Budget 2008

The text of the Budget 2008 speech delivered in Parliament yesterday by President Mahinda Rajapaksa, who is also the Finance Minister.

Part I

Introduction

1. I am presenting the third budget of our Government to this House with great respect. I am tabling the Fiscal Management Report - 2008, Revenue and Expenditure Estimates and publications containing information about the economy. I am also tabling a Progress Report of last year’s Budget proposals, as a part of this Speech.

2. As a result of severe terrorist threats that were prevailed for the last 25 years, the impact of neglected infrastructure development and failure to strengthen the domestic economy, we inherited an unstable economy, a backward agriculture sector, and a country in which development was privileged to a limited area.

I presented ‘Mahinda Chintana’ Vision for a New Sri Lanka - A Ten Year Horizon Development Framework

 2006-2016’, to this House along with my previous Budget proposing to strengthen the domestic economy, as an alternative to ‘Regaining Sri Lanka’ which undermined the role of the public sector and instead relied on privatisation and globalisation to solve all economic problems.

As expected, the journey to build a New Sri Lanka was a challenging one. However, the revival of local entrepreneurs and products is encouraging.

3. The ruthlessness and armed power of terrorists, the continuous brutal human massacres and colossal damages caused to public property, arms and powerful explosives detected by the Security Forces and the armories and many ships carrying weapons which were destroyed through joint operations launched by the Security Forces, demonstrate the magnitude of the threat faced by our country.

Despite the armed strengths and the brutal actions of terror, we were able to rescue the entire Eastern Province, including areas that were in the control of terrorists’ consequent to the so-called ceasefire agreement, through a successful humanitarian operation.

We were also able to control the smuggling of arms into the country and restrain illegal fund raising activities undertaken by the LTTE, by strengthening the legal framework.

We also managed to curb overseas operations of the LTTE with the assistance of many countries.

With the attack launched on the Anuradhapura Air Force Camp, the terrorists who are desperate and confined to their camps after having faced continuous defeats, again demonstrated that they will never be ready to surrender arms and agree to a democratic political settlement.

In this background, we have no alternative but to completely eradicate terrorism, if an environment in which a political solution upholding human rights in the interest of those who are still in the grips of terrorists is to be created.

4. In addition to successful facing terrorist threats from the very beginning, we have also been able to surprise opponents who predicted that the economy has collapsed, by sustaining a high average economic growth rate of 7 per cent over the last 2 years.

This demonstrates that sustained resilience of our economy and it is in fact the highest growth rate recorded in our country in 30 years. Our 10 year Development Framework highlighted the importance of prioritising infrastructure development, if we are to achieve an economic growth in excess of 8 per cent.

In this backdrop, without permitting security conditions or financial constraints to be a barrier, we took up the challenge to build new power plants, highways, drinking water schemes, ports and airports, irrigation schemes and to strengthen railway and transport facilities.

Although some take pride by boasting that a peaceful environment for development was created during 2002-2004 regime and that resources were raised by pruning public services and welfare expenditure and also by privatising public enterprises, this House should not forget that not even small development activities such as construction of rural roads, have taken place during that period.

5. Despite economic and political constraints, we dedicated to ensure public welfare. We introduced the fertiliser subsidy for the benefit of small farmers, Gama Naguma - Jathika Saviya targeting Samurdhi beneficiaries and the poor and substantial salary and pension increases for public servants and pensioners.

Renewed expectations have been created in agricultural sector by offering higher prices for crops such as paddy, onion and maize. 3,800 Tamil teachers were recruited to be deployed to schools in the Estate Sector. Enhanced welfare facilities were granted to displaced persons, on a priority basis.

6. We paid constant attention to the rising cost-of-living. The credit growth of the Government, public enterprises and the private sector has resulted in increasing the money supply by about 19 per cent, and international price escalations of gas, fuel, milk powder and wheat flour have caused steep price increases of such items, while also increasing production and consumption expenditure.

In this background financial policies were directed to promote domestic savings and curtail the demand for credit while tax concessions were granted to stabilise prices of essential commodities such as rice, potatoes, onion and sugar to take control of the situation.

