Budget Proposals 2018

40th Budget of Democratic Socialist Republic of Sri Lanka

Asha Phillip Securities Ltd,

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BUDGET PROPOSALS 2018 SECURITIES LTD
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Introduction

The Minister of Finance and Mass Media of the Government of Sri Lanka presented the
Government’s budget proposals for the year 2018 on 9th November 2017. A snapshot of
the salient features that may have an impact on the relevant sectors and companies
listed on the CSE is presented below;

Budget Theme:

“Blue - Green Budget; the Launch of Enterprise Sri Lanka”

Targets of Budget 2018:

Support the achievement of predicted medium-term targets such as:

 Per capita income of USD 5,000,

 One million new jobs,
 FDI inflows of USD 5 Bn
 Increasing exports to USD 20 Bn.
 GDP growth of 5%
 Inflation of around 6%, and,
 Expects to achieve for the first time in almost 6 decades primary surplus of 1% of
GDP and a Budget deficit of 4.5% of GDP.

Focus of Budget 2018:

 Restrictions on foreign ownership will be removed permitting foreigners to freely

invest in the shipping and freight forwarding industry in Sri Lanka
 Promote exports through the SME sector, facilitating entrepreneurship
development and Information Technology (IT) Industry.
 To generate an environmentally sustainable economic growth by utilizing the
under-utilized ocean resources and adopting new sustainable technologies in the
agriculture, fisheries and manufacturing sectors

List of legislations to be revamped includes:

• Customs Ordinance  Education Ordinance

• Excise Ordinance  Labour laws including shop and office act
• Rent Act  Bankruptcy law

APSL Research 10th November 2017 Page 2 of 10

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

Government’s Budget at a Glance (2018)

 The 2018 budget targets a reduction in the budget deficit to 4.8% of GDP in comparison to
5.2% in 2017.

 Government expects to increase tax revenue (Direct and Indirect) to LKR 2,034 Bn (16.3%
YoY growth) in 2018.

 LKR 375Bn is expected as income tax which is a 22% YoY growth in comparison to 2017.

 LKR 1,239Bn is expected as Taxes on goods and services which is a 17.6% YoY increase.

 The effective ratio between Income tax and taxes on Goods and Services is 23%:77%.

 However, with the addition of Taxes on External trade, the projected effective tax ratio
between Income and other sources of indirect taxes has reached the target structure of
39%:61%.

 Government expects to increase Public Investment by c.20% in 2018.

 Introducing tight expense controlling mechanisms, the Government seeks to maintain

the existing “Recurring expenses to GDP ratio” at 15.8 % for 2018.

Summary of the Budget (2014-2018) Rs. Bn

Item 2014 2015 2016 2017 2018E
Total Revenue 1,264 1,534 1,774 1,997 2,326
Tax Revenue 1,050 1,356 1,464 1,749 2,034
Total Expenditure 1,855 2,363 2,414 2,677 3,001
Recurrent 1,382 1,775 1,838 2,053 2,250
Public Investment 487 603 594 633 761
Budget Deficit -591 -830 -640 -680 -675

As a % of GDP
Total Revenue 12.2 14 15 15.4 16.4
Tax Revenue 10.1 12.4 12.4 13.5 14.3
Total Expenditure 17.9 21.6 20.4 20.6 21.1
Recurrent Expenditure 13.3 16.2 15.5 15.8 15.8
Public Investment 4.7 5.5 5 4.9 5.4
Budget Deficit -5.7 -7.6 -5.4 -5.2 -4.8
Source- Department of Fiscal Policy

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

2018 Budgeted Revenue and Grants (LKR Bn) 2018 Budgeted Expenditure (LKR Bn)
Grants - LKR Capital
Non-Tax - 10 Bn Expenditur
LKR 184 Bn 0% e (Net
8% Lending) -
Interest
LKR 751Bn
Payments -
Direct Tax - 26%
Goods & LKR 820 Bn
LKR 375 Bn 28%
Services -
17%
LKR 195 Bn
Indirect Tax 7%
- LKR 1,659
Bn Salaries &
Subsidies &
75% Wages -
Transfers -
LKR 630 Bn
LKR 507 Bn
22%
17%

