2014

BUDGET DECISIONS

The 2014 Budget Speech concentrated on strengthening the economic fundamentals of the country while maintaining continuity of the existing policy framework to further improve its fiscal performance. Government is determined on meeting its target budget deficit for 2013 of 5.8% while planning to further reduce it to 5.0% during 2014. The expected Debt to GDP ratio for 2013 is maintained at 78% without revision while it is planned to improve the ratio to 74%. The budget seems to have concentrated more on the agriculture sector with subsidies being maintained, certain loan schemes introduced and beneficial treatment provided for best performing plantation companies. Priority was also given to improve revenue sources for the Government. In order to increase revenue and further wide base the VAT on retailers, VAT applicable threshold was reduced to LKR250mn. Though no major changes were introduced to the tax structure the removal VAT exemptions were noted on a wide range of items. The introduction of a 2% NBT was noted and is likely to boost government revenue. In relation to the Capital Market a 3 year 50% tax holiday on companies that pay 28% tax was proposed for newly listed entities in selected sectors.

Softlogic Equity Research

BUDGET DECISIONS

2014

Fiscal Strategy
In line with the government objective to support growth process in the medium to long run a further consolidation of fiscal reduction is envisaged through increase in revenue and a moderation of the growth in current expenditure. Budget deficit is anticipated to be reduced to 5.0% while debt to GDP ratio is expected to fall to 74.3%.

The Government plans to grow revenue to 14.5% of GDP for 2014 with 91% of the revenue expected through taxes, with VAT and, excise tax on external trade projecting to take the top slot each contributing 25% to the tax revenue. Non-tax revenue is forecasted to be 11% of the total expected government revenue.

The total planned expenditure for 2014 maintained at 19.6% of GDP, which is slightly below compared to 2013 estimated targets at 19.7%. Recurrent expenditure is forecasted to be controlled at 13.5% of GDP from the 2013 planned figure of 14.1% of GDP mainly with the support of the relatively low defense expenditure and expenditure associated with IDP camps. Recurrent expenditure consists of 69% of total expenditure out of which salaries and interest are expected to be the largest component.

Government plans to grow public investments to 6.3% of GDP with the largest investment continues to be for highways where 1.5% of GDP (24% of public investments) is expected to be spent.

Softlogic Equity Research

BUDGET DECISIONS

2014

Summary of the Budget: 2013-2014

Revenue Tax Revenue Income Tax VAT Excise Tax Tax on External Trade Other Non Tax Revenue Grants Expenditure Current Expenditure Salaries and Wages Interest Payments Subsidies and Transfers Other Goods and Services Public Investment o/w Highways Ports and Aviation Power and Energy Water and Sanitation Irrigation Education and Health Rural Sector Revenue Deficit (-) / Surplus (+) (% of GDP) Budget Deficit Government Debt (% of GDP)

(Percentage of GDP) 2012 2013 (Revised) 2014 Budget 13.9 13.6 14.5 12.0 12.1 12.8 2.3 2.8 2.9 3.0 2.9 3.1 3.0 2.8 2.7 2.9 2.7 3.1 0.9 1.0 1.2 1.9 1.5 1.6 0.2 0.2 0.2 20.5 19.7 19.6 14.9 14.1 13.5 4.6 4.5 4.1 5.4 5.1 4.4 3.1 2.8 2.9 1.8 1.6 2.0 5.9 5.8 6.3 1.8 1.5 1.5 0.2 0.2 0.1 0.4 0.3 0.2 0.4 0.4 0.3 0.4 0.4 0.4 0.6 0.6 0.6 1.3 1.2 1.1 (1.1) (0.5) 1.0 (6.4) (5.8) (5.0) 79.1 78.0 74.3

Jan Sep 2013: Fiscal Outlook

Summary of the Budget (Jan - Sep): Economic Classification
Revenue and Grants Revenue Tax Non Tax Grants Expenditure Current o/w Salaries & Wages Interest Public Investment Other Revenue Deficit (-)/Surplus (+) Overall Deficit (-)/Surplus (+) Financing Net Foreign Financing Net Domestic Financing Revenue/GDP Ratio (%) Current Expenditure/GDP Ratio (%) Public Investment/GDP Ratio (%) Revenue Deficit (-)/Surplus (+)/GDP Ratio (%) Overall Deficit (-)/Surplus (+) /GDP Ratio (%) 2012 774,314 759,915 678,105 81,810 14,399 1,257,437 886,193 257,421 321,491 384,402 -13,158 (126,278) (483,123) 483,123 161,752 321,371 10.1 11.7 5.1 -1.7 -6.4 2013 783,235 780,218 706,684 73,534 3,017 1,275,085 920,017 290,720 367,572 369,005 -13,937 (139,799) (491,850) 491,850 95,379 396,471 9 10.6 4.2 -1.6 -5.6 YoY (%) 1.2% 2.7% 4.2% -10.1% -79.0% 1.4% 3.8% 12.9% 14.3% -4.0% 5.9% 10.7% 1.8% 1.8% -41.0% 23.4%

Softlogic Equity Research

BUDGET DECISIONS

2014

BUDGET & THE STOCK MARKET

Capital Market Developments on spotlights of the Budget
Continued incentives for new listings: The 2014 budget continues the tax holiday on a
revised note with new listings on selected sectors; Banking, finance, insurance and manufacturing now being offered a three year tax holiday at half the existing rate on companies that pay 28% tax.