Economic Trends

7. Our country was confronted with formidable challenges during 2006 and 2007, as was not experienced in the recent past. The import cost of oil, wheat flour, milk powder and other food items has increased from US$ 2,000 million in 2004 to US$ 3,500 million. Security related expenditure to counter terrorism and protect public life and property has increased from Rs. 63 billion to Rs. 117 billion.

This expenditure was directed to strengthen the i infrastructure facilities of Security Forces and there is an increased understanding that strengthening national security is an essential investment for long term development.

We must admire the progress achieved by our Security Forces while containing security expenditure below 3.5 per cent of GDP, since many countries spend over 5 per cent of GDP on their defence.

8. The tourism and fisheries industries which suffered a setback due to the tsunami were further affected due to terrorist activities. Labour disputes and vagaries of weather caused the tea production to decline by about 10 per cent.

However, as of now the tourism and fisheries sectors as well as the tea industry are showing a positive growth. High prices for paddy, onion, potatoes, maize, dairy and livestock products and for exports such as tea, rubber, cinnamon and pepper, have contributed towards a growth in such sectors.

9. The increase in apparel exports from US$ 2,800 million to US$ 3,300 million demonstrates the capacity of the apparel industry to face global competition. Consequent to the incentives offered by the past two Budgets, exports of gems and jewellery have increased by 20 per cent while home and office furniture production has also increased by 15 per cent.

The accelerated growth that can be seen in the printing and packaging, footwear and leather industries is commendable. There is also a notable growth of investments in these sectors.

10. A unique trend that can be witnessed in the service sector expansion is that the users of telephones have exceeded 7 million, and the usage of motor vehicles, motor bicycles and three wheelers have increased up to 7 million. Investments taking place in the telecommunication sector have exceeded US$ 300 million. Public and Private transportation is being rapidly expanded.

Transport facilities have witnessed a substantial improvement with the introduction of 2,200 new buses through the CTB and the new railway coaches. The annual growth recorded in the port, shipping and aviation sectors as well as in international and domestic trade, is in excess of 7 per cent.

Further, the growth in the banking and financial sectors and education, health, tourism and other services provided by both private and public sectors have also increased in excess of 7 per cent.

The construction activities undertaken islandwide in roads, power, water supply, irrigation, housing and urban development, have contributed to a growth in excess of 9 per cent in the construction sector.

11. While the economic growth achieved in 2006 was 7.7 per cent we have managed to achieve a growth of 6.3 per cent during the first 6 months of this year despite setbacks to the agricultural and tourism sectors. It is estimated that a 7.2 per cent growth could be achieved in the second half of this year.

As such, the per capital income of our country will be in the range of Rs. 165,000 (US$ 1,500). The unemployment rate which was 8.3 per cent in 2004 has declined to 6.2 per cent. As of now country’s official foreign reserved have increased to US$ 3,200 million.

Foreign Income and Expenditure

12. It is important to note that our foreign income has increased by 10 - 12 per cent. Agricultural exports have increased by 9 per cent while industrial exports have also increased y 9 percent. Earning from tea exports could reach US$1 billion mark, by exporting high value added tea and by targeting new markets.

Opportunities have been created for the apparel sector to earn net foreign exchange in excess of US$ 2.5 billion.

Opportunities have also been created to enhance export earnings from rubber and rubber based products, spices, fruit and vegetable, gem and jewellery, home and office furniture, footwear and leather products as well as to ensure accelerated income from port, shipping and aviation activities.

The value of investment goods such as machinery, equipment, building material etc. has increased from US$ 5,300 to around US$ 7,500 million underscoring that their is sustained investments on economic development and exports.

13. Foreign investments are estimated to be around US$ 650 million, whereas it was US$ 250 million around 2 years ago. Remittance from those employed overseas has increased up to US$ 2,700 million, this year.

It is apparent that improving skills of those seeking overseas employment and placing greater emphasis to supply professional services could earn foreign exchange in the excess of US$ 4 billion. TheTourism industry could also be transformed into a business that generates income in excess of US$ 1 billion.

14. Import cost during this year is likely to be around US$ 12,000 million. The cost on oil, fertiliser, wheat flour, milk powder and sugar increasing from US$ 1,988 million to US$ 3,150 million, has heavily influenced this situation.

Food and energy security could be ensured by switching on to alternative power generation avenues and through local food production, to reduce import costs. Since import substitution industries should also be promoted along with export promotion, many incentives have been extended for such industries to develop within a competitive environment.

