Annual Report 2010 - Ministry of Finance and Planning

3 | REFORM INITIATIVESOverview2010 - 2011 End MayHaving ended the long drawnconflict, the Governmentfocused on promoting publicinvestment in strategic industries, andconsolidating reforms in several areasto create an enabling environmentfor accelerated growth. Reforms werewitnessed in areas including taxation,banking and finance, investment,governance and accountability, socialsecurity, institutional reorganizationand public procurement.The consultation process associatedwith the following, providing theGovernment with greater insightinto stakeholder views required tobe recognized in the developmentprocess.• Inputs received fromrepresentatives at national,provincial and local governmentlevels, during the island wideconsultation process carried outby His Excellency the President ineach Provincial Council area, witha view to identifying need basedprovincial development concerns.• Inputs received in the process ofthe continuous dialogue betweenHis Excellency the President withrepresentatives of trade unions,trade and industry chambers,professionals, the businesscommunity, the SMEs and selfemploymentassociations and theinformal sector representatives,adopting a need based approachtowards economic reforms.• The outcome of the dialoguebetween the Ministry of Financeand Planning and the membersof the Sectoral Clusters, pavingway for tax payers as well asother stakeholders in the processof development to give aninsight to their practical needsand the obstacles, enabling thegovernment to formulate policywith greater awareness of theground realities.• The Final Report of the 10 memberPresidential Commission onTaxation that was appointed inJuly 2009 as envisaged in theBudget Speech 2009, which wassubmitted in October 2010 havinghad extensive consultations, alsogave valuable recommendationson the desired changes andreforms.• The Final Report of the fivemember Ministerial Sub -Committee appointed in May2010, assisted by a panel of PublicOfficials with diverse expertise,to identify Impediments toInvestment submitted its reportin November 2010, identifyingsuch impediments and suggestingpossible remedial measures.This report has been preparedafter extensive discussions withinvestors, businessmen, privateand public sector officials,representatives of trade chambersand lawyers and hence gave avivid view of related concerns.Stemming from these insights andrecognizing the global and regionalchallenges faced by the country, areform package with emphasis ontaxation was introduced through the2011 Budget. The other reforms signifysystem improvement endeavours bythe government, involving institutional,administrative and procedural relatedadvances.The reform agenda recognizedbuilding Sri Lanka’s economic futureon five, well connected pillars involvingport, shipping, aviation, energy,commerce and knowledge. Growthstrategies linked to such a ’hubbased’ development, placed emphasison promoting investment to reapthe peace dividend by developingvalue added manufacturing andservices. Tourism was promoted inthe backdrop of the internationalpublicity portraying Sri Lanka as oneof the preferred eco-friendly touristdestinations with unique bio diversity.Agriculture was incentivized throughmany measures including a fertilizersubsidy and guaranteed producerprices to ensure food security. Smalland Medium Enterprises (SMEs)received priority treatment to exploittheir vast and untapped potential.Tax ReformsIn the area of tax reforms, the standardcorporate tax rate was reduced from35 percent to 28 percent and thecapital consumption allowance wasincreased to make the system moreinvestor friendly. The threshold forthe chargeability of the EconomicService Charge was increased from Rs.7.5 million to Rs. 25 million a quarter,mainly for the benefit of the SMEs.In the case of individuals, themaximum income tax rate was reducedfrom 35 percent to 24 percent. The taxslabs were broadened. Tax on certainterminal benefits was removed, whilechargeability of tax on certain otherretirement benefits was also reduced.Further, in relation to those whoseonly source of income is employment,the need to file income tax returnswas removed by making PAYE as atax at source. Provisions were madeto permit the submission of quarterlyreturns for VAT while having tomake monthly payments, to simplifycompliance.The Nation Building Tax (NBT) isalso simplified and extended up tothe wholesale and retail level byamalgamating the provincial turnovertax relating to those sectors, withthe introduction of a system in which174