Financial Times

Skewed import tax system erodes Pelwatte Sugar profitability
A tax structure that favours imports is badly hurting Pelwatte Sugar Industries and is preventing the economy from reaping the benefits of local manufacture and the resultant employment generation, a stock broker has said.

"Even with 90 percent of Sri Lanka's sugar requirement being imported, the company operates at 50 percent of its capacity, as it is not financially viable for it to operate at the full capacity due to the duty structure that favours imports," Lanka Orix Securities Ltd., an LOLC Group company, said in a research report.

The factory has the capacity to produce over 70,000 MT per annum, but currently produces only around 45,000 MT per annum, due to a number of reasons such as non-availability of raw material in adequate quantities, and the unfavourable duty regime.

As sugar is an essential food item, 90 percent of Sri Lanka's sugar requirement is imported under extremely low import duties. These imported products are sold in Sri Lanka tax free while local producers like Pelwatte, are charged with a 15 percent VAT.

Pelwatte, now a subsidiary of Master Divers, owned by ship and salvage operator Ariyaseela Wickramanayake, has repeatedly appealed to the government to establish fair competition between foreign and local sugar producers.

"Under the current market conditions, benefits that the national economy could receive as a result of local manufacturing have been wiped out," Lanka Orix Securities said.

"Furthermore, opportunities to provide jobs in the Moneragala District and improvement of infrastructure are also adversely effected as a result of the current practice. As a result, (Pelwatte Sugar's) profitability also has been severely affected."

However, the brokers forecast a net profit of Rs. 165 million for the full FY 2004/05 because of better operating conditions prevailing during the current year due to company's effort at reducing production cost. Net profit increased 255 percent to Rs 156 million in the first half of FY 2004/05 from Rs. 44 million in the same year before period.

For the first half of FY 2004/05 Pelwatte Sugar reported a revenue of Rs. 803 million, an increase of 51 percent compared to Rs. 532 million reported for the first half of FY 2003/04. Lanka Orix Securities also said Pelwatte is concentrating on opening up the plant in Higurana, and has plans of investing in a power generation project that is likely to generate higher revenue in the long term.

Pelwatte Sugar Industries is also looking at developing 200 hectares of land in order to focus on operations related to the tourism and leisure sector. "The main intention behind these investments would be for the company to generate revenue throughout the year, unlike now when November, December and January are the months used for planting cane and the revenue generation is at its minimum level."

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