Did Budget 2009 target import substitution policies?

By Gamini WARUSHAMANA

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The business community questioned whether Budget 2009 targeted import substitution policies. The questions were posed at the post budget seminar organised by Ernst & Young on Friday in Colombo.

Senior partner of Ernst & Young Lakmali Nanayakara said that the budget supported certain key industries, garments, plantations and tourism while discouraging imports and encouraging exports.

However, the budget deficit has increased and expenditure on debt service too has increased significantly, she said.

Elaborating on the tax proposals in the budget, Nanayakara said that the tax system of the country was made more complex by the 2008 Budget that introduced ten legislative enactments and eight amendments to the tax laws. Therefore, the business sector in the country expected a simplification of the tax system in Budget 2009. However, the Government has introduced a new tax - Nation Building Levy (NBL) on manufacturers, importers and some service sectors effective from January 1, 2009.

She said that the tax at import point is complex and the tax base is not clear. Government loses Rs. 40 million revenue on the reduction of VAT by 5% but earns Rs. 50 million from NBL.

Referring to the impact of the new tax system on the business sectors, Nanayakara said that the financial sector was heavily taxed earlier and the heavy tax burden remains unchanged. The agricultural sector which had a complex tax system has a low impact.

The export sector has a low impact and the telecommunication sector has been heavily taxed. The tourism sector has a relatively low impact but the tax system is complex.

The construction sector too has a relatively low impact. The manufacturing sector has a high impact and imports and trading sectors have been taxed heavily, she said.

Responding to the questions, Treasury Secretary Sumith Abeysinghe said that supporting local industries is not import substitution. Most countries adopt policies to protect their local industries and even Japan protects its rice farmers.

Financing the budget deficit has been outlined in the budget and the borrowing limit has been approved by Parliament by the Appropriation Bill. Accordingly, the Government can borrow locally or from foreign sources. The Government has the option of Commercial borrowing from the international market. Even the interest rates are high because concessional funds are not available today. The banks who were with us in our earlier borrowing programs are still with us. However, major infrastructure projects receive donor assistance and they have already agreed to fund the project loans, he said. The message given by the budget is that the Government is behind local businesses at this turbulent time in the global economy, said Director, Fiscal Policy Division of the Treasury, S. R. Attygalle. All businesses will benefit by the reduction of VAT because indirect costs such as insurance and leasing payments have been reduced, he said.

Tax Advisor to the Treasury, R. P. L. Weerasinghe said that Sri Lanka's tax system is not simple because taxation is not simple as there are various concessions and different taxes. To address this issue a special Commission will be appointed to review the tax system and formulate a national tax policy within a year, he said.