2013 Budgets bearing on the Listed Counters

Budgetary Move Extend the 2% NBT applicable to the banking sector to all banks and financial institutions Counters Affected BFI Sector Impact NBT is a broad base turnover tax which is likely to have a negative impact on the bottom line of the counters in the BFI sectors

Tax on profit in banking and financial institutions which HDFC and other BFI Sector counters This will impact the bottomline of the banks provide loan facilities for professionals who combine in positively which caters to this segement small groups to build housing complexes will be given a through the tax benefit half tax holiday for 7 years Sri Lanka finance companies with subsidiary finance companies as well as banks having subsidiary finance companies will be encouraged to merge through qualifying payment status for acquisition Price controls will be taken off poultry and a regulated cost based pricing will be imposed. Fix the tax-free threshold applicable for VAT on supermarket scale retail trade at Rs. 250 million per quarter instead of 500 million rupees. Fix a limit of 25% of the total turnover as exempted value from VAT VAT exemptions have been removed on the import and supply of paddy, rice, wheat, a range of spices, dessicated coconut, rubber, latex, coconuts, tea including green tea, rice flour, wheat flour, break, eggs, liquid and powdered milk. All banking and Fiannce Counters with such subsidiaries Neutral and will depends on the respected entitities financial capacity to acquire the subsidiary and the complementary nature of the subsidiary to the respected entity

Ceylon Grain Elevators and Bairaha This would reduce their prevailing high cost Farms margins and improve profitability. Cargills Ceylon, Ceylon Cold Stores This is likely to worsen their position as VAT and Richard Pieris would now have to paid even at a lower level of revenue and the VAT exemption limit being fixed at 25% gives little flexibility to entities. Nestle Lanka, Lanka Milk Foods, Kotmale Holdings & other local manufacturing food and beverage companies Dipped Products Encourages local manufacturers. Locally sourced liquid milk business is likely to benefit

Due to imported rubber margins may dip Positive impact - complications on tax calculations will be reduced

Simplify tax differentials in IT hardware and softwares

PC House

Softlogic Equity Research

BUDGET DECISIONS

2014

Budgetary Move Credit facilities are provided at an interest rate not exceeding 8% for Manufacturing and SME industries to modernize their factories with energy efficient technology

Counters Affected All manufacturing sector counters especially Tokyo Cement

Impact Positive impact through lower finance cost in relation to the investment

Vision to increase export value of tea, rubber and Textured Jersey Lanka, Kuruwita This gives positive industry sentiment and textiles to USD10 bn by 2016. To be among the top 10 Textile Mills, Orient Garments and encourages investments for local textile mills in top 10 textiles producing nations by 2020. Expenditure Hayles MGT Knitting Mills the drive to achieve the proposed targets. on experimentation and innovations will be entitled to tax relief. Import cess has also been raised on steel products, aluminum bars and tubes, padlocks, hinges, Portland cement in packs of 50 kilograms or below. Tokyo Cement Lanka This initiative encourages local manufactures however the impact may be neutral given that Tokyo Cement imports a significant proportion of cement as well. A positive impact may materialize in the long run with its grinding plant expansion. This is likely to increase demand for brand new cars as opposed to used car imports which would be relatively more costly with higher depreciation allowances. Minor positive impact to improve efficiency

Depreciation allowance on used car imports will be tightened to increase customs revenues.

All Motor Sector counters

Grant LKR5,000 per acre, once a year subsidy, to all tea smallholders to improve the conditions of their lands through water and soil conservation

Tea Smallholder Factories

VAT exemption on tractors, semi trailers, machinery for Trading companies such as Browns, Margins and sales amy be affected due to tea and rubber industry, plant and machinery for firms CIC increased costs of imported products qualifying for tax holidays and some pharmaceutical preparations have also been removed. Plantation copmanies Higher investment may be required to buy the products Implement a Women Micro Enterprise Credit Guarantee Scheme against which Regional Development Banks and SME Banking Units of Commercial Banks will provide working capital loans up to Rs. 250,000 without requiring security All the banking counters with a microfinancing unit. ExampleCommercial Bank, Sampath Bank etc Provides additional boost for banks to strengthen the lending portfolio in the micro financing segment while providing a better risk profile Possible improvement in the efficiency of planatation Companies to obtain credit schemes at lower cost to expand operations Customers will be negatively impacted as tax is charged on them directly. Revenue growth may down due to the increase

Implement a credit scheme with 8 year maturity and 6% All Plantation Companies interest to best performing plantation companies, provided they -commit to replant an agreed extent Telecommunication Levy will be raised to 25% from 20% Dialog and Sri Lanka Telecom

Softlogic Equity Research

BUDGET DECISIONS

2014

Softlogic Equity Research

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Softlogic Equity Research

BUDGET DECISIONS

2014