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Finance Minister K. N. Choksy, PC, MP presented the Budget 2004 of the United National Front Government in Parliament yesterday.

The present state of the economy

Economic Performance 2003

I will commence by placing before this House the progress of the economy this year, 2003. In my last two Budget Speeches, I emphasised the importance this Government attaches to having consistency in its budgetary and fiscal policies so as to ensure well-planned and sustained economic development, and the confidence that the continuity of policies brings with it.

This strategy we commenced in our first year in Government, namely 2002, and continued through the Budget of 2003. The strategy has yielded results and benefited almost every sector of our economy. Simultaneously, it has identified a few areas which require strengthening.

I will therefore commence my Speech by placing before this House an overview of the economy as it stands at the conclusion of the first 10 months of this year, and thereafter indicate how we propose to further in 2004, the progress made in 2002 and 2003.

Overall, I could state objectively and with conviction that we now have in place an economy which is on the upward march. The collective determination of all Members of the United National Front Government under the stewardship of Prime Minister, Ranil Wickremesinghe, to establish peace and rejuvenate our country's economy, backed by the ready support received from all right-thinking citizens of Sri Lanka and the public service, has enabled the Government to retrieve our economy from the state of total collapse we found it when this Government assumed office two years ago.

Growth

Our sustained effort has enabled us to achieve a growth rate of 5.6% in the first six months of this year, and earn for Sri Lanka the confidence of nations. This Government has therefore turned a negative growth of 1.5% under the previous regime in 2001 to an appreciably higher rate of growth. A growth of 5.6% is considered very satisfactory for an emerging economy, such as ours.

Sectoral Performance

The services sector is safely estimated to achieve a growth of 6.8% for 2003, with banking and financial services, tourism and telecommunication being the principal contributories. The industrial sector has recorded a growth of 5.8% These two sectors together make-up 80% of the economy.

The country has had two unprecedented paddy harvests this year. the Treasury has advanced to the cooperatives through the Divisional Secretaries the aggregate sum of Rs. 900 Million to enable the purchase of paddy at Rs. 13.50 per kg. thereby giving the farmer the guaranteed price. Nevertheless, the agriculture sector growth remains low at 1.7% and requires particular attention to improve quality and productivity.

A notable development has been the entry of the private sector in developing non-traditional vegetable and fruit cultivation for export, and in the training of out-growers to improve quality and productivity.

Revenue

A drop in tax revenue collection has occurred. I shall later explain the reasons for this, and what remedial measures have been put in place and are proposed in this Budget to arrest the decline.

The Budget Deficit

The budget deficit was reduced from 10.8% in 2001, to 8.9% during 2002, our first year in office. For this year, despite the adverse effects of certain international occurrences and the floods in May last, we have curtailed the budget deficit at 7.8% of GDP.

The Public Debt

We have repeatedly emphasised the need to bring down our public debt which had reached unsustainable levels and in the Fiscal Management Responsibility Act indicated the planned reduction in the public debt. We have been successful in reducing the public debt from 103% of GDP in 2001 to 100% this year. The external debt service ratio has been reduced to 9.2%.

Exports

Despite the war in Iraq and the general international economic slowdown, export earnings made a strong recovery and are 10% higher in Dollar terms than last year. This was primarily due to the strong performance of industrial exports which grew by 12%.

External Assets

The total external assets of the country has increased to approximately US Dollars 2.9 billion up to date, and is expected to the US Dollars 3 billion by the year end. This is sufficient to cover the cost of 5.2 months of imports, the highest level achieved in the past six years.

Foreign Direct Investment

Foreign direct investment has increased from US Dollars 82 million in 2001 to almost US Dollars 230 million this year, demonstrating confidence in our progress. This inflow will contribute significantly to enhance industrial production and thereby provide greater employment opportunities. The country will also benefit by the transfer of technology and skills.

Stability of the Rupee

A notable development during the past year was the appreciation of the Sri Lankan Rupee in the international currency market. The independently floating exchange rate backed by the revival of our economy, and the decline of the US dollar against other currencies, have conjoined to result in a stronger Rupee. Sri Lankans had over the past decade accepted with complacency and resignation the concept of a weak Rupee rate prevailing indefinitely.

We have shaken this complacency by achieving for our currency an enhanced value, and the financial strength and dignity which goes with it. We must look at this new achievement positively rather than in a negative and self-serving way, as some are apt to do. We must deploy it in furthering the interests of our people as a whole, rather than moving to protect sectoral interests.

Whilst I appreciate the need to protect certain sectors, particularly the export sector, we shall move in a careful manner. The overall beneficial impact on the economy remains steadfastly in my mind. I see in this development the opportunity to further reduce inflation. In a country so heavily dependent on imports, the rupee appreciation could be used to reduce the cost of imported goods, and thereby the cost of living. Both the local and export industries could benefit by reduction in the cost of imported inputs used in production of finished goods.

Confidence could be further built in the eyes of potential direct foreign investors. No purpose is served by freely floating the rupee, and nevertheless using artificial means to prevent its finding its true international market level. The Government sincerely hopes that the recent political events will not have a negative impact on this achievement.

Inflation

Inflation which took a favourable downward trend from 14.2% in 2001 to approximately 9.6% in 2002 has further declined to 7.2% by October 2003. The declining trend in inflation will have far reaching beneficial effects across the economy. It has resulted in lower interest rates which will encourage investment and thereby enhance future growth. Increases in the cost of living will also be eased. This Government is proud to state that its commitment to fiscal prudence has in a large measure helped to bring down inflationary pressure.

Interest Rates

Market stability and the curtailment of inflationary tendencies enabled the Central Bank to reduce its policy interest rates four times during the first ten months of 2003, resulting in a consequential reduction in commercial rates in the market. This has benefited business and industry.

The prime lending rate has reduced from 12% at the beginning of this year to 9.3% in September. This records a significant achievement, in as much as the rate was as high as 22.4% in January 2001.

Government borrowing has been reduced, resulting in less crowding-out of private sector borrowers in the commercial banking sector. If you would remember when the Government assumed office the Government had an overdraft with the two State Banks amoungting to almost Rs. 40 billion which not only cost the Budget a substantial amount by way of interest payment but also created instablity in the money market. In my first Budget Speech, I gave the assurance that this overdraft will be dealt with and in fulfilment of this assurance the overdraft has been reduced to almost zero.

The reduction in interest rates is a sign of a healthy economy. Hardships that may be caused to certain sectors such as pensioners are being addressed and remedied later on in this Budget. However, an area of concern is that commercial bank lending rates, albeit recuded by the banks, is in my view still not commensurate with the overall benefits and profits made by the banking sector consequent upon our revival of the economy.

A concerted effort is being made to secure greater concessions to the private sector in bank lending rates. The banking sector has parlty responded to the Governement's call. Certain difficulties faced by them have been identified and are being addressed by teh Government to bring about more relief to borrowers. This is a social duty owed by this important and profitable sector of our economy.

The Stock Market

The Stock Market achieved record levels in the All-share Price Index and turnover, and earned recognition internationally as the second best perforning stock exchange in the world. This reflects strong investor confidence and corporate sector profitability.

A notable and salutary feature was the presence of small investors in the market, who invested in particular in shares of privatised ventures. Two regional exchanges have also been opned so as to facilitate investment by the smaller investors and those resident outside the metropolis.

Treasury Bonds

An unprecendented response has caused each issue of Trasury Bonds this year to be over-subscribed. During the latter part of the regime of the previous Administrration, Treasury Bonds even though issued at interest rates as high as 13% and for maturity periods of 5 to 6 years, did not sell bec ause of the lack of publci confidence in the then management of the economy.

In stark contrast, the public took up Rs. 36 billion in 10, 15 and 20 year Treasury Bonds with interest rates as low as 6.9% during the period January to October 2003. The Government has utilised the proceeds to refinance a fair portion of the public debt at lowwer rates of interest.

Privatisation

The Government continued its programme of divestiture of commercial public enterprises to the private sector. The Public Enterprise Reform Commission is in charge of the proigramme, under the control of the Cabinet. The Stock Exchange is used to ensure maximum sale prices and transparency.

The Government's entire holding in the Insurance Corporation of Sri Lanka and a further 15% of its holidng in Sri Lanka Telecom were sold at a profit to the Government. In the period from November 2002 to end August 2003, receipts from privatisation yielded Rs. 10 billion.