Government Finance

Government Expenditure

15. We all remember that our economy was managed for a considerable period of time on the basis that the public sector is not important. Many public services deteriorated considerably since vacancies were not filled. Salary anomalies caused complex problems among public servants.

Government expenditure has also increased as a result of resolving such problems, priority given to expand education, health and welfare facilities, substantial capital expenditure being earmarked for infrastructure development and to strengthen national security.

In this background our policy is to mobilise public servants to improve the efficiency of public expenditure and to ensure maximisation of benefits of such expenditure, at least cost and waste, as well as free from corruption.

I feel that this is a more meaningful approach although it is a more difficult than what was planned under Regaining Sri Lanka Strategy, which aimed at pruning the public services.

Government Income

16. We initiated action to rectify corrupt practices and shortcomings that prevailed in the revenue departments, fill vacancies, provide local and foreign training for the staff, and formulate relevant rules and legislation.

We have undertaken the computerisation process of the Inland Revenue Department involving a substantial investment. Government revenue has increased from Rs. 311 billion in 2004 to Rs. 600 billion in 2007, with a record improvement in Income Tax from Rs. 41 billion to Rs. 112 billion Government revenue reached 17 per cent of GDP which is the highest revenue recorded in 7 years.

Budget Deficit

17. In the two Budget Speeches I have already presented, I explained the need for a medium term framework to be able to bring down the Budget deficit and public debt in a systematic manner.

This process has enabled us to reduce the Budget deficit which was 8.2 per cent of GDP in 2004 to 7.2 per cent this year. It is expected that public debt which was 105 per cent of GDP in 2004 could be reduced to 90

 per cent this year.

Continuous growths in government revenue, controlling public expenditure and maintaining the economic growth at a high rate of around 7 per cent, have brought about these favourable trends. During the last two years, we have further strengthened our unblemished reputation relating to timely debt servicing.

18. Honourable Speaker, considering the limitations prevalent in the domestic market to mobilise fund required for development projects, we initiated action to raise US$500 million from the international capital market.

The international bond issue being oversubscribed by more than 3-fold, despite unnecessary obstructions, distorted publicity and intimidations, confirms the confidence placed by international capital market and investors on the future developments of our country. This has reduced domestic borrowing at an annual interest rate of around 17 per cent and has enabled to strengthen the exchange rate.

Economic Reforms

Public Sector

19. Parallel to the challenging task being carried out by the National Salaries Commission to rationalise public sector salaries and cadre, an Administration Reform Committee has also been set up to improve the public service delivery mechanism undertaken by various departments and agencies.

Measures have been taken to provide closer public service to the people through mobile secretariats being conducted by the Ministry of Public Administration and through the issuance of birth, marriage and death certificates electronically.

Special programmes have been introduced by the Ministry of Labour Relations to improve productivity.

20. Priority was given to implement new projects to revitalise Ceylon Transport Board and Railways services which were deteriorating, and Ceylon Electricity Board which was pushed towards financial crises due to the reliance place on fuel based power plants.

We also proceed with the expansion of the Colombo Port transferred back to Ceylon Petroleum Corporation its filling stations which were earmarked to be privatised and adjusted fuel prices to prevent the Corporation from getting into a financial crisis.

We recommenced operations of the Paddy Marketing Board and Fertiliser Corporation. We have given priority to strengthen the CWE and the cooperative system which is capable of being used to intervene in the supply of essential commodity items.

In addition to strengthening State Banks and consolidating Regional Development Banks. Lankaputra Development Bank was set up to extend financial assistance to ordinary entrepreneurs who were affected by the privatisation of development banks.

Sri Lanka Savings Bank was set up mainly to extend relief to those affected by the closure of Pramuka Bank, National Insurance Trust Fund was set up to improve insurance related activities including reinsurance and Mihin Lanka - the new budget airline was set up to facilitate foreign travel of low income travellers. The process has commenced to re-engineer the management of SriLankan Air Lines, in a manner favourable to the country.

21. The Committee on Public Enterprises has reported to this House, several reasons which have led to the weakening of public enterprises. Action has been taken to strengthen the management of these enterprises by addressing shortcoming and legal action has been initiated against those who are alleged with corruption and fraud.

