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Labour law changes attract investments A budget review by Lal de Mel, Immediate Past-President, Federation of Chambers of Commerce and Industry. The
estimate of the total unemployed has shown a downward bias since
1998, due to increased coverage of unpaid family workers as employed
persons in the labour force; hence the unemployment figures in 1994
and 2000 cannot be compared. 863,000 Public
Servants The Finance Minister has boldly declared that a hiring freeze will remain in force for all Government Departments and every Department and Agency will be rationalised over the next three years. This leaves little room for politicians to stuff the Public Service with their supporters. For the first time a pool of Rs. 500 million is being established to finance one-off expenses arising from the rationalisation. The benefits from this unpopular, but necessary measure will be felt in the future. The employment in the semi-government corporations, boards and authorities that decreased from 625,000 in 1994 to 309,000 in 1997, has remained static at 300,000. This needs to be pruned to less than 100,000 within five years and the productivity improved, to reduce the burden on VAT Tax payers It needs to be web-enabled to introduce transparency and access to information. Textile quota allocations too need to be web-enabled to introduce convenience and transparency in the allocation of textile quotas. 1.75 million
self-employed people A consistent rate of protection of about 60 percent of the landed cost of imports is envisaged for agricultural produce. This is a good break from the three-tier tariff structure with ad-hoc imports and needs to be made transparent, to prevent under-invoicing and racketeering. If imports of essential food items are properly monitored, it will change the rural scene, presently full of uncultivated farmland, to prosperous farmland. It is necessary to review the impact of the Paddy Lands Bill on the full utilisation of agricultural land. Self-employed also includes the informal sector which is as big as the formal sector and hates the idea of getting involved with the tax man. The budget accepts this reality and has devised the following strategies to bring this resource to the formal sector. * Dividends will be taxed ten per cent at the source and will be free of income tax in the hands of the shareholder. The Stock Exchange needs marketing oriented people to sell the benefits of this measure to the informal sector. * Interest income up to Rs. 72,000 a year will be tax-free and the balance taxed at ten per cent and withheld. Interest income will be free of income tax in the hands of the recipient. This will help people to get regular monthly incomes free of any hassle and make it unnecessary to depend on Certificates of Deposit and NRFC accounts. * The withdrawal of Stamp Duty and Capital Gains tax will help land and building transactions to take place in a market oriented manner, without the need to under-value transactions. This will help the construction and sale of affordable houses by the informal sector. * 11,800 students have been admitted to our universities in the year 2000. 8,787 students have graduated in 1999. It is unlikely that more than half this number will secure employment, taking into consideration that majority of them are BA graduates with a poor command of English and Information Technology. Most of the unemployed graduates are from the rural areas. It is heartening to note that the envisaged National Youth Corp will provide job-oriented vocational training and thereafter working capital to the educated unemployed youth, to set themselves up in self-employment. This will minimise the creation of a frustrated group of educated young people. Private Sector-
2.74 mln employees The large companies focus on wealth creation by maximising productivity through automation and sub-contracting arrangements. It is the small and medium sector that provides most of the employment. Representations made to minimise the number of business failures which result in parate execution of the property, with the entrepreneur being disgraced by publishing the failed businessman's name in the newspapers and the name being blacklisted by all banks, have fallen on deaf ears. Some of the root causes of business failures, which have been identified and addressed in the budget, are given below: * Small and medium scale enterprises were taxed at 35 percent while the Public Limited Liability companies were taxed at 30 percent on profits made under inflationary conditions. With the surcharge of 20 percent in 2001/2002, the effective corporate taxation is 42 percent and 36 percent. No consideration was given to the fact that funds required for working capital, as well as the replacement of fixed assets, needed increases to the extent of inflation. As a result the small and medium sector became increasingly debt ridden and burdened with obsolete machinery. This problem has been addressed by introducing a tax rate of 20 percent for companies with a taxable income of less than Rs. 5 million. * Another inequity repeatedly highlighted by all the chambers was the impact of the non-deductibility of a part of the National Security Levy (NSL) paid from the taxable income. This spelt the death-knell for companies with a profit margin of less than two percent, as a result of the astronomical taxation. This has been addressed through the removal of the NSL. * Another anomaly
was the absence of a level playing field between the local manufacturer
who charges GST and NSL on the wholesale price and the majority
of importers who escape with GST and NSL on the CIF price, often
under valued. It is heartening to note that 20 percent will remain till end-March 2003. This anomaly needs to be rectified before the surcharge is withdrawn, to give the local manufacturers an even playing field. * The formation of a permanent tariff commission is a move in the right direction, to have two-way interaction between the Private Sector and the Government. It needs officials who are receptive to new ideas. * The earned income of private sector employees was taxed at 35 percent and up to 38.5 per cent with the surcharge, while no tax was levied on some Government officers who earned mind boggling incentive payments. As a result the Private Sector had to increase the salaries to provide their executives a reasonable take-home salary, thereby increasing the salary bill to dangerous levels. The gradual reduction of the personal income tax and increasing the exemption threshold from Rs. 144,000 to Rs. 240,000 will provide a measure of relief to the PAYE category. The taxing of public officers income derived from other sources beyond the threshold of Rs. 240,000 makes the personal income tax system more equitable. * The removal
of advance company tax and the exemption of dividend income from
income tax will provide adequate incentives for the formation of
public limited liability companies, without the need for creating
distortions in the corporate tax structure. * The introduction of pioneering investments in designated areas including power generation, transmission and distribution and other infrastructure projects will help to attract foreign investments. Foreign investors, who have learnt hard lessons in investing in the state-controlled Indian power sector, are unlikely to invest in Sri Lanka, unless they have the facility of directly distributing the power on a pre-agreed pricing formula or selling power to privatised electricity distribution companies. Special consideration should be given to the generation of power from environmentally friendly renewable resources such as waterways, wind, sunlight, fuel-wood and refuse. 146,000 Employers The benefits provided to the private sector and the self-employed also apply to this segment. One of their major concerns is to be in a position to quantify the cost of failure of a new venture. The inability to quantify the cost of redundancies makes Sri Lankan businessmen risk averse. The proposed amendments to the Industrial Disputes Act and Termination of Employment Act, aim to establish enforceable time limits on the hearings and the decisions of labour tribunals and arbitration panels. A schedule of specified compensation payable on termination of services, which is equitable, by employer and employee is envisaged. These will make Sri Lanka a more attractive location for investment and create productive employment, while minimising business failures arising as a result of the inability to shed excess labour during business downturns. This analysis highlights the benefits of a budget designed to provide the people fishing rods rather than attempt to get short-term benefits by increasing subsidies. A peaceful environment will help to re-build the active market conditions which prevailed in 1994. |
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