The petroleum sector was liberalised with the sale of one-third of the retail network of the Ceylobn Petroleum Corporation to a foreign Company. This Company has made a large investement and is already active in the market. The process to bring in a third player has commenced. The multi-sector Regulator will protect the public interest.

The privatisation of the Regional Trasnport Boards is a matter of the highest priority and urgnecy. These Boards are making considerable inroads into revnue on a monthly basis to pay wages and remian operative by purchase of essential spares. They are burdened with brought forward losses. Unfrotunately, trade union activity by Court proceedings has stayed the privatisation of six of those companies through the stock exchange.

Apart from the saving of the constant drain on the public revenue, we consider it beneficial to commuters to place the operation of these companies in private hands. We are pursuing this programme in the national interests.

Overall Assessment

Overall, judging from these statistics, there has been a broad-based and commendable economic recovery in 2003. This has resulted in winning local and international investor confidence as demonstrated by the Stock Market activity. The country's success at the Tokyo/Sri Lanka Donor Conference held in June 2003 and the increased foreign private capital inflows further demonstrated the confidence of the international investor community has in Sri Lanka.

The Donor Conference attracted representatives from 74 countries and international agencies, who expressed much satisfaction at the Government's progress in forwarding both peace and economic development.

Recognition has also come from the World Bank, which for the first time gave us a Poverty Reduction Support Credit (PRSC). The International Monetary Fund granted Sri Lanka loan facilities at concessionary terms under its Poverty Reduction and Growth Facility (PRGF). The rate of interest is 0.5% per annum and the facility is repayable in 10 years, with a grace period of 5 1/2 years.

Financial sector reforms were continued on a sustained basis by the Ministry of Finance in collaboration with the Ministry of Policy Development and Implementation and the Central Bank, so as to strengthen the macro economic framework.

Amongst other measures, amendments to the Banking Act, a new Asset. Management Law, and a Foreign Exchange Management Law to replace the outdated Exchange Control Act are ready for enactment. An Economic Management Law is being drafted so as to strengthen financial discipline in the public sector. These new Laws increase the efficiency of the management of the economy and also create governmental accountability to the People through Parliament.

The Central Bank has also taken certain innovative measures. A Real Time Gross Settlement System, a Scripless Securities Settlement System, and the automation of the Central Bank's General Ledger have been affected.

Wasteful recurrent expenditure in Ministries and Government Departments and Institutions is being constantly pruned. The saving achieved by this measure is channelled to capital expenditure.

There has been a reduction in the rate of increase of the cost of living since April this year. A reduction in the inflation rate over the last two years to a single digit i.e. approximately 6-7%, and a further reduction which is reasonably anticipated together with the stability of the Rupee and the drop in interest rates will hold down price increases in the future. Several essential consumer items are exempted from VAT and customs levels.

The average annual income per person has increased to approximately Rs. 93,000.

Greater employment opportunities are available, reflected by the increase in the number of new E.P.F. registrations by about 187,000 up to August this year.

The strengthening and improvement of our economy over the first two years has not been an easy task. In particular, the Treasury has been constantly confronted with fall-outs of the mismanagement of the economy during the period 1994-2001. Apart from having to surmount the colossal debts that had already been incurred, constant inroads are made upon revenue by certain public corporations, due to past mismanagement. Consequently, our two years in office could not see considerable direct financial benefits being handed down by the Government to our people as a whole, though they have enjoyed many indirect benefits.

We made no promise of rice from the moon or bread at below cost of production prices, as others were apt to do so. Unostentatiously, we are concentrating on strengthening the basics of our economy. Our progress is thus being built on a bed-rock foundation. No politically motivated misinformation campaign can shake it.

We took the people into our confidence and indicated that hard though politically unpopular decisions would have to be made within the first two years, with an eye to a better future. We told then the process of nation re-building would take time.

They placed their confidence in us, and co-operated. With this Budget they will receive the benefit of their patience. Employment generation, increased wages, and tax relief for the lower and middle-income levels will be their immediate benefits, with a determined thrust by the Government to bring about further reduction in prices of consumer goods in the market. The main theme of this year's budget proposals will be the promotion of their interests.

As I have said, the re-building of our economy and bringing it to its present satisfactory allround level has been a difficult tasks, considering the state of the economy we inherited from the People's Alliance. What is also vital is that we have re-established both local investor and foreign investor confidence. This is an essential necessity in the building of a nation's economy.

The confidence that had been lost in 1994 - 2001, had been regained. Unfortunately this has been badly shaken by the events of the first week of November. The uncertainty created has resulted in a decline and greater fluctuations in the Colombo Stock Exchange and also in the exchange rates.

Then again, the confidence placed in the Government's policies by the international community at the Tokyo Donor Conference will also be eroded by the political turmoil that has been created.

We ran the Government for two years without the need for an emergency. We had back on our streets the unfortunate spectrum of the armed forces and the police. This by itself detracts both local and foreign confidence with adverse effects on investors and private sector development. A prospective highly successful tourist season has been placed in jeopardy.

The establishment of a dialogue with the LTTE and the successful achievement of a ceasefire by the Government after 20 years had contributed significantly towards the resuscitation of the economy. The present inability to proceed with the process in itself another negative factor. The precipitate action taken in the absence of the Prime Minister on an official visit aborad has dealt the economy a severe blow and reversal. We are now compelled to say halt to the momentum gathered over the last two years and instead divert on a course of damage control. The Government shall, however, not be deterred. We shall overcome the crisis placed in our path and proceed to implement the Regaining Sri Lanka Medium Term Development Programme.

Implementation of previous budgetary proposals

Mr. Speaker, I will now proceed to review briefly the present status of implementation of the proposals contained in the last Budget, ie. the Budget 2003.

Reducing the Interest Cost of the Public Debt

The Treasury has reduced the cost of the existing public debt by replacing high cost short-term bank borrwings with long-term bonds issued at lower interest rates. Of the outstanding letters of credit due to the state-owned banks of Rs. 14 billion, Rs. 13.2 billion, has been settled, reducing the annual interest cost appreciably.

Further, the unauthorised off budget overdraft facility of Rs. 40 billion that the previous regime had incurred at high interest rates from the state-owned banks has now been brought under Parliamentary authority, and has also been reduced by substituting long term Government Bonds at lower interest rates.

Rupee loans with high rates of interest in excess of 13% have been converted to Treasury Bonds carrying interest at 7% to 8% with maturity in 10 to 20 years. Rs. 22.4 billion of loans had been so converted as at end September, and a further Rs. 11 billion will be retired before the end of this year. We will continue this policy in 2004 so as to further reduce interest costs. The Public Debt Management office has been set up.

Cost Savings

As at the end of September 2003, idle assets of Ministries amounting to Rs. 95 million have been disposed. In order to speed up the balance process, the function is being outsourced to the private sector.

Tax Reform

All of the proposals announced in the last budget to change tax rates and to expand the tax base have been implemented, save the proposal to extend VAT to the retail and wholesale sectors, which we have deferred. The tax amnesty, which was widened with immunity being granted under several related laws, was the most extensive and successful tax amnesty ever offered in Sri Lanka and over 51,000 declarations were received. The beneficial reasons which motivated the Government to do so were fully explained by me to this House when I introduced the Law.

The establishment of the Revenue Authority has been actively pursued. The draft Bill is being finalised for presentation to Parliament. The creation of this Authority is essential to improve revenue collection and widen the tax collection base. The re-organisation of the three main revenue-collecting organs will result in less bureaucracy, grater efficiency, and prompt collection of revenue.

Tariff Policy

The tariff provisions of the Indo-Sri Lanka Agreement came into force from March 1st 2003. Recommendations of the Tariff Advisory Council regarding anomalies were implemented through a Gazette notification in November 2002. Other tariff anomalies have also been corrected during the year. The budget proposal for the imposition of low import duties from 2% to 10% on imports, which were previously exempt (except for crude oil, pharmaceutical and wheat) was implemented in November 2002.

Excise Tax

Excise duties on cigarettes, imported liquor, and arrack were raised in the course of the year. The tree tax on Kitul was introduced so as to legalise toddy tapping.

Ports and Airport Development Levy

The Ports and Airports Development Levy was reduced on January 1, 2003, from 0.75% to 0.50% for imports solely used in goods manufactured for export.

Road Fund

The proposal was that a Road Fund be set-up for the maintenance of public roads, which would be funded from levies on vehicles. However, a levy on fuel was imposed for this purpose from August 2003.

Decentralised Budget

The proposal to increase to Rs. 5 million the decentralised budget to be utilised for development activities by Members of Parliament in their electorates was implemented.

