Budget 2013: PBJ tells banks: “Show what you’ve got ”
Treasury Secretary Dr P B Jayasundera on Friday urged commercial banks to make use of their balance sheets which they claim to be so good and source foreign funds.
Speaking at a post budget seminar organised by Earnst & Young, he said: “The banks who say that they have good balance sheets should do a bit more in terms of funding small and medium enterprises (SME). If those balance sheets are strong, then they should be able to use their balance sheets and raise funds from (outside) foreign countries. They should be able to borrow money and bring into the country.”
He told more than 1,000 participants at the seminar that DFCC and NDB now can raise up to US$ 250 million each to provide development funding. Analysts say that DFCC and NDB will be encouraged to raise over 10 year tenure foreign development finance with this initiative. “With this incentive, the government will underwrite the exchange risk for their borrowings. The interest income from such lending will also be tax exempt,” an analyst said.
This year’s budget proposal says that the government will facilitate such borrowings by floating domestic bonds enabling these two institutions to invest their surplus funds until loan proceeds are fully utilised. “With this the government solves the long end liquidity mismatch for these two institutions,” the analyst added.
Dr Jayasundera added that one cannot expect the Bank of Ceylon to be the bankers to the nation forever.
Interpretation issue
Taking a swipe at the Board of Investment (BOI), he charged that the BOI has an ‘interpretation issue’ with its two tax regimes. “I can’t understand the interpretation problem that BOI has on its two tax regimes,” he said, adding that if BOI can’t allocate a tax regime for a company which was incorporated in the last tax regime, then it should assign it under the new tax laws. “What’s the problem?”
He stressed the importance to deepen the capital market through debenture listings. “It’s important for banks to list (go public) with their debentures. And the CPC (Ceylon Petroleum Corporation) boss is here.
He doesn’t need to turn to me all the time (for funds). (Instead) he can float a debenture to raise cash,” he said.
The Colombo Stock Exchange (CSE) cheered in the good news for capital market boosting budget proposals with all three indices up.
“Given the constraints on the budget deficit, the budget has done more than what I expected towards driving development,” Deshan Pushparajah, Head of Capital Markets Capital Alliance told the Business Times.
“The capital markets have been encouraged significantly, with a focus on new listings, foreign borrowings and asset management. Sri Lanka’s market cap/ GDP ratio is significantly lower than our peers. Hence the 3-year tax holiday for companies listing on the CSE is an unprecedented boost to encourage more of our small and large companies to list,” he said.
Mr. Pushparajah added that the withdrawal of withholding tax (WHT) from listed debentures would make this segment very competitive to the banking sector. “Foreign borrowings, both commercial banks and corporates without exchange control approval is also unprecedented and shows a push towards raising foreign capital,” he said. He added that the asset management industry is underdeveloped in Sri Lanka and tax breaks given for these companies and the relaxation of currency regulations in investing in Unit Trusts would be very helpful. In addition, municipal councils would also now be able to issue bonds adding another dimension to the local capital markets, he added.
He said that with the challenges the energy industry is facing right now, the tax breaks given to investors in the renewable energy sector is also encouraging. Analysts said that as profits of any mini hydropower project or any other alternative energy source will be taxed at a concessionary rate of 12 per cent, firms such as Vidullanka PLC, Vallibel Power Erathna PLC, and Panasian Power PLC etc will be likely beneficiaries from this move.
The reduction in income tax for employees in the Knowledge Process Outsourcing (KPO) is a push towards this industry and possibly migrating ‘us’ from a BPO destination to a KPO destination, he said.
Listed firms to benefit
Nikita Tissera, Head of Research Bartleet Stockbrokers said that with the tax rate on profits from poultry farming reducing to 10 per cent, firms such as Bairaha Farms, Ceylon Grain Elevators PLC and Three Acre farms PLC will benefit from this move. He welcomed the proposal for a presidential task force to be appointed to co-ordinate and implement a capital market development plan.
The cost to set up stockbroker back office systems to be compliant with the CSE requirements in relation to the risk management system will be allowed for a full deduction for tax purposes, he added. The new proposals say that a wholesale or retailer making a quarterly turnover not less than Rs 500 million will be liable to be registered for VAT. “However, VAT is chargeable on liable supplies only. Retailers Cargills Ceylon, Ceylon Cold Stores PLC on Keells Super outlets (CCS), Richard Pieris PLC and Laugfs Gas PLC will have their already thin margins eroded further by this move,” he said.
The present 20 per cent rate of telecommunications levy will be reduced to 10 per cent in respect of services provided through internet broadband which will see Dialog Axiata and Sri Lanka Telecom emerge as beneficiaries, he said. Duty on imported liquor, beer and spirits will be increased further. “This would make the locally manufactured spirits of Distilleries Lanka PLC and Lion Breweries PLC push more volumes,” Mr. Tissera said.
Pravir Samarasinghe, CEO Overseas Realty said that the tax rationalisation and simplification process adopted three years ago continued in these budget proposals. “Consistency is very important to business,” he said, adding that “the budget is commended due to the strong commitment on infrastructure, capital market development, export promotion and import substitution whilst focussing on the SME, agriculture, dairy and rural development.”
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