Legal Reforms

22. Recognising the need to have a legal structure that facilitates country’s development, a new Companies Act and several other financial related statutes were introduced.

Action was also taken to build modern legal infrastructure with the construction of several Court Complexes islandwide provide computer facilities to court houses, launch a legal website LawNet and provide training to the members of the judiciary and legal profession.

The process of administration of justice was made more efficient with the setting up of Regional High Courts of Appeal and action is being taken to simplify business related systems and procedures.

Tax System

23. With wide reforms undertaken in the tax administration, revenue related legislation arising from Budget Proposals continued to be enacted in a timely manner, loopholes in the tax system were addressed, staff were given training opportunities, an Ombudsman was appointed to resolve issues associated with the tax administration, a Code of Conduct and Ethics was introduced for tax officers and Customs officers, the audit mechanism was expanded and measures were taken to interlink Customs and Inland Revenue Department using technology.

The number of tax files opened since 2006 is 79,786 and it is admirable to note that 3,941 of such files are those of public servants, of which 321 are those of officers of the Inland Revenue Department.

The Court Case filed pertaining to the large scale VAT fraud that has taken place during the 2002-2004 regime, is being heard by the High Court of Colombo and a separate investigation is being conducted by a 3 member Presidential Commission of Inquiry, chaired by a retired member of the judiciary.

Tourism

24. Significant reforms took place in the tourism sector with the introduction of a new statutory framework which enables to mobilise all stakeholders in the industry to develop the sector and thereby create an overall framework within which the tourism industry could be strengthened as a private-public partnership.

Territorial Sea Limit and Oil Exploration

25. Steps were taken to expand the limit pertaining to territorial waters of Sri Lanka which is currently 200 km from the coast to 800 km and associated work is expected to be completed next year. Arrangements are in place to select investors and commence preliminary work on oil exploration within next year.

Regional Trade Relations

26. Further progress was made in achieving mutual economic benefits from the Free Trade Agreements entered into with India and Pakistan and in the efforts to remove Custom duties and other trade barriers in the last phase.

Duty revision and under the Indo-Sri Lanka Free Trade Agreements will be implemented in 2008. As a result of discussions held during my state visit to the People’s Republic of China, availing preferential market access for Sri Lankan goods to China is being explored.

‘Bim Saviya’

27. A programme by the name ‘Bim Saviya’ was initiated to clear impediments on land titling, in terms of which a 10 year action plan was drawn to enable the registration of around 10 million blocks of land in 332 divisional secretariat divisions and also to computerise related information. Funds have been allocated to enable the commencement of registration of 75,000 such blocks of land situated in 10 districts, during 2008.

Procurement Audits of Major Purchases

28. As proposed in the last Budget, to conduct special audits by the Auditor General’s Department risk based audits have been commenced on major procurement of food, medicine and fertiliser and public expenditure management is being strengthened by expanding such audits. Special attention is being given to introduce programme to minimise expenditure on telecommunication facilities, water, fuel and vehicle maintenance.

Expenditure Priorities

Expenditure on Welfare and Subsidies

29. We have increased provisions for various welfare expenditure and subsidies, targeting low income people.

The sum allocated for medicines for Government Hospitals was increased from Rs. 11,000 million to Rs. 13,000 million while the allocation for school uniforms, text books, scholarships, mid-day meal and school bus services was increased from Rs. 4,500 million to Rs. 6,000 million.

30. It is planned to make allocations to increase the subsidy for Samurdhi and kerosene from Rs. 9,600 million to Rs. 10,850 million and to provide nutritional food to expectant and lactating mothers from Rs. 1,775 to Rs. 1,875 million, it is also proposed to provide food and other welfare facilities to families displaced consequent to terrorist activities at a cost of Rs. 3,860 million. While the allocation for the fertiliser subsidy has been increased from Rs. 10,000 million to 15,000 million, it is expected to encourage the usage of organic fertiliser.

Development Expenditure

31. Under the theme Nilla Pirunu Ratak - Pivithuru Parisarayak’, priority is given to preserve our environment. Special projects are to be implemented to ensure proper disposal of garbage. Allocations have been made to expeditiously conclude irrigation projects such as Moragahakanda, Deduru Oya, Menik Ganga, Rambukkan Oya, Yaan Oya, Uma Oya.