Governance

In 2003, all departments and public corporations were required, for the first time in 50 years, to adhere to strict deadlines for the submission of performance reports and annual accounts to the Ministry of Finance. Around 90% of these entities have met these deadlines.

Capital

The new Law to establish an Asset Management Company to takeover the recovery of large non-performing loans of banks is ready. Current estimates disclose approximately 225 non-performing loans, aggregating to as large a figure as Rs. 30 billion. It is envisaged that the bad loan portfolio of People's Bank would be placed in the Company. The transfer of non-performing loans should lead to the lowering of interest rates by the relevant institutions.

Pension Reforms

A contributory pension scheme for new recruits into the public service has been commenced from January 1, 2003. This scheme will reduce future increases in the unfunded pension liability of the Government, which was at Rs. 550 billion as at the end of 2002.

Labour

To promote the mobility of labour and encourage the private sector to enhance employment, the Termination of Employment of Workmen's Act and the Industrial Disputes. Act were amended during 2003.

The standardised compensation formula and the unemployment benefit scheme have been formulated in consultation with Employers' Organisations and Trade Unions. They will be implemented next year.

Further enhancements to the benefits to migrant workers are being considered for implementation.

Fiscal Management (Responsibility) Law

The first Mid-Year Report under this Law was presented to Parliament in June by me. The Fiscal Strategy Statement and the Budget Economic and Fiscal Position Report required by the Law are tabled in the House today .

Welfare Benefit Law

This Law was enacted to ensure that welfare schemes are better managed and targeted to reach the poor. The Board of Management has been appointed by me and new admission criteria are being tested in a pilot project involving 40,000 persons.

Agro Enterprise Development Fund

The Fund was established this year and is funding the areas of dairy farming and drip irrigation.

Human Resource Endowment Fund

The Bill for the establishment of this Fund is ready for approval by the Cabinet. This Fund will finance training to upgrade the skills of the work force, and provide tertiary education and vocational training for students and unemployed youth. The Fund will be managed as a public private partnership. The manner of capital accumulation by the Fund was explained in my last Budget Speech.

Infrastructure and Corporate Restructuring Fund

This fund has not been set up as yet. However, progress has been made on the transfer of the assets of the Private Sector Infrastructure Development Corporation (PSIDC) to the proposed Fund. The valuation of the Corporation's assets has been completed.

Affordable Housing Finance for Low and Middle Income

Households

In November 2002, the Government introduced the "Affordable Housing Finance Scheme" through the Housing Development Finance Corporation to finance the construction of houses for low and middle income families at an interest rate of 9.5%. Approximately 15 banks are participating in the scheme and about 3,000 housing loans have been granted.

Certain commercial banks and state owned banks have also embarked on middle-class housing loan programmes at affordable interest rates.

Information Communication and Telecommunication Development

The initiative E Sri Lanka was launched in November 2002, to enhance the use of information and communication technology by the private sector and the government, for economic development. The information and Communication Technology Agency (ICTA) was set up in July 2003, to implement the E Sri Lanka road-map. Information technology will also be used for government databases, registries and procurement, thereby improving services provided to the public.

Enabling Environment for Promoting Growth

In order to widen the scope of private sector investment, the Monetary Law and the Securities and Exchange Commission Law were amended. Amendments to the Banking Act have been gazetted and are now before Parliament.

The proposals relating to lifting of exchange control restrictions were implemented in January 2003. The new Foreign Exchange Management Law which is ready to be introduced in Parliament will relax exchange control restrictions on capital and international transactions.

Development of the Rural Economy

Three Regional Economic Boards under the BOI are operative in the Wayamba, Central, and Southern Provinces. They are concentrating on assisting small and medium enterprises with capital and technical know-how.

The Rural Economy Resuscitation Fund has been established and was allocated Rs. 200 million in 2003 to support rural industries. Two programmes were carried out by the Ministry of Rural Economy through the Fund - the One Village One Product Programme and the Village Development Programme. By the end of September, sixty-two villages were covered by these programmes and over Rs. 150 million had been disbursed. Eighty villages will be covered by the end of the year, utilizing the entire allocation.

Four strategic economic centres have been established outside the Metropolis of Colombo by the Ministry of Rural Economy. These centres are active and are a considerable benefit to rural agricultural and cottage industries to market their products at fair prices. Six more centres are under construction, and a total of 15 such centres will become operative in all the Provinces next year. A handicraft village at Sigiriya, and three Export Development villages were also set up in 2003.

The Turu Sevana scheme that assists producers to set up sales outlets to market environment friendly products was also commenced by the Ministry.

The Youth Corp has trained 830 Youth Range Leaders at four residential centres, and 12 Divisional Centres are currently being established. These centres will be operative from December this year.

Tea Sector and Plantations Development

The new Tea Sector Association with stake-holder representation of sea exporters, brokers, factory owners and planters commenced operations in May 2003. Hitherto, each component of the industry had been functioning separately.

The association will move towards self regulation, functions which were hitherto managed by the public sector, and create a standard brand "Ceylon Tea" to differentiate our teas and to add value through branding.

Tourism

The additional levy of $5 on airline tickets to and from Sri Lanka came into force in August 2003 and will be used for promotional activities of the Tourism Development Council, as a public-private partnership.

A levy of 1 percent on the turnover of all Tourist Board licensed institutions also came into effect from August 2003.

The ceasefire has increased the influx of tourists to the highest level in the past decade, with tourist hotels being able to make operating profits, and ancillary businesses reviving.

Garment Forum

The Forum is conducting training programmes with monies allocated by Government. Other steps to meet the 2005 international transition are also under way.

Women's Development

The Ministry of Women's Affairs has prepared a set of guidelines on allocation and disbursement of funds to women under the various sector development projects. Ministries are allocating 10% of expenditure in their budgets, towards programmes for improving the status of women.

Re-positioning the Gem and Jewellery Industry

As it would take time to establish the Gem & Jewellery Trade Promotional Council by statute, an interim arrangement was made in July 2003 to recognise the existing Sri Lanka Gem & Jewellery Association as the apex agency, with responsibility to undertake promotional activities. A proportion of the cess (service levy) is being provided to them for this purpose.

Three year development programme

Introduction

"Regaining Sri Lanka" sets out the Government's strategy for increasing economic growth and employment. In doing this, we will attach the highest priority to the poorest regions and the most disadvantaged in our society.

The Government has developed a comprehensive ten-year plan that represents an integrated approach to developing the physical infrastructure that will be essential if the economy is to further improve. Too often in the past, investment in our infrastructure has been done on a piecemeal basis.

As a result, the whole has been rather less than the sum of its parts. We intend to change that, and as an initial step we will invite discussion of the Physical Infrastructure Development Programme with international agencies and all other stakeholders, including the LTTE in the case of programmes for development of the North-East.

Mr. Speaker, highlights of the 3 year development programme that I will now proceed to elaborate upon, draws on the 10 year infrastructure development plan for the relevant sectors. I will also review some of the key elements of the other sectors. The 3 year programme will involve an investment of Rs. 400,000 million over the period.

Any reference in this section to expenditure to be incurred or, with regard to physical targets to be achieved are, unless otherwise stated, in relation to programmes to be launched or progressed over the 3 year period 2004 to 2006. In the case of programmes which extend over a 6 year period, we have estimated the achievements over the next 3 years.

Rs. 110,000 million has been provided for capital expenditure in the budget for 2004. This is the largest amount allocated for any one year over the last decade. This includes the following:

Power Generation and Rural Electrification

The Government will embark on an accelerated rural electrification programme during this period to provide some 285,000 households with electricity. The target is to provide electricity to over 70% of the population by the end of 2004, from the present 65% and to 80% of the population by the end of 2006. In spite of the high costs involved, the Government is committed to fast tracking the rural electrification programme.

Contracts have been awarded or proposals have been invited for the building of a number of thermal power plants, including pre-qualification of bidders for a 300 MW coal fired thermal power plant.

The budgetary allocation for electricity generation, transmission and distribution including rural electrification, is Rs. 35,000 million.

Road Development

The construction of the national highway network and the proper maintenance and rehabilitation of existing roads are essential to reduce transaction costs in the economy to improve its capacity to generate growth, employment and higher incomes.

A series of high-speed expressways will be constructed to connect the major urban centres of the country.

Specific projects include:

* The construction of the Southern Expressway from Colombo to Matara on which work has commenced. The expressway will be the catalyst that opens up the southern region for major commercial activity.

