Budget 2021 – A ‘grow’ your way out of trouble strategy
This year’s budget reflects a ‘growing your way out of it’ or spend your way out of it strategy with the government giving a push to businesses on the back of low growth.
Focus on infrastructure improvements, like roads and railways, will increase the country’s competitiveness for the future, analysts said.
The government’s focus on the domestic manufacturing sector will be positively on the Colombo Stock Exchange’s (CSE) companies as most listed firms are skewed towards the manufacturing sector, analysts said. Limiting importation of agricultural commodities except the items that cannot be produced domestically (negative list) will profit agricultural and plantation related companies with the increased demand for locally produced crops. “Imposing the Special Commodity Levy to balance the supply and demand of domestic production for selected agricultural products will profit agricultural and plantation related counters,” Atchudan Srirangan, Assistant Manager – Research for Investments (Fixed Income and Equity) at First Capital said.
The budget is boosting exports and also encouraging domestic industries to produce value added goods which will increase the production of domestic industries, analysts said. “As such, import substitution and encouraging manufacturing is good,” Deshan Pushparajah, Managing Director – Global Markets Capital Alliance told the Business Times.
The CSE aims to attract 500 companies to list by 2025 and to take market capitalisations to at least 65 per cent of GDP. To get to this, the budget said that Sri Lanka Real Estate Investment Trust (SLREIT) regulated by the SEC investments are exempted from capital gains tax, dividends are exempted from income tax, and stamp duty reduced to 0.75. “It allows SLREIT to function smoothly. The stamp duty was a prohibitive factor in investing in REITS. Now it’s likely that this will take off,” Mr. Pushparajah noted. Another analyst noted that high end real estate businessmen were doubtful of selling their units but with expatriates seeking to buy, they said this sector will take off.
A 50 per cent tax concession for the years 2021/22 for such companies that are listed before end December 2021 and to maintain a corporate tax rate of 14 per cent for the subsequent three years and a tax rebate on dividends of foreign companies for three years if such dividends are reinvested on expansion of their businesses or in the money or stock market or in Sri Lanka International Sovereign Bonds were also proposed which will broadbase the CSE, analysts said.
Farming, including agriculture, fisheries and livestock farming will be exempted from taxes in the next 5-years. “Poultry and plantation sector firms such as CIC and Hayleys will see a boost in profitability with the tax exemptions,” Mr. Srirangan added.
Allowing the two years of the capital investments deprecation on latest technology to collect local liquid milk in collaboration with local dairy farmers, enhancements to milk-related production and promotion of liquid milk and to provide strategic investment tax concessions for five years for capital investments of over US$ 25 million for companies to process milk powder exports will see increased investment leading to high production which will improve profitability in firms such as Watawala PLC, Lanka Milk Foods etc, analysts said.
The budget has a few central themes such as promotion of exports and import substitution, supporting SMEs and entrepreneurship and promoting technology, NDB Zephyr Partners Managing Director, Senaka Kekiriwaragodage told the Business Times. “I think directionally these are good moves although excessive import substitution should not lead to sub optimal resource allocation decisions.”
There were incentives for capital markets as well such as encouraging listing, tax concessions for REITs, he said noting that there are some unclarified issues on REITs such as tax position on the original transfer of assets (capital gains, VAT etc). “Consistency in tax treatment is appreciated. As the budget deficit is large staying within the targets will be important from a perspective of macroeconomic stability.”
Meanwhile the apparel industry was “extremely delighted” with the budget proposals stating that most of their proposals have been incorporated.
JAAF Secretary General Tuli Cooray said that it is important to note that the government has recognized that there needs to be more verticality in the industry and supporting the infrastructure development.
Among other things the fabric mills will be given concessions under the Strategic Development Act for investments worth US$10 million or more, he noted.
Mr. Cooray said they also requested for tax exemptions for offshore businesses which have been granted by income tax and WTH tax exemptions that will “create a new mode of export revenue to the country.” He noted this will help to focus on front-end services where there is a higher value addition.
Moreover, concessions will be given to clothing manufacturers to sell in the domestic market at a lesser tax rate per piece with a vision of creating an apparel hub in the country.
This would deter retailers from purchasing stocks from countries like Thailand and Singapore and on the other hand sell quality apparel wear bought from local manufacturers.