to the GDP.

Gajendran said that while China was trying to be the factory of the world; India the office of the world, Sri Lanka was leading towards providing the housemaids of the world.

While foreign exchange was being earned, by mass scale exodus of married women, it was breaking up the Sri Lankan family structure.

Other speakers thought that the proposal to have a bottom line for foreign employment earnings was good.

Chairman BOI Lakshman Watawala said that the BOI will hold a seminar to explain the post-budget position of investment into the country.

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