* An MoU was signed recently with the Malaysian Government to undertake the feasibility study and design for the Colombo to Kandy Alternate Highway. Construction will begin in the next 3 years.

* The contract for the Colombo to Katunayake Expressway will be awarded shortly.

There are several on-going programmes for the improvement, rehabilitation and upgrading of all classes of existing roads. Allocations will be made as follows:

* Rs. 9,000 million to rehabilitate 300 kilometres of the main Class A and Class B roads.

* Rs. 6,500 million to upgrade 1,200 kilometres of Class C and D roads in all the provinces.

* Rs. 4,000 million for the rehabilitation of 8,000 kms of the unclassified rural road network inclusive of the farm-to-market roads maintained by local authorities.

The following institutional policy reforms are also to be given effect to during this period.

* Current legislation is being reviewed to expedite land acquisition for development projects and to provide for full compensation to, and resettlement of, affected persons.

* The Road Fund, which is funded by the fuel levy, will be incorporated as a company limited by guarantee, to be operational by 2004. The Fund will maintain core public roads.

Water and Sanitation

The provision of safe drinking water and access to basic sanitation are key elements in the Government's efforts to improve living standards.

As insufficient resources are available for the Government to undertake the much needed investment in this sector, the Water Service Reform Bill is now before Parliament to provide for the regulation of the water and sanitation sector by the Public Utilities Commission, to allow for public-private sector partnerships.

In addition to the ongoing programmes of water supply development, the Government has recently commenced the following programmes.

* A programme to construct two water networks for Batticaloa and Muttur and to extend two existing water networks to Hambantota and Polonnaruwa. Another component is a rural water scheme for 150,000 people in Polonnaruwa and Anuradhapura. These programmes will provide about 40,000 new safe drinking water connections, and the construction of 25,000 latrines to provide access to safe sanitation for 3% of urban and 30% of the rural households in the project areas.

* The Kandy Water Supply Scheme will provide 50,000 new connections, serving approximately 200,000 people. It will also upgrade existing servicing for 300,000 persons in Kandy and the surrounding areas.

* Projects funded by the international donors are under way in the Southern Province. Rs. 8,000 million will be allocated for these programmes.

A project will also be implemented for urgent repairs and upgrading of the sewerage network system in the Greater Colombo Metropolitan Area at a cost of Rs. 2,500 million.

Industry and Enterprise Development

The Government is opening up new business opportunities through a series of bilateral trade arrangements. To benefit from these unprecedented opportunities, Sri Lanka enterprises of all sizes must enhance productivity and significantly improve their ability to compete. In order to facilitate this change the Government will launch the Regaining Sri Lanka Transitional Programme for Industrial Renewal, which will have 3 elements:

* The Technology initiative for Small and Medium Industry.

* The Industrial Partnership Programme.

* The Small Scale Industry Financial and Accounting Advisory Programme.

Rs. 35,000 million will be allocated for on lending, through the Banks to small and medium enterprises. With the steep reduction in interest rates we expect interest rates to the end borrowers to be at around 9 - 12%.

It is encouraging that the local garment sector has already mobilised itself to prepare to meet these new challenges. In taking action to help themselves they have set an example for other sectors to follow.

Education and Training

In addition to the ongoing programmes in education, other key initiatives will be implemented through a series of programmes that are designed to equip the people with the right skills and to increase employment. These include the following:

* A Distance Education Participant Programme will provide curriculum training and multimedia services through more than 100 national centres, both public and private. Around 4,500 unemployed university and A level students will qualify annually to receive needs based stipends under this programme. A sum of Rs. 3,000 million has been allocated for this programme.

* There are about 25,000 Grama Seva village divisions in Sri Lanka. It is our intention to train 25,000 unemployed youth, who have passed all subjects in the GCE A Level Examination, to act as facilitators of rural development in these divisions. Unemployed youth would be eligible for selection. We plan initially to recruit 5,000 trainees in batches for this purpose.

Agriculture

Mr. Speaker, our agricultural sector is characterised by low productivity and low incomes. Support for the supply chains between producers and consumers and markets is required if producers are to share equitably in the benefits of economic growth and development. The major investments in rural roads, rural electrification and other infrastructure will help. Programmes to introduce modern technology and improve quality and productivity will be implemented to further improve the sector.

We will allocate Rs. 3,000 million to these programmes.

Plantations

We will implement a programme for the plantation sector which includes the following components:

* The construction of 2,400 new workers' houses and re-roofing of 4,400 line rooms.

* Provision of financing for replanting and infilling 2,000 ha of tea, replanting 5,000 ha of rubber, consolidating 14 tea factories, and rehabilitating 8 mini hydro schemes.

A sum of Rs. 2,500 million will be allocated towards the programme.

Tourism Development

We have already experienced a handsome peace dividend in the tourism sector. Today, there are considerable new opportunities for Sri Lanka to emerge as a key tourist destination within Asia. The sector is gearing up for arrivals of 750,000 and to increase the average daily spending per tourist to $100 by 2006. This will require further investment to upgrade and raise the current 14,000 room capacity to an estimated 20,000 good quality rooms.

This process will be aided by the Government. We propose to facilitate the development of Maskeliya and Puttlam lagoon as major new resort areas and also the further expansion of the Bentota resort area.

North East Rehabilitation and Reconstruction

The Conflict in Sri Lanka has been a major constraint to growth and poverty reduction. It has not only caused extensive suffering and dislocation in the North and East but has also sharply reduced the economic contribution of the region to national development. In addition to the existing programmes, 3 major programmes will be ongoing over this period.

* Under the first programme, about 200 kms of the primary road network will be rehabilitated and 4 districts will have access to electricity. The Vavuniya-Kilinochchi transmission system will be rehabilitated. A comprehensive water study for Jaffna will be completed and 800 schools will be rehabilitated.

* The North-East Coastal Community Development Project will provide infrastructure for a large number of coastal households. About 84,000 Internally Displaced Persons now in India are expected to be resettled next year. Their livelihoods will be secured by providing them needed community and social infrastructure.

The details of the three year North-East rehabilitation programme is being worked out in consultation with international aid donors and other stakeholders. Rs. 8,000 million has been allocated towards the above programmes.

Special Projects

Southern Province Development Programme The Southern Expressway will be extended to Hambantota and Wellawaya. Our infrastructure development plan also envisages the development of a port and the establishment of a coal power plant and an oil refinery, in Hambantota.

An initial study has revealed that the setting up of an airport in Kuda Oya would be financially viable and would facilitate increased tourism in the region. Preliminary steps that have been taken in this regard are the site survey, a feasibility study and the identification of sources of finance.

Second Export processing Zone at Biyagama

With the renewed interest of investors in setting up manufacturing enterprises in Sri Lanka, the Board of Investment is faced with a shortage of readily available industrial land and property to be offered to prospective investors. A 300 acre location at Keragala in the Biyagama area has been identified to establish the first Export Promotion Zone of the United National Front government.

The estimated cost of this new EPZ will be Rs. 3,000 million. This programme will be partly funded by the BOI divesting of properties within existing zones that are currently being leased to investors.

A further zone will be set up in Pannala.

Housing Programme

The Government will continue to attach priority to its "home ownership" campaign, which will not only promote more home ownership, but also generate significant activity in the construction sector throughout the country. The Housing Programmes will have four components, based on the levels of affordability of different categories of persons.

* I have already described the progress we have made in implementing the "Affordable Housing Finance Programme" introduced in my last budget, which would cater to those requiring houses costing Rs. 100,000 to Rs. 500,000.

* We have also allocated Rs. 800 million in 2004 for housing for the low income families who desire houses that cost less than Rs. 100,000.

* We will establish a programme for the construction of houses for middle-income families, at prices ranging from Rs. 500,000 to Rs. 1.5 million.

This will entail the construction of low rise apartment complexes with a maximum floor area of 1,100 sq. ft. The Government will provide land and basic amenities. Private developers will construct the apartments according to specifications set out by the Government. A loan scheme will be established by the Government to facilitate the purchase of these apartments.

* The Government will launch a self aided programme with an allocation of 26 corrugated sheets and 3 plain sheets per family to the poorest of families, who will contribute their own labour, towards improving their housing. The programme provides for 820 selected families in each electorate, and we expect to cover 125,000 households in the year 2004.

City of Colombo

The city has fast outgrown its existing infrastructure facilities. Their expansion and strengthening are therefore planned on a priority basis.