In the allocation of funds to the health sector, priority is to improve the hospital system and to provide official quarters for doctors and in allocating funds for education, upgrade facilities in universities to increase the annual student intake to 20,000 and to develop high calibre professional education centres.

It is proposed to spend around Rs. 106 billion as overall expenditure in the education sector. Preserving water resources and forests as well as ensuring free healthcare and education, are the priorities in Mahinda Chintana; Vision for a New Sri Lanka-10 Year Horizon Development Framework.

The fact that those who planned to privatised such assets are now making efforts to mobilise masses to protect such assets, proves that our policies are in the right direction.

32. Priority was given to develop the transport sector by constructing roads and main bridges, import railway engines and carriages, improve railway lines and the signal system as well as to provide additional buses.

By allocating funds to develop towns such as Kottawa, Kaduwela, Kadawatha and Dambulla, construct the International Convention Centre and administrative complex at Hambantota and Court complexes and District and Divisional Secretariat, and infrastructure for natural disasters management, it is aimed at developing an infrastructure framework capable of facilitating widespread national development.

33. We took the brave initiative and made provisions to expeditiously construct the Upper Kotmale and Norochcholai power projects which suffered delays owing to political sensitivities and also to commence development work of Colombo and Hambantota Ports and Weerawila Airport while improving drinking water facilities in urban areas, developing rural irrigation schemes in smaller towns, and community water supply schemes in 1400 Grama Niladhari Divisions.

Greater attention is being given to uplift under developed areas with an allocation of Rs. 15,000 million for Jathika Saviya - Gama Neguma programme, Rs. 1,125 million for the decentralised Budget, Rs. 1,600 million to improve estate housing, Rs. 8,000 million for the development of the Eastern Province and funds to provide computer facilities to 600 main post offices.

Religious, Social and Cultural Activities

34. A key feature in our economic development agenda under ‘Mahinda Chinthana’: Vision for a New Sri Lanka - A Ten Year Horizon Development Framework 2006-2016’ is to develop a society with values to achieve sustainable development. Priority was given in this Budget to improve Sunday school education, broad-base measures to eradicate drug abuse and to promote religious harmony.

International Buddhist Centres and other places of religious worship will be developed. Priority is given to improve Sigiriya National Museum, Kundasale Art Gallery and national drama and fine arts. Rs. 6,000 million has been allocated under respective ministries to develop sports and recreational facilities, youth affairs and skills development and to ensure the well-being of women and children.

Production Sector

35. Under the theme “Api Wawamu - Rata Nagamu”, with priority attached to agriculture, is our 10 year

 vision to strengthen the domestic economy and the long-term strategy to reduce cost-of-living.

As such, allocations for line ministries in the productions sector such as agriculture, plantation, fishery, tourism, livestock and industries have been increased from Rs. 3,000 million to Rs. 7,000 million to promote domestic production and exports.

As envisaged in the ‘Mahinda Chinthana: Vision for a New Sri Lanka - A Ten Year Horizon Development Framework 2006-2016, the national resurgence created through the recognition of local entrepreneurs and production, measures taken to develop infrastructure, and steps taken to promote local products in place of imports, we have embarked on a long journey towards building a strong national economy.

Part II

Budget Proposals

Introduction

1. This Budget is being presented amidst many challenges. The progress made in the national security front, and the national priority that has been accorded to protect our motherland should not be compromised to any challenge. Major infrastructure development projects which have been commenced in the country should be completed within the next two to three years.

Priority should be given to extend relief to the low income groups to address their cost-of-living concerns. The reawakening of local entrepreneurs and improvements of local products needs to be further strengthened. This Budget is prepared with emphasis on these 4 priorities.

Fuel Prices

2. The price of crude oil has now exceeded US$ 95 per barrel. As such, the need to adjust fuel prices has surfaced again. However, since any revision of diesel and kerosene price would cause hardship to the public, I am considering to refrain from revising such prices at least as a temporary measure.

In order to maintain diesel and kerosene prices, on which VAT is already exempted, at present levels through a cross subsidy mechanism, I propose that the 15 per cent VAT on Petrol be reduced to 5 per cent from January 2008. If this measure becomes insufficient in the context of changing international crude oil prices, I propose to remove the Excise Duty on Petrol as well.