Variance Analysis
 Execution of budget proposals has not been 100% successful (ex: in 2017) and hence there
is a gap between budgeted and realized numbers.
 Actual Total revenue marked c.LKR 91Bn lower than the budgeted figure for 2017
 Actual Total expenses posted c.LKR 46Bn decline compared to budgeted figure for 2017
 As a result, Overall Budget deficit has increased by c.LKR 55 Bn over and above the
budgeted figure for 2017
 However, reflecting efficient tax collection, GDP to Tax revenue target has been
successfully achieved during 2017. Hence, lower than expected GDP growth has caused
Tax revenue variance to be negative in 2017
 More government funds have been utilized over and above the budgeted levels for
Recurrent expenses during 2017. This has caused a significant decline in Growth oriented
Public Investment in both absolute and relative terms

Variance Analysis (2016-2017)

Item (LKR Bn) 2017 E 2017 A Variance
Total Revenue 2,088 1,997 -91
Tax Revenue 1,821 1,749 -72
Total Expenditure 2,723 2,677 -46
Recurrent 2,024 2,053 29
Public Investment 708 633 -75
Budget Deficit -625 -680 55

As a % of GDP
Total Revenue 15.5 15.4 -0.1
Tax Revenue 13.5 13.5 0.0
Total Expenditure 20.2 20.6 0.4
Recurrent Expenditure 15 15.8 0.8
Public Investment 5.2 4.9 -0.3
Budget Deficit -4.6 -5.2 0.6

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

Proposals which may have possible impact on listed counters

Banking and Finance Sector

 Debt Repayment Levy -The above levy will be imposed on all transactions entered in to by a
commercial bank. It is expected that the revenue collected from this levy will be utilized for
the repayment of the government debts. The rate of tax is LKR 0.20 per LKR 1,000 worth
transaction (0.02%). This will be applicable only for 3 years and shall not be passed on to the
customers.

 Loan to value ratio for the electric buses, three wheelers, domestically assembled electric
three wheelers, cars and buses will be revised to 90/10.

 A “SME Guarantee Fund” to be established to expand the borrowing capacity of SMEs. The
proposed SME Guarantee Fund will enable SME Exporters who are in the CRIB but have the
potential to export, yet has no access to finance its operations, to access financing from
Banks utilizing the SME guarantees.

Telecommunication Sector
 Cellular Tower levy of LKR 200,000 per tower per month to discourage the proliferation of
such towers.

 Fee on advertisements done through SMSs at a rate of LKR 0.25 per SMS with effect from 1st
April 2018

Motor Sector
 Carbon Tax

Carbon tax will be imposed on motor vehicles based on the engine capacity. Rate will depend
on age and fuel type of vehicle as follows:

Type of vehicle Less than 05 years 05 to 10 years Over 10 years

Hybrid (Petrol/Diesel) 25 Cts per cm3 50 Cts per cm3 LKR 1.00 per cm3
Fuel (Petrol/Diesel) 50 Cts per cm3 LKR 1.00 per cm3 LKR 1.50 per cm3
Passenger bus LKR 1,000/- LKR 2,000/- LKR 3,000/-
Electric vehicles are exempted from the levy

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

 Luxury Tax on Motor Vehicles

Import taxes on an electric car will be reduced by at least LKR 1 Mn while the import tax on
the high end fossil fuelled cars will be increased by almost LKR 2.5 Mn.

Duty rates based on (petrol) engine capacity;

Engine capacity On petrol motor cars On Petrol hybrid motor cars
(LKR per cm3) (LKR per cm3)
Proposed Current Difference Proposed Current Difference
≤ 1000cm3 1,750 1750 - 1,250 1,250 -
1000cm3 < x ≤ 1300 cm3 2,750 2750 - 2,000 2,000 -

1300cm3 < x ≤ 1500 cm3 3,250 2,750 500 2,500 2,000 500
1500cm3 < x ≤ 1600 cm3 4,000 4,000 - 3,000 3,500 (500)
1600cm3 < x ≤ 1800 cm3 5,000 4,500 500 4,500 4,000 500
1800cm3 < x ≤ 2000 cm3 6,000 5,500 500 5,000 4,500 500
2000cm3 < x ≤ 2500 cm3 7,000 6,000 1,000 6,000 5,000 1,000
2500cm3 < x ≤ 2750 cm3 8,000 6,000 2,000 7,000 5,000 2,000
2750cm3 < x ≤ 3000 cm3 9,000 6,000 3,000 8,000 5,000 3,000
3000cm3 < x ≤ 4000 cm3 10,000 6,000 4,000 9,000 5,500 3,500
4000 cm3< 11,000 6,000 5,000 10,000 5,500 4,500