The large extent of land at Chalmer's Granary will be made available to the private sector for commercial development.

Tax Reforms

Mr. Speaker, any Government is dependent on the collection of tax revenues to pay for the infrastructure and other services provided to the public. A significant shortcoming in our tax revenue collection system is that the tax net is small. A large numbers of persons and businesses that should be paying taxes do not do so.

The United National Front government has taken a systematic approach to address this problem. The comprehensive tax amnesty was a major success with over 50,000 declarations received, which is more than 10 times the number received under any previous amnesty. The Revenue Authority, being established to take over the Inland Revenue, Customs and Excise Departments will strengthen the process of tax administration in a systematic and fair manner, broaden the tax base and increase revenue collection.

Economic Service Charge

There are around 32,000 registered companies in the country. Less than 9,000 of them filed income tax returns for the year 2001/02 and just 2,850 of them paid income tax. In other words, less than 10% of the companies in the country pay income tax while the rest, who also use the same infrastructure and other services provided by the Government, make no contribution whatsoever towards meeting the cost of these services. This also applies to other forms of businesses such as partnerships and sole proprietorships.

We cannot permit this state of affairs to continue. Every business must make some payment towards Government revenue collection, even if the amount is small. We cannot place greater burdens on businesses that already pay tax.

Therefore as a transitional measure to achieving a ratio of income tax to GDP that is comparable to that of other countries, I propose, with effect from April 1, 2004, to impose on all entities carrying on any trade, business, profession or vocation that have a turnover in excess of Rs. 20 million or total assets in excess of Rs. 10 million and which have been in commercial operation for more than two years, an Economic Service Charge (or ESC) of 1%, payable on turnover or total assets. Each business will be permitted a one time choice of whether the 1% ESC should be applied to turnover or total assets. The ESC can be set off against income tax payable for the year, limited to the full amount of tax payable without any carry forward provision. The minimum ESC payable by an entity which is liable to this charge will be Rs. 100,000, and the maximum amount payable will be Rs. 20 million.

A request will be made to BOI companies to submit to the ESC from 2005/06 as a measure of fairness in view of their enjoying the same infrastructure and other Government services in conducting their business.

We expect to collect Rs. 3,000 million in revenues during 2004 with the introduction of this Economic Service Charge.

Deductions for Losses

Many businesses that make substantial profits do not pay taxes because they set off these profits against losses incurred during the year and brought forward from previous years. Commencing April 1, 2004, businesses can set off losses against the current year's total statutory income only up to a maximum of 35% of such income. Annex 1 provides further details of this tax policy change.

This measure is projected to result in Rs. 800 million in revenue.

Partnership Income

I find that some partnerships currently distribute profits to fictitious partners and neither the partnership nor the partners pay tax on the profits earned. Commencing April 1, 2004 an up front tax of 10% will be imposed on the divisible profits and other income of all partnerships. This tax can be set off against the proportionate individual tax liability of each partner, up to a maximum of the tax payable, with no carry over provision.

We estimate that Rs. 500 million will be collected through this measure.

by Personal Income Tax

The tax free allowance for individuals will be increased to Rs 300,000 from the present Rs. 240,000 and the subsequent tax slabs broadened.

The tax slabs for terminal benefits from all such benefits will be expanded so that the first Rs. 3.5 million will be free of tax.

Details of these two measures, which will substantially reduce the tax burden on individual tax payers and retirees, are given in Annex 1.

These measures are estimated to reduce revenue by Rs. 300 million.

Value Added Tax

At present, VAT is charged at two rates of 20% and 10%. Seventy percent of the revenue collected by the Government from VAT comes from the 20% band, which includes a large number of items that are consumed by the average consumer. The high rate of 20% is, in some cases, a cause for tax evasion. Furthermore, the dual rate distorts prices in the economy and creates problems relating to VAT collection and refunds.

The drop in revenue collection in 2003 is largely attributable to complications caused by the two band system. The upper rate of 20% and the dual band system acts as a deterrent to growth in the business and industrial sectors. Therefore, from January 1, 2004 we will move to a single unified VAT rate of 15%.

The turnover threshold of Rs. 500,000 per quarter for payment of VAT will be raised to Rs. 750,000 per quarter and the annual threshold will be increased to Rs. 3 million. Certain changes will be introduced in the present refund system to simplify administration.

The new unified VAT rate will result in price changes, with the majority of items reducing in price. A publicity campaign will be launched to inform consumers, traders and retailers of the need to bring down prices in line with the reductions in the upper VAT rate from 20% to 15%. With increased compliance resulting from the lowering of the upper band and the elimination of problems relating to VAT refunds, the Government expects to collect Rs. 2,000 million in additional revenue.

I have been particularly mindful of ensuring that the resulting increase of the lower band from 10% to 15% will not increase the cost of living. A detailed analysis has been done. Many essential items are exempt from VAT.

Hotel Room Tax

We had previously intended to introduce a hotel room tax of 10% of the room charge for all hotels classified as 3 stars and higher by the Ceylon Tourist Board. However, because of the large negative impact on the sector due to the recent political actions we have now decided to defer the imposition of this tax.

Levy on Cellular Mobile Subscribers

We are currently faced with large revenue leakages from the non payment of VAT on mobile cellular phones. An annual levy of Rs. 300 per mobile phone subscriber will be imposed instead of VAT on the purchase of mobile phones, starting January 1, 2004. VAT will continue to be payable on the cost of calls. Annex 2 provides the details of the scheme.

It is estimated that the revenue yield in the first year will be Rs. 600 million with increasing yields expected from the anticipated rapid growth of mobile telephony.

Elimination of Tax Exemptions

A number of tax exemptions have come into the Inland Revenue Act over a long period of time and the original rationale for them longer exists. Their removals will result in more equal treatment of income from different sources. I therefore propose to eliminate the tax exemptions listed in Annex 3 starting April 1, 2004.

This measure is estimated to result in increases in Government revenue by Rs. 900 million

Withholding Tax

Commencing January 1, 2004 the present exemption limit of Rs. 9,000 per month or Rs. 108,000 per year for withholding tax on interest income per deposit will apply to the total interest income from all deposits in any individual bank or financial institution made by a person or a corporate entity.

However, the withholding tax free limit will be raised to Rs. 25,000 per month or Rs. 300,000 per year in aggregate from all deposits of individuals whose sole or main source of income is interest from deposits. Such individuals must obtain a direction from the relevant Government authority for this purpose. This measure will assist pensioners from January 1, 2004.

Commencing on April 1, 2004, a 10% withholding tax will be levied on any annuity or royalty paid by any person or partnership in excess of Rs. 50,000 in any month or Rs. 500,000 in any year; and a 5% withholding tax on any management fee or similar payment. This withholding tax can be set off against the final liability to tax of the recipient.

The proposed changes in withholding taxes are estimated to increase revenue by Rs. 500 million.

Tax Administration and Compliance

In order to widen the tax net and improve tax compliance I propose to introduce the tax administration and compliance measures listed in Annex 4, which includes measures relating to VAT. This will result in Rs. 400 million in additional revenue.

Tax Expenses and Allowances

The changes in tax laws and procedures listed in Annex 5 will be introduced from April 1, 2004 which will result in the simplification of procedures, and the rationalisation of expenses and allowances for the determination of taxable income. This measure will yield Rs. 300 million.

Duty changes

Customs Duty/Excise Duty (Special Provisions)

As part of the continuing process of rationalising and simplifying customs duties, the duty bands will be reduced from 6 to 5. At the same time the present 20% surcharge on duty will be reduced to 10%. These changes will take place with effect from January 1, 2004. Excise Duty (Special Provision) on some items will also be adjusted at that time.

These measures are estimated to yield Rs. 4 billion in revenue without adverse impact on the cost of living.

Excise Duty

The excise duty on beer has remained unchanged since 1998 while the excise duty on hard liquor has been increased several times. Therefore I propose to raise the excise duty, with immediate effect, by Rs. 5 per litre on beer with an alcohol strength of less than 5%, and Rs. 10 per litre where alcohol strength is 5% or higher.

Large quantities of rectified spirits issued for industrial purposes are being grossly misused for the production of illicit liquor. Besides the health hazards to the public of consuming such illicit liquor, it has been estimated that on illicit liquor produced using one litre of rectified spirits the Government loses almost Rs. 600 on taxes. I therefore propose to increase the excise duty on rectified spirits from Rs. 36 per litre to Rs. 200 per litre with immediate effect.