In order to recoup the revenue forgone, I propose to change taxes on liquor, motor vehicles and non essential imports as well as to change only the price of petrol, in an appropriate manner. If international price of crude oil remains continuously high, we have no choice but to face the hard reality.

However, the price of kerosene will be maintained at the current level and provision has already been made to extend a Rs. 100 kerosene subsidy per month to Samurdhi and other low income households who do not have electricity.

It is proposed to give limited quantity of Petrol at a discounted price to three wheelers with meters and also to introduce a loan scheme to enable the purchase of such meters.

Strengthening the Co-operative System

3. The co-operative system has rendered a unique service to our society, and also gave a protection to the lower income groups.

The consequent economic well-being that was available to low income groups, was eroded with the introduction of the open economy. ‘The Mahinda Chinthana: Vision for a New Sri Lanka - A Ten Year Horizon Development Framework’ draws attention to the fact that the Co-operative system could make a major contribution towards reducing poverty.

As such, it is proposed that over 300 Co-operative Societies which are scattered islandwide will be linked with Lak Sathosa outlets. I propose to offer a grant up to a maximum of Rs. 1 million to all Co-operative Societies to modernise outlets to be able to distribute essential commodities to consumers.

Further the Lak Sathosa outlets will be expanded up to 200 on an urgent basis. Budget Shops will be set-up in more populated areas for which it is proposed to allocate Rs. 650 million.

4. In order to revive Co-operative Movement, I propose that to write-off all long term loans and interest due, and also to write-off all unpaid taxes of Co-operative Societies.

5. In order to promote the distribution of essential items at affordable prices, I propose to exempt Co-operative Societies from Income Tax, VAT, Debit Tax, including Withholding Tax on interest, for a period of 5 years.

Since Co-operative Societies are also exempt from the Economic Service Charge and Provincial Council Turnover Tax, Co-operative Societies and associated Rural Banks will become tax free enterprises in terms of this Budget.

Essential commodity items at concessionary prices for low income groups

6. Despite removing taxes on essential commodities since November 2006 at a cost of around Rs. 10 billion, the impact of such tax concessions did not seep down to consumers other than through Lak Sathosa outlets, Co-operative Societies and a limited number of other shops.

As such, I propose to confine such tax concessions only to Lak Sathosa outlets, Co-operative Societies and Budget Shops and distribute a welfare pack containing essential commodities at tax free prices to low income groups through these outlets.

Rice subsidy for the plantation sector and neighbouring communities

7. I propose to allocate Rs. 200 million to introduce a programme to make available rice at a concessionary price to the communities in plantation and neighbouring areas, in order to encourage them towards rice and rice flour consumption.

Priority will be given to set up Lak Sathosa and Co-operative Societies in these areas in order to ensure the success of this programme.

State Trading Wholesale Establishment

8. It is proposed to set up a State Trading Wholesale Establishment, which will be a company owned by the Government, to streamline supplies in order to stabilise prices, to import essential commodities when required, and to maintain buffer stocks. I propose to avail a bank guarantee to the value of US $ 10 million to facilitate related imports.

Concessions for the Fishery Sector

9. In the context of continuous rising fuel prices, a system is in place through which Fisheries Corporation purchases 19 identified varieties of fish at guaranteed prices. I propose to provide financial assistance to facilitate this process.

The VAT exemption granted to prawn farmers to improve the industry, is proposed to be implemented with retrospective effect from 2004. I propose to allocate an additional Rs. 100 million to complete housing construction activities undertaken under the ‘Diyawara Gammana’ Programme and also to expand this programme islandwide.

I also propose to give priority to provide vessels for deep sea fishing through the programme undertaken by the Fisheries Ministry.

Development of a domestic shipping industry

10. As a small island nation, the international market for our products could be expanded by increasing the number of ships owned by local ship merchants. Further to the incentives offered in the last Budget, to expand this business, I propose that purchase of a ship to be registered under the Sri Lankan flag will be exempted from the Port and Airport Development Levy. It is also proposed that ships being registered under the Sri Lanka flag will not be considered as an import.

It is further proposed that when such ships carry cargo, the freight charges to be used for the purpose of computing Customs Duty will be limited to a 15 per cent of the value of cargo being carried.