Duty rates based on engine capacity;

Engine capacity On Diesel motor cars On Diesel hybrid motor cars
(LKR per cm3) (LKR per cm3)
Proposed Current Different Proposed Current Different
≤ 1500cm3 4,000 3,500 500 3,000 3,000 -
1500cm3 < x ≤ 1600 cm3 5,000 4,500 500 4,000 4,000 -
1600cm3 < x ≤ 1800 cm3 6,000 5,000 1,000 5,000 4,500 500
1800cm3 < x ≤ 2000 cm3 7,000 6,000 1,000 6,000 5,000 1,000
2000cm3 < x ≤ 2500 cm3 8,000 7,000 1,000 7,000 5,000 2,000
2500cm3 < x ≤ 2750 9,000 7,000 2,000 8,000 5,000 3,000
2750cm3 < x ≤ 3000 10,000 7,000 3,000 9,000 5,000 4,000
3000cm3 < x ≤ 4000 11,000 7,000 4,000 10,000 5,000 5,000
4000 cm3< 12,000 7,000 5,000 11,000 5,000 6,000

Electric Motor Vehicles (Unregistered)

Motor power (kW) Proposed for 2018 Current Difference
(LKR per kw) (LKR per kw) (LKR per kw)
≤ 50 7,500 15,000 (7,500)
50 < x ≤ 100 12,500 25,000 (12,500)
100 < x ≤ 200 25,000 40,000 (15,000)
200 < 40,000 55,000 (15,000)

 Importation of Motor Vehicles below the Emission Standard of the EURO 4 or its equivalent
will be prohibited effective from January 01, 2018 in line with the health and environmental
safeguard measures.

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

 Importation of Motor Vehicles, which are not complied with the safety measures namely (a)
Air Bags for driver and the front passenger, (b) Anti-Locking Breaking System (ABS) and (c)
Three Point Seat Belts for driver and the passengers travelling in the front and rear seats, will
be prohibited effective from January 01, 2018 in line with the safety of passengers / travelers.

Beverage Food and Tobacco

 The liquor licensing fee structure will be rationalized. License issuance mechanism will be
revamped with a view to promoting tourism, especially in Guest houses, Boutique Hotels etc.
A tax file number will be one of the essential requirements when issuing these licenses.
o Rate structure of Liquor license fee will be simplified w.e.f. 01/01/2018

 Alcohol volume based Excise Duty depending on the type of liquor will be introduced

 Excise duty will be imposed on import of non-potable alcohol at LKR 15/- per Kg.

 Excise Duty will be imposed on raw materials used for manufacturing of ethanol
Toddy: - LKR 5/- per litre, Molasses/Maize/Rice/Fruits: - LKR 10/- per Kg

 Excise (Special Provisions) Duty applicable on canned beer will be removed.

 NBT to be introduced on liquor from 1 April 2018.

 Sugar tax on sweetened beverages

o Excise duty based on the quantum of sugar contained will be introduced for the
beverages with added sugar. The rate will be 50 cts per gram of sugar

 Plastic resin
o Excise duty on plastic resin will be introduced at LKR 10 per Kg.
This duty will be applicable for items classified under the HS Codes 3901.10, 3901.20,
3902.10, 3903.11 and 3904.10

Construction & Engineering / Land & Property

 Remove restrictions that limit the land ownership rights of listed companies with foreign
ownership together with the restrictions on foreigners’ ability to purchase condominiums
below the 4th floor.

 Imposition of Value Added Tax (VAT) on sale of condominium housing units - from 1 April
2018

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

Shipping & Logistics

 The Sri Lanka Ports Authority Act, No. 51 of 1979 and the Merchants Shipping Act, No. 52
of 1971 will be amended to cater to the demands of the modern day logistics and marine
industry. This will also ensure healthy competition, an independent Ports regulator will be
introduced.