These changes will result in additional revenue of Rs. 950 million.

Other changes in excise duty required to maintain revenue neutrality will be made at the time of introduction of the single VAT rate.

Depreciation for Calculation of Fiscal Levies

The maximum age of used motor cars that can be imported, without a licence, is at present three years. With a view to allowing Sri Lankans access to motor cars at a lower price I propose to increase this age to three and a half years.

Further, at present there are two separate depreciation tables, which are used to calculate depreciated values for determining VAT and duty on used motor cars and commercial vehicles.

These depreciation tables will be changed in the manner detailed in Annex 6 to encourage the import of newer vehicles which are better from an environmental point of view and to reduce malpractices where motor cars have been classified as commercial vehicles to take advantage of the higher depreciation rates applicable to the latter category.

Construction Machinery Imports

The maximum age of used construction machinery that can be imported will be reduced from 10 years to 7 years.

Fee Changes Licence Fee on Kitul Palms

In the 2003 budget the Government introduced an excise tax of Rs. 250 per tree on the tapping of kitul palms to provide a legal framework for granting of licences for such tapping. There has been significant development in this industry since that time. To further encourage the sector the excise tax will be reduced to Rs. 50 per tree with immediate effect.

Administrative Fees, Rents and Other Charges

Rationalisation and changes to administrative fees, rents on Government houses and buildings and other charges of loss making entities will be introduced to reflect realistic costs. Rs. 1,250 million in additional revenue and budgetary cost savings will result.

Turnover Levy on Tourist Board Registered Organisations

A 1% turnover levy was imposed on all organisations registered with the Sri Lanka Tourist Board in 2003. The General Sales Agents of airlines whose income is derived from the small percentage commissions they receive from the sale of air tickets will be exempt from this levy with effect from January 1, 2004.

Developing Sri Lanka as a Regional Shopping Centre

We plan to introduce a scheme to make Sri Lanka a regional shopping centre for consumer electronic goods and high quality locally produced goods, such as ceramics. Under this scheme, foreign visitors to the country, who buy such goods from VAT registered retailers, will be entitled to a refund of the VAT paid on such goods, at the time of departure at the airport; and the duties on imported consumer electronics goods will be reduced to a nominal 3%.

The scheme will be introduced early in 2004 and will have a beneficial revenue impact on the tourism sector.

The revenue foregone as a result of the duty reduction and VAT concession is estimated to be Rs. 200 million.

Funds in Dormant Accounts with the Employees Provident Fund

Detailed analyses of EPF data reveal that there are large numbers of EPF accounts with low balances which have been dormant for long periods and which are very unlikely to ever being redeemed. Rs. 4,500 million of such funds will be transferred to the Government as non-tax revenue with the provision to the EPF of a contingency guarantee, as necessary. A part of this amount will be used for the proposed unemployment benefit insurance scheme.

Increase in Salaries of Public Officers

The Tissa Devendra Commission report published in mid-2002 carried out a detailed review of the public service salary structure and related issues.

The trade unions and the opposition have been calling for the implementation of the recommendations in the report. Budgetary constraints, however, did not permit this. With the improvement of the economy we are now in a position to do so on a phased basis during the coming three years.

As part of this process, I will be appointing a Salary Review Committee to review the recommendations in the Devendra report to rationalise and amalgamate salary scales and to enhance selected scales because of anomalies or changes in circumstances. The Committee will also study options for rationalisation and closure of government entities. Its recommendations will be proposed for implementation with the next budget.

Meanwhile, commencing January 1, 2004 the Government will grant every public officer a monthly increase of 10% of his present salary or Rs. 1,250, whichever is higher. This will also apply to employees of the Police Department, the armed forces and corporations. Further benefits will follow in 2005 and 2006.

The Rs. 1,200 interim allowance granted in 2000 and the Rs. 1,000 or 10% of salary interim allowance granted in 2001, will be incorporated into the base salary of each scale by 2006. With this incorporation, lower level public sector employees will be on salary scales substantially higher than those recommended in the Devendra report. Consequently their pensions will also be higher. The higher increments recommended in the Devendra report will also be introduced by 2006, in stages.

The rate of movement to the full Devendra scales will be subject to the condition on voluntary retirement that I will speak of shortly.

Where public sector or corporation employees in any individual sub-sector have been granted increases in salaries or allowances during the past three years, beyond the allowances granted to all public officers in 2000 and 2001, these increases will be set off to calculate the additional monthly amounts to be paid to such employees during 2004, 2005 and 2006. This process will eliminate the differences that have arisen between the salaries of such employees and public sector employees as a whole.

The cost of the 2004 salary increase is estimated to be Rs. 12.5 billion.

Voluntary Retirement Scheme

We do not intend to implement the 30% reduction in the lower and middle grades of the public sector recommended in the Devendra report without a suitable safety net, since there will be hardships due to the resultant high unemployment. To overcome this problem we will introduce a Voluntary Retirement Scheme, or VRS, on January 1, 2004 with a suitably designed staggered compensation package which ensures that employees who accept the VRS will continue to receive monthly extragratia payments equivalent to their salaries and allowances.

An employee accepting the VRS will receive an up front payment equal to one year's remuneration, consisting of the retiring salary and the 2000 and 2001 allowances. The employee will also receive monthly payments equal to his salary at retirement plus the 2000 and 2001 allowances until he reaches the retirement age of 55 years. Thereafter he will receive the applicable pension.

Employees will also be relieved of Rs. 24,000 of outstanding distress loans at the time of retirement. Any balance outstanding on loans will be recovered from future monthly payments, with a one year grace period without deductions.

Employees with no distress loans or loans less than Rs. 24,000 will be paid equal monthly payments over two years to that they enjoy the same total benefit as those whose loans have been written off.

Our target is to reduce 100,000 public sector employees by 2004 and a further 200,000 by 2006 from the lower and middle income grades. Numerous indirect savings will accrue to the Government as a result.

The cost of the up front payment for the staggered compensation package is estimated to be Rs. 8 billion, of which Rs. 2 billion is already included in the voted budgetary estimates.

Increase in Pensions

It is only fair and just that pensioners be included in any revision in public sector salaries. Therefore pensioners will be granted a 10% increase in pensions from January 1, 2004. This is the largest increase granted to pensioners during the past 10 years.

This increase will cost the Government Rs. 2.5 billion.

Further the recently setup Pensions Reforms Office is presently studying various options to address anomalous situations where persons who have been retired for many years receive substantially smaller pensions than lower grade employees who retire later, because of salary scale changes that have occurred since the retirement of the first group.

Enhancement of Interest Rates on Deposits by Senior Citizens

In view of the difficulties faced by retirees and senior citizens because of the reduction in deposit interest rates special deposit schemes have been introduced through the National Savings Bank and the two state commercial banks for senior citizens, where such persons receive a higher rate of interest on deposits.

Unemployment Benefit Insurance Scheme

The Government will provide Rs. 1,000 million as initial funding for an unemployment benefit insurance scheme to be set up during the coming year. When fully operational the Scheme will be funded by contributions from employers and employees.

Housing Loan Scheme for Public Sector Employees

A loan scheme for public servants, in addition to the existing scheme, will be facilitated by the Government through the National Savings Bank for the purpose of construction, purchase, extension or repair of a house, purchase of land to build a house, or to repay a loan obtained from a recognised financial institution for housing purposes. The maximum loan available will be Rs. 1 million, the interest rate 9.5% per annum and the repayment period a maximum of 20 years. Instalments for repayment will be recovered from the salaries and remitted to the Bank.

Increase in Fertiliser Subsidy

We propose to increase the subsidy given to fertiliser from Rs. 2,000 million to Rs. 3,000 million from January 1, 2004. This will mean that the total subsidy on a bag of urea will increase from Rs. 300 to Rs. 450. Rs. 3,000 million is the largest fertiliser subsidy granted in the last decade.

Agricultural Loan Relief for Farmers

The two state banks have, at the request of the Government already instituted a scheme whereby farmers who have obtained loans from these banks for agricultural purposes and found it difficult to repay these loans due to crop failures and other valid reasons will be granted relief by the banks. Under the scheme farmers will be able to reschedule their loans for repayment over six growing seasons and the interest rate on the rescheduled loans will be a very attractive 4% per annum.

Garment Sector Productivity Improvement

A garment sector productivity improvement project will be implemented in 2004 through the Joint Apparel Association Forum. This will include a grant towards an international campaign to promote the industry and an interest free loan for the training and development of productions staff. The cost of this project is Rs. 150 million.