Gem and Jewellery

11. In order to further develop this industry, export income arising from gems imported and thereafter cut and polished, will be exempted from income tax. In order to encourage gem and jewellery exporters, 50 per cent of foreign exchange earnings of such exporters maintained in bank accounts in Sri Lanka, will be permitted to be used for the importation of required raw material.

I propose that the Central Bank of Sri Lanka will introduce a credit guarantee scheme to encourage banking institutions to extend credit to those industrialists engaged in the gem industry.

To popularise gem auctions I propose that only 2.5 per cent income tax will be charged from the value realised from gem auctions conducted under the supervision of the State Gem Corporation, in place of prevailing income tax.

Domestic textiles industry

12. To encourage the domestic textile industry, a Cess of Rs. 50/ Kg. is proposed to be imposed on textiles

 imports for domestic consumption. I also propose to exempt importation of yarn from VAT in order to encourage production of high quality fabrics.

Year Five Scholarships

13. I propose to increase the number of year 5 scholarships from 10,000 to 15,000 to facilitate education of children of low income groups.

Graduates employment

14. To give priority to resolve graduates unemployment, a system of filling vacancies in the Government Services by recruiting graduates was introduced last year. As such, around 3,000 vacancies were filled in the institutions such as the Department of Inland Revenue without any political affiliations and through a competitive examination. When presenting the 2007 Budget, I proposed to employ 10,000 graduates.

As such, including the 2,088 graduates who were recruited under the ‘Tharuna Aruna’ Programme steps have already been taken to recruit 15,000 graduates in 2008 by following a recruitment procedure and through exams. I reiterate that steps will be taken to recruit graduates to public service based on annual vacancies without any political interference.

Foreign Employment

15. In the area of foreign employment, there is a major demand for professional such as doctors, trained nurses and quantity surveyors. To meet the demand relating to nurses, the Ministry of Foreign Employment Promotion and Welfare and the Ministry of Healthcare and Nutrition have together introduced a programme through which 500 nurses are sent for foreign employment each year.

Further, I propose to increase the intake of students to be trained as quantity surveyors from 50 to 150 and allocate Rs. 75 million to expand the required facilities at the University of Moratuwa in 2008. It is proposed to set up an Employment Placement Coordination Centre in order to assist foreign employment of professionals.

Environment Conservation Levy

16. The damage caused to the environment through air and water pollution and soil erosion is estimated to be in excess of 2 per cent of the GDP. But the resources that we earmark for environment conservation is grossly inadequate. I, therefore propose to introduce an Environment Conservation Levy Act ensuring environment conservation. Individuals, business or items considered as harmful to the environment will be subject to this levy.

As such, a permanent household, with a vehicle and a telephone and electricity connections will be liable to this environment levy of Rs. 20 per month through the Act. The Central Environmental Authority will be empowered to register relevant Chief Occupant to enable the process of recovering of this levy.

Further, provision will be made in the Act to enable the gazetting of any items or businesses considered as harmful to the environment as well as the relevant tax rates pertaining to which the gazette will be submitted to the Parliament. It is estimated to raise Rs.1,000 million from this Environment Conservation Levy that will be introduced from 2008.

I also propose to allocate Rs. 150 million for Piyakaru Purawara and Haritha Gammana Environment Programmes. It is proposed to reduce around 3 million tonnes of Carbon emission per year in Sri Lanka.

The associated foreign exchange earnings in line with the relevant international conventions are estimated to be around Rs. 3,000 million. I propose to setup a Sri Lanka Carbon Fund with the participation of Banks and private investors as shareholders to facilitate this process.

Income Tax

7. I do not see a rationale, to extend special concessions to foreign professionals working in Sri Lanka, since Sri Lankan professionals with domain expertise are sufficiently available and also in view of double tax agreements which are in place with many countries. As such, I propose that tax computation on income with regard to both foreign and local persons employed in Sri Lanka would be done in an equal basis.

18. I also propose that any loss from a business of leasing that is permitted to be set-off against income, to be confined to the income arising from leasing business only.

Rs. 300 million is expected to be raised from these measures.

Simplification of the Tax System

19. The simplification of certain taxes is helpful for the tax administration as well as tax payers. As such I propose to exempt those paying Economic Service Charge from having to pay Withholding Tax and Income Tax.