 Restrictions on the foreign ownership on the shipping and the freight forwarding
agencies will be lifted. This will enable major international shipping lines and logistics
operators to base their operations in Sri Lanka.

Manufacturing
 Supporting the use of Solar Power
o Tax benefits

The NBT and PAL will be exempted on machines and equipment including solar
panels and, storage batteries which will be imported for the establishment of solar
charging stations.

o Credit schemes
Individuals, companies incorporated under the Companies Act, No. 7 of 2007, co-
operative societies, farmers/fisheries societies engaged in agriculture, agro
processing including drip irrigation, poultry, canning, plantation and tourism industry,
that will invest in technology for the generation of solar power to be used for their
own operations, will be supported through the introduction of a loan scheme at a
subsidized interest rate of 8%.

 Supporting the SME companies

o The SME companies will be companies incorporated under the Companies Act, No. 7
of 2007 and will have at least 10 shareholders each contributing at least Rs.10,000 in
equity. These companies could engage in any business from agriculture to apparels to
IT.

 Imposition of Value Added Tax (VAT) on import or supply of the imported Yarn/Fabrics
with HS Codes 50.01, 50.02, 50.03, 50.04, 50.05, 50.06, 50.07, 51.11, 51.12, 51.13, 52.01,
52.03, 52.05, 52.06, 52.08, 52.09, 52.10, 52.11, 52.12, 53.09, 53.10, 54.02, 54.03, 54.07, 54.08,
55.09, 55.10, 55.12, 55.13, 55.14, 55.15, 55.16, 58.01, 58.02, 58.04.21, 58.04.29, 58.04.30,
58.06, 58.09, 58.11, 60.01, 60.02, 60.03, 60.04, 60.05, 60.06, 62.15

APSL Research 10th November 2017 Page 8 of 10

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

Poultry Industry
 The import of maize will be liberalized provided that such imports will be made only to
meet any gap created due to a lack of domestic production of maize.

 Will provide on lease basis underutilized state farms or land suitable for this industry to
develop modern poultry farms with a view to increase the live birds stock from 110 million
to 500 million per year.

Tourism

 VAT refund scheme for foreign passport holders will be implemented at the Airports and
Sea Ports with effect from 01st May 2018.

 A tax of 1% will be imposed on the reservation commission derived or accrued in Sri Lanka
by Online Travel Agents.

Diversified Sector

 Tax concessions will be granted on capital goods imported through bonding facilities
during the construction period for large scale pharmaceutical investments, dairy industry
and solid waste management ventures.

Corporate Tax Rates Proposed through the New Inland Revenue Act 2017
(Applicable from 1st April 2018)

Description Proposed rate Prevailing rate

SME * 14% 12%

Exporters ** 14% 12%
Agriculture (including poultry farming)** 14% 10% / 12%
Promotion of tourism** 14% 12%
Information technology services** 14% 0%/ 10% / 28%
Construction work 28% 12%
Healthcare services 28% 12%
Manufacture of animal feed 28% 12%
Supply of goods and services to a foreign ship 28% 12%
Alternative power generating projects 14%/ 28% 12%
Unit Trusts/Mutual Funds/Unit Trust Management Companies 24% / 28% 10%
*- As defined

** - As defined and the revised tax rate is applicable to a company predominantly (i.e. 80% or more of gross
income) engaged in the stated business activity.

APSL Research 10th November 2017 Page 9 of 10

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BUDGET PROPOSALS 2018 SECURITIES LTD
HIGHLIGHTS & REVIEW SriLanka

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Important Information

This document has been prepared and issued by Asha Phillip Securities Ltd, on the basis of publicly available information, internally developed
data and other sources, believed to be reliable. Whilst all responsible care has been taken to ensure that the facts stated are accurate and the
opinions given are fair and reasonable neither Asha Phillip Securities Ltd, nor any Director Officer or employee, shall in any way be responsible for
any decisions made on its contents. Asha Phillip Securities Ltd may act as a Broker in the investments which are the subject of this document or
related investments and may have acted upon or used the information contained in this document, or the research or analysis on which it is
based, before its publication. Asha Phillip Securities Ltd., Its Directors, Officers or Employees may also have a position or be otherwise interested
in the investments referred to in this document. This is not an offer to sell or buy the investments ref erred to in this document.

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