Agri-Business Development Fund

Continuing funding will be provided to the Agri-Business Development Fund from which grants will be given to private sector entities that qualify, for the development of new technologies and practices in agriculture.

The cost of this programme is estimated to be Rs. 100 million.

Development of the Milk Industry

Commencing January 1, 2004 incentive payments of Rs. 2 per litre and higher will be provided to companies processing milk who collect a minimum 5 million litres of milk per year. The tariff adjustment will provide an additional incentive. These incentives will increase milk collection and develop dairy farming.

This programme is estimated to cost Rs. 60 million.

The Government also intends to introduce a milk feeding programme for needy pre school age children. A committee will be appointed to study issues relating to the distribution of milk and lactose intolerance among children and make recommendations on how to implement a suitable milk feeding programme.

Rs. 5 million has been allocated for the work of the Committee and for setting up a pilot programme based on the Committees initial findings.

Technology Improvement for Small and Medium Industry

A project to bring about technology improvements in small and medium enterprises will be implemented.

A total of Rs. 1,000 million in funding has been budgeted for this project, of which a sum of Rs. 900 million will be obtained from previous small and medium industry guarantee scheme funds collected by the Central Bank.

Development of Rural Telecommunications

In keeping with the decision taken by the Economic Policy Committee of the Cabinet and the directive issued previously, starting April 1, 2003 telephone operators were required to pay a prescribed charge to the Vishwa Grama Fund. This fund will be used for the development of rural telecommunications.

Streamlining of Departmental and Statutory Funds

There are more than fifty statutory and departmental funds within various Government entities without adequate performance reporting or auditing and outside budgetary control. Income of these funds are from fees, charges, fines and donations and are estimated to be in excess of Rs. 10 billion per year. These funds will be rationalised, merged and closed as appropriate. The funds will be brought under budgetary control and performance reporting and auditing systems will be introduced.

Visas for Foreign Nationals

At present the Government grants citizenship to foreign nationals who meet specified criteria for investment in the country. This process is complicated by issues such as dual citizenship, which arise in this context. To avoid such complications, forty nine year long stay visas will be granted to non-residents who meet specified criteria for investment and deposits in the country.

Five year resident visas will be granted to professionally qualified persons in identified categories where a shortage of such professional skills exists in the country.

Budget Forecasts

Mr Speaker, in Table 1 of Annex 7, I provide details relating to the expected budgetary performance for the year 2003.

Table 2 in the same annex provides a summary of the budgetary estimates for 2004. These estimates have been prepared on a conservative basis assuming that we will be able to realise only Rs. 332 billion in revenue for the year. We have done so because of the uncertainties associated with the revenue impacts of some of the new tax proposals and the performance in revenue collection. If we are able to collect higher revenues, the additional amount will be spent on capital expenditure not identified or included in Table 2.

The fiscal deficit for 2004 is estimated to be Rs. 138 billion, or 6.8 per cent of the projected GDP. The net domestic borrowing requirement for the year is projected to be Rs. 65 billion. Table 3 provides summary details relating to the gross borrowing requirements for 2004.

My Thanks

Mr. Speaker, the preparation of this budget has required much effort, which was compounded by the delay caused by the prorogation of Parliament. I have received assistance from many people in this effort. I would particularly like to thank the Hon. Deputy Minister of Finance and the officials of my Ministry for the inputs they have provided into the process.

The staff attached to my office worked diligently and I thank them. The Hon. Prime Minister made a number of useful suggestions which have been incorporated into the budget. Trade chambers, professional organisations, trade unions and others forwarded suggestions for the budget, which we studied carefully and incorporated where appropriate. Finally, I wish to thank you Mr. Speaker, and the staff of the Parliament who have arranged the logistics for today.

Conclusion

Mr. Speaker, I concluded my last Budget Speech by asking that we be judged by the results that we deliver. As this House is well aware, on assuming office the challenges before this Government were both formidable and complex. Our legacy was an economy that had been battered and bruised. We have strived hard to resurrect it by adopting a three pronged approach of promoting peace, macro economic stability and growth, and employment creation.

We have achieved much as shown by the figures I gave at the commencement of my speech. On peace, we have advanced to a point where we need considered yet decisive action to pursue the interest of all the people of Sri Lanka.

On macro economic stability, our record of delivery has been enviable. Fiscal prudence has brought the country lower inflation, reduced interest rates, a stable exchange rate and a strong external reserve position. Mr. Speaker, we have also created the foundation to place the economy on a path of higher growth and employment generation. Both Sri Lankan and foreign investors have begun to show greater confidence in our economic prospects.

There is, however, much more that needs to be done. It is important that we build on the results that we have delivered. The challenge before us is to deliver the peace and prosperity that all the people of this country desire. We have constructed a strong foundation. The Government possesses the vision and the strategy, as well as the conviction and commitment to bring about a brighter future for this and future generations of Sri Lankans.

It is the Government's wish, and I have no doubt also that of all right thinking people of Sri Lanka, that no further political crises be created which will derail the existing process, and that political issues, if any, be sorted out by objective consultation and decision. This, the nation is entitled to demand from all those who hold the reins of government.

1.2 Losses incurred in any trade, business, profession or vocation

With effect from April 1, 2004, losses incurred in any year or losses brought forward from previous years, by any person, will be available for set off against income earned in any year to a maximum limit of 35% of the total statutory income in that year.

All current limitations on the carry forward of losses will be removed. The existing provisions with regard to the carry back of losses, and to special conditions for certain sectors, including losses on horse racing, leasing, FCBU onshore transactions will also be removed. Capital losses will be abolished with effect from April 1, 2004.

Further, losses generated by way of intra group transactions, which have no economic substance will be disallowed.

Annex 2:Levy on cellular mobile subscribers

The Government will impose an annual levy of Rs. 300 with effect from January 1, 2004 one every cellular mobile subscriber (defined as the holder of a telephone number starting with the prefix 07 as specified in the National Numbering Plan and which is capable of receiving calls, even if not capable of originating calls for the entirety of the 12 month period).

The holders of the relevant number ranges beginning with 07, namely the mobile operators licensed under Section 17 of the Sri Lanka Telecommunications Act, No. 25 of 1991 as amended, shall collect the annual levy and remit it to the Telecommunications Regulatory Commission (TRC) in the following manner:

a) In respect of all existing mobile subscribers, within thirty (30) days from the commencement of the levy on 1 January 2004;

b) For any new subscriptions initiated on or after January 1, 2004, within seven (7) days of the end of the quarter within which the services have been initiated;

c) For any subscriber referred to in categories (a) and (b) above, at the expiry of every 12 month period, within seven (7) days of the end of each quarter within which such 12 month period expires. Each operator shall submit a summary of the total of active mobile subscribers as defined above and the number of disconnected subscribers on a quarterly basis together with the payment of the aggregated levy to the TRC within seven (7) days of the end of the quarter. Payment with regard to item (a) above together with a summary of subscribers shall be submitted to the TRC on or before February 7, 2004.

The TRC shall submit a payment for the total levy collected with a consolidated statement of the information referred to in the previous paragraph, to the Treasury, within fourteen (14) days of the end of the quarter. Payment with regard to item (a) above, together with a summary of the subscribers, shall be submitted to the Treasury on or before February 15, 2004.

Annex 3:Rationalisation of tax exemptions and reliefs

3.1 With the exception of international and multilateral organisations, other income (excluding donations and grants) of institutions approved under section 8(a) of the Inland Revenue Act, in excess of Rs. 200 million will be liable to tax at 10% with effect from April 1, 2004. Dividends and interest earned by such institutions will continue to be liable to the withholding tax.

3.2 Any exemption currently available on Dividends declared by companies will be withdrawn with effect from April 1, 2004 with the exception only of those declared by companies which have entered into an agreement with the Board of investment or which qualified of exemption under the relevant sections referred to in section 11(f) of the Inland Revenue Act before 6 November 2002, which will be governed by the terms of those agreements and provisions.

3.3 Profits and income earned from the re-export of stones, metal, petroleum, gas or other items as have been approved that have been imported, fees received by employment agencies from the Sri Lanka Bureau of Foreign Employment; and from the operations and maintenance of facilities for the storage of goods and commodities brought into Sri Lanka for re-export will be liable to tax at 10% with effect from April 1, 2004.

3.4 Profits earned from the sale of shares (including rights, bonuses and warrants and shares in BOI companies) that are issued by any company will be liable to tax at 15% with effect from April 1,2004.