Aiming greater convenience with regard to Stamp Duty payable on Leases or Mortgages, I propose that either stamps representing the relevant amount could either be affixed or a receipt proving the payment of such amount to a Bank could be affixed, to a lease or a mortgage instrument and legal safeguards will be introduced in this regard.

I propose to exempt all key development projects from VAT and the service providers will be entitled to claim their input. I also propose to simplify the prevailing system relating to taxing salaries and allowances of public servants.

Collection of Tax Arrears

20. With the repeal of the tax amnesty legislation, many taxes to which the amnesty applied are now recoverable. Although the amount as tax arrears reflected in the books of the Inland Revenue Department is substantial, we have confronted difficulties in ascertaining the amounts that is in fact recoverable. I propose to introduce a Special Act in this regard.

This proposed Act will have provision pertaining to resolving related issues and will enable the recovery of such taxes in an expeditious manner. It is proposed that this Act will make specific provision to appoint an Independent Committee consisting of 3 members, to be chaired by a retired member of the Judiciary and provide a mechanism through which tax arrears upto March 31, 2007, of state institutions or those who are legally declared bankrupt, could be written off as may be approved by the Committee. It is also proposed to refer to a special judicial process to recover arrears relating to Turnover Tax, National Security Levy and the Goods and Services Tax. I also propose, Inland Revenue Act and VAT Act to be amended to require the Commissioners general of Inland Revenue to ensure, that commencing from April 1, 2007, tax arrears in any tax year cannot exceed 3 per cent of the tax revenue of the previous tax year.

It is expected to set up a special unit directly under a Deputy Commissioner General of Inland Revenue which will be in charge of collecting tax arrears. It is expected that the Inland Revenue Department under the supervision of the above mentioned Committee will be able to collect at least Rs. 5,000 million in 2008 through this measure.

Customs levy

21. I propose to raise Rs. 2,000 million by reducing tax evasions taking place at the Port and Airport and by modernising the administration of Sri Lanka Customs by auctioning the vehicles and articles confiscated by Customs.

Economic service charge

22. I propose to increase the Economic Service Charge on the sale of liquor and motor vehicles from 0.5 per cent to 1 per cent. I also propose that the Economic Service Charge payable by a business earning export income will not exceed 0.25 per cent. It is expected to raise Rs. 400 million from this measure.

Other revenue proposals

23. I propose to raise an additional Rs. 9,400 million by amending Excise Duty on motor vehicles and non essential imports, by increasing import and export license fees, by increasing the surcharge on Import Duty to 15 per cent and by revising the Cess on imports which have local substitutions.

I expect to increase revenue by a further Rs. 4,700 million by increasing provincial infrastructure development levy with is based on motor vehicles, by increasing the telecommunication licence fees and by extending the 10 per cent tax levied on mobiles to wireless phones. I propose to increase the fee for the renewal of a Passport and raise an additional Rs. 250 million.

Tax Holidays

24. Continuous provision of tax holidays to promote investment has caused distortion in our Tax system. Time has come to eliminate these distortions and get everybody into the tax system. It appears more appropriate that tax holidays already granted will not be extended, and to give only three year tax holidays other than for flagship investments, or to those engaged in development activities in lagging regions or building housing facilities for lower income groups.

I consider this is a practical beginning to ensure that the high tax rates that are prevailing to be reduced over the next 5 years to ensure that tax rates could be aligned with those prevailing in other countries in the region. As such, I propose that grant of tax holidays from 2008 will be restricted as aforesaid and that, such companies will be permitted to graduate through a lower tax rate during the 3 years next ensuing.

I expect an additional Rs. 500 million could be raised in 2008 by broadening the tax base. Further, I propose that the approval of the Ministry of Finance will be mandatory prior to availing a tax holiday under any statute and to make for which required statutory amendments put in place. I also propose to require that all tax holidays granted should be annually Gazetted by the Ministry of Finance and Planning at the end of the year.

Nagenahira udanaya

(Eastern Resurgence)

25. To reap maximum benefits to the people in the Eastern province from the humanitarian operations which were carried out in the region, the Government accords high priority for development activities in that region. Special steps have been taken to mobilise foreign aid for infrastructure development and housing construction.

As a measure to encourage private investