Budget 2018: Simple and uncomplicated
The 72nd fiscal budget of the Government of Sri Lanka and the maiden budget of Minister of Finance and Mass Media Mangala Samaraweera will go down perhaps as the simplest and the least complicated budget in the recent past. One may opine the same is akin to a skirt on an elegant lady, short enough to be interesting and long enough to cover the subject! Nevertheless, this budget endeavours to achieve the main objectives of a tax system i.e collection of revenue for the state, re-distribution of income among the populace and re-pricing (i.e use of tax as a tool to incentivise and discourage certain industries/activities).
The budget as a whole has been designed with the intention of gathering tax revenue of Rs. 110,000 million. Twenty two per centum (22 per cent) of the revenue is expected from the motor vehicle by way of excise duty and luxury tax. Revisions to VAT and NBT are expected to contribute another 22 per cent of the total revenue. Thirty three per centum (33 per cent) in total is expected from the four new additions to the web of taxes in Sri Lanka i.e Cellular Tower Levy, SMS Advertising Levy, Debt Repayment Levy, Carbon Tax.
Sugar Tax
Though the budget referred to a ‘sugar tax’ on importers and manufacturers of beverages with added sugar, which is a common parlance used in foreign jurisdictions (such as Mexico, Norway, France, UK, Saudi Arabia), there may not be an introduction of a new tax to the multitude of taxes in the country. The levy will be a mere additional payment under the Excise Duty (special) Provisions Act on the importers and manufacturers of the ‘beverages with added sugar’. At present, the duty is Rs. 12 per litre and the budget imposes a duty of 50 cents per gram of sugar (included in the beverage) and the importer/manufacturer will be liable to pay the higher of the two.
This move is an example of application of re-pricing to discourage the consumption of sweetened beverages which leads to obesity and diabetes. Recent statistics revealed by the International Diabetes Federation reveals the prevalence of diabetes among adults in Sri Lanka is 8.5 per cent. At present, one in 12 adults in Sri Lanka suffers from diabetes.
‘Sugar Tax’ is only a single measure that is in the Budget 2018 that evinces the technique of re-pricing. The policymaker’s desire for re-pricing extends to discourage use of polythene. In the words of the Minister “to discourage the use of polythene and plastic products, we will impose an excise duty of Rs 10 per kilogramme for plastic resins” (clause 23- page 8 of the Budget Speech).
Electric vehicles
The theme “The Blue – Green Budget” itself reflects the policy makers inclination for using tax as a tool for “re-pricing”. The move to pressure the populace to switch from petrol/diesel vehicles to environment friendly electric vehicles is demonstrated by lowering the excise duties applicable on all electric vehicles including three wheelers and buses and the upward revision of the duties applicable on petrol/diesel vehicles.
This proposal is supplemented with incentivising the use of ‘off grid solar power’ for establishing electric car charging stations among others such as agro processing, poultry, hotel industry. Perhaps this category who enjoy the incentive for ‘off grid solar power’ should essentially extend to households in order for the buy-in of the motor vehicle users, of the switch from fuel based to electric vehicles. The minimal cost of charging electric vehicles at their homes, at their convenience would inspire the vehicle users for the switch, realising the Government’s vision of total elimination of petrol/diesel vehicles by 2040 and all Government vehicles to be converted to hybrid or electric by 2025.
One may recall that Budget 2016 contained a proposal in relation to providing income tax incentives for households to derive the benefit of solar power, though the same was not enacted into legislation. That proposal was as follows. “in order to encourage energy saving, I urge owners of residential premises to convert solar energy, and the cost would be considered as qualifying deduction for tax purposes” (Clause 231 of the Budget Speech 2016)
Liquor
The change of excise duty on hard liquor and the removal of NBT exemption also reflect the attempt at re-pricing. The Minister’s rationale for this as stated in the budget speech is, “Out of total liquor consumption, almost 49 per cent is from illicit sources while 85 per cent consume hard liquor. However, in most countries, the tax structure is designed to discourage the consumption of hard liquor and is often proportionate to the alcohol content. We will rationalize the tax structure based on a formula linked to the alcohol content and type”. (clause 214 of the budget speech)
Tourism
To encourage the tourism industry, exemptions from NBT and PAL have been provided for importation of equipment and accessories for water sports and aero sports. Rationalisation of the liquor license fee structure is yet another proposal to promote tourism.
Super Luxury tax
Generally, re-distribution of income and wealth is achieved via direct taxes including income tax, capital gains tax and wealth tax. Revision of the individual income tax rates, introduction of tax on capital and investment gains have already been encompassed in the new Inland Revenue Act which will be effective from April 1, 2018. The policy maker’s continuing endeavour to re-distribute income and wealth is evident in the 2018 budget in the form of indirect taxes as well. This includes proposals such as imposition of one off luxury tax payment of Rs. 2 million on high end vehicles (petrol vehicles more than 3500 cc, diesel vehicles more than 4000 cc and electric vehicles more than 500 kw) and the upward revision of duty on high end fossil fuelled cars.
‘Repetitions’
The Budget Speech also contains ‘repetitions’ of certain proposals that were presented in previous budgets, such as listed companies with foreign shareholders being permitted to acquire freehold title, removal of restriction on foreigners acquiring condominium properties below the 4th floor and the VAT refund scheme for tourists.
The Debt Repayment Levy of 0.02 per cent applicable on all cash transactions is also akin to the “Financial Transaction Levy” proposed in the Budget 2017 but was not legislated.
Reduction of VAT exemptions
This budget continues the gradual removal of a plethora of VAT exemptions contained in the Sri Lankan VAT Act which impacts the effectiveness of the VAT system. Countries such as New Zealand and Singapore that are renowned for implementing the concept of taxation on value addition very effectively, contains only about four exemptions, whereas the Sri Lankan VAT statute has over 150 exemptions. For the purpose of widening the VAT base, list of items including electronic goods, watches, cameras and projectors, plastic beads, dyes have been subject to the VAT.
Condominium housing units
A significant proposal pertaining to the removal of VAT that may attract the attention of the real estate industry is the removal of hitherto VAT exempt condominium units being liable to VAT on sale of such units. Due to the limited scope of this article, the detailed impact of this proposal is not addressed here. However the intention of the policy maker seems to confine the application of VAT only on sale of housing units by the developers and on the persons who are engaged in buying and selling condominium units as a business.
Effective dates
A point of significance in relation to VAT and NBT proposals is that, these will be effective from April 1, 2018, deviating from the tradition of VAT and NBT proposals being effective from January 1 subsequent to the budget reading. This may be due to the challenges faced in the past in enacting the VAT and NBT legislation prior to the operational date. The same effective date of April 1, 2018 will be applicable to Economic Service charge and amendments to the Finance Act as well.