3.5 Off shore transaction of the Foreign Currency Banking Unit of any Bank operating in Sri Lanka, which had previously been exempted, will be liable to tax at 20% with effect from April 1,2004 (Year of Assessment).

3.6 The exemption granted to any royalty payment made to a non resident person will not be available to any company that signs an agreement with the Board of Investment on or after April 1,2004.

3.7 The exemption granted under section 21 for the construction and sale of houses will be removed with effect from April 1, 2005, since this activity is now covered under section 21C. 3.8 A new tax regime will be introduced with effect from the Year of Assessment 2004/05 for any person who has obtained a development licence under the Petroleum Resources Act, whereby the operation would be liable to tax at 15%. Any foreign based service sub contractor would also be liable at 15%.

3.9 Other amendments would be made to the existing provisions to bring them in line with the incentives available under the Board of Investment Law and to rationalise the existing reliefs under the Inland Revenue Act with effect from April 1,2004:

3.9 1

i)Animal husbandry; deep sea fishing; manufacture of machinery; and export or deemed export of services to be included as "Specified Services" for section 21 A of the Inland Revenue Act;

ii) The minimum investment to qualify under this section to be increased to Rs. 10 million for a new company and Rs. 50 million for an existing company; 3.9.2

i) Application of relief available under section 21A, for investments in excess of Rs. 250 million to be limited to pioneering projects;

ii) Where the investment is in excess of Rs. 1 billion, relief to be aligned with that available under section 21B;

3.9.3

i) The upper limit of Rs. 50 million imposed for relief available for Small Scale infrastructure under section 21C to be removed;

ii) Redevelopment of housing schemes to be included for relief under section 21 C 3.9.4 Exemption available under section 21 D to any undertaking involved in Research and Development to be limited to the income earned from that activity only;

3.9.5 Relief under sections 21 F and 21 G for expansion of existing businesses would be extended to 31 December 2004; and

3.9.6 In order to include other benefits available under the BOI law, to provide relief under the Inland Revenue Act for-

a. the acquisition of assets of existing undertakings involved in large scale infrastructure projects.

b. regional operating headquarters for specified activities,; and

c. export trading houses within a Free Trade Zone

Annex 4: Measures to improve tax administration and compliance

4.1 Non payment of taxes Currently interest and penalty are combined into one charge for non payment of taxes. With effect from April 1,2004, the penalty for non payment to be charged at a maximum of 10%. The penalty to be charged on the following basis:

a. Where persons have accepted liability and not paid: a 5% charge with effect from the date on which the tax is due and an additional 1% per month thereafter.

b. Where taxes have been in dispute: a 10% charge on the due date

c. Persons who have not filed returns: a 10% charge with effect from the date on which payment is due under an Assessment

Interest on taxes in default will be computed as follows and may not be waived - 1st 12 months at 1.0% per month or part thereof; and Thereafter at 2.0% per month or part thereof.

Where the tax payable by any person has been in default for more than 3 years such person could be liable to a term of imprisonment of a period not exceeding 3 months.

4.2 Payment under the self-assessment scheme

For payment of income taxes under the self-assessment scheme, the 1st and 2nd instalments of any year may be estimated on the basis of the tax payable for the previous year of assessment or the year immediately preceding that year of assessment. Any person, whose income had previously been exempted from income tax and becomes liable on the expiry of the tax holiday, will have to estimate liability on the basis of the income earned in the preceding years that had been exempted from tax.

4.3 Registration with the Inland Revenue Department

All companies and partnerships and any other businesses that are registered with the Registrar of Companies or the Registrar of Business Names shall be required to register with and open a file with the department of Inland Revenue and file an annual return of income together with the relevant statements of accounts for each Year of Assessment commencing from the Year of Assessment 2003/2004, whether or not they are liable to pay any tax.

A scheme for submission of confirmation will also be formulated.

All persons who are liable to deduct and remit any Withholding Tax under the Inland Revenue Act will be required to register with the department and furnish monthly returns along with the payment.

The existing regulations for the submission of information to the Department of Inland Revenue will be updated.

4.4. Vat

In order to encourage BOI companies that are in the business of providing or producing exempt supplies, to purchase their capital items at project implementation stage, from local manufacturers, a negative list of items that will not be entitled to any exemption from VAT at the point of import will be introduced. Any refund of excess input tax would be made after 6 months from the end of the taxable period other than for zero rates supplies and new businesses registered under Section 22 (7) of the VAT Act.

Annex 5: Computation of taxes

5.1 Rationalisation of the determination of statutory income that has been depreciated and is replaced either 6 months prior to or 6 months after the disposal of such asset.

At the time of disposal of any of the above assets, the total sale proceeds to be taken into consideration in determining the profit or loss on disposal.

b) Leased assets

In the books of the lessor, where the leads item is subsequently transferred to the lessee, the transfer will be valued at the deemed market value as at the date of transfer. In the books of a lessee, where any asset has been leased and the lease rental has been allowed as a deduction either in part or in full, then any proceeds on the subsequent sale of that asset, after acquisition, would be treated as business income.

c) Costs incurred by a business on behalf of any employee

The current provisions are the ability to claim the following expenses will be amended with effect from April 1,2004.

i) The cost of providing residence or assets to be used at the residence of any employee;

ii) Domestic and private expenses of partners and other employees of any business;

iii) Any property, movable or immovable, given by the employer to the employee at a price that is less than market value;

iv) Any loan or other advance or credit given to an employee and subsequently written off in the books of accounts;

v) Where any employee is provided with more than one vehicle, any expenditure incurred in respect of the additional vehicle (s). This same provision will also apply to any vehicle provided to any non executive director or other person, who is not an employee of the company;

vi) Any additional payments made by an employer towards a super annulation fund or scheme to be allowed as a deduction if certified by an actuary.

d) Management Fees

The current restriction on the payment of management fees to be removed.

e) PAYE

Where any director or chairman of the Board of Directors of any company receives any remuneration which is not included in the payroll for purpose of computing PAYE in accordance with the Inland Revenue Act, then a 10% tax to be charged on such remuneration which amount may be set off against the ultimate tax liability for that year of that director but which is not refundable.

Where any payment is made to a non executive director of the company, a 10% tax to be charged on the total remuneration payable by the company to such non executive director which may be set off against his ultimate tax liability for that year but which is not refundable.

Valuation for benefits provided to employees to be amended as follows:

Private use of motor car, jeep or van Rs. 7500 per month

Private use of a motor cycle Rs. 2,000 per month

Residence to directors or senior executives Rs. 120,000 per annum. (Senior executive to be identified as an employee drawing a monthly base remuneration in excess of Rs. 50,000).

5.2 Assessable and Taxable income

a) Amendment to the Inland revenue Act with regard to the Return of Income

The Inland Revenue Act will be amended to remove the computation of Assessable Income in the Return of Income. Only Statutory Income and Taxable Income will be retained.

b) Computation of Taxable Income

The value of donations, expenditure on housing, provident fund contributions and insurance premia, which may be claimed to arrive at Taxable Income to be revised as indicated below: i) Donations made to the Government, Government Fund and Funds of the Local Government, Provincial Councils and Universities to unlimited value (if in cash) or to a limit of Rs. 2 million (if in kind) in any year, with the ability to carry forward any surplus;

ii) Donations in cash to any approved charity: contributions not exceeding 12% of salary to any approved Provident Fund: Premia on life or medical insurance - to a maximum of Rs. 75,000 in any year (all combined) with any surplus not being available to carry forward;

iii) For any individual (subject to other provisions currently in force)

a) expenditure incurred in repayment of any approved housing loan with any surplus not being available to carry forward; and/or

b) any expenditure incurred, out of his or her own funds for the construction of a first house with the ability to carry forward any surplus for a maximum of 9 years to a maximum of Rs. 100,000 in any year,

iv) 50% of the cost of any investment, not less than Rs. 500,000, in new shares of a Venture Capital Company, which is exempt from income tax, with any surplus not being available to carry forward;

v) any balance outstanding on the Investment Tax Allowance to be available for set off only until 31 March 2005;

vi) The amount to be claimed in respect of items (ii), (iii) and (iv) will each be subject to a further limit of 10% of the Statutory Income.

5.3 Other provisions to simplify and rationalise the existing law.

Sources of income to be extended to include winnings from lotteries, betting and gaming. The definition of 'business' to include forestry, Any rental income earned by a company to be treated as business income.

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