Sunday, November 28, 2010

Impact on listed firms

The Sri Lankan government’s budgetary fiscal plans was seen a very pro private sector budget. The middle class will now be able to save more and also consume more, two activities which drives private sector investment in the country.

The reduction in the VAT rates also means more savings and also a reduction in the cost of living. In the case of the corporate and banks, the reduction in the corporate tax base to 28% from 35% was seeing as being positive, but if sustained investment is to be carried out, then taxation rates will need to go down even further.

There was a certain element of confusion with regard to the Investment fund, to which banks will have to contribute to create a “long term investment” fund. Its purpose was not properly lined out. Planners seemed to have ignored the fact that only banks lend long term to the private sector due to the lack of a dynamic corporate debt market, and absence of venture funds or other seed capital bases.

The other source of confusion was the Central Bank administered pension fund to which the employer and the employee have to contribute 2% of the worker’s salary. Again the terms of the pension fund have not been laid out clearly and many felt that there should have also been a private sector participation in the administration of the fund. There was justified comparisons with the Central Bank managed Employees Provident Fund (EPF) and the Employees Trust Fund (ETF) which are gratuity funds, but given the low returns of the past, many treat it as a tax rather than a savings scheme. On the positive side, the government has recognized the need for the pension fund. Industry wise, the biggest blow was to the two telecom firms, Dialog Axiata and Sri Lanka Telecom who now face a Rs 2.00 per minute tax on calls made to overseas residents. With Skype and Google offering low cost charges, many feel that there will be certain migration to these networks. In a commodity type business, business always migrates to the low cost service provider.

Already having lost competitive space in the local call market due to the floor price of Rs 2.00 being implemented (which will be reduced to Rs 1.50 in June 2011), the companies have been competing on international call rates and roaming charges. The other body blow was the tax on foreign programming content taxes being imposed on cable channels. The vice trade too will suffer an increase in taxes with Alcohol, Tobacco and Casino business seeing an increase in corporate tax levels to 40% from 35%. The firms affected by this increase in tax will be Distilleries Company, Lion Breweries and Ceylon Tobacco. While it may initially impact their bottom line, these firms have found fiscal protection from future completion. High taxes tend to drive businesses away and in this case will make competitors think twice about entering the market.

Hoteliers benefited from lowering of the corporate tax base to 12% from 15%. A US$20.00 per bed tax was to be charged on 5 star hotels that charge less than US$125.00 per room.

Firms such as Singer Sri Lanka, Brown & Co and Hunter & Co will benefit from the abolition of import duty on branded items. This is with the view of making Sri Lanka a shopping hub along the lines of Dubai and Singapore. These firms will also benefit from the abolition of import duty on the agricultural equipment.
Overall, the budget is a plus for a vibrant private sector and middle class, despite a few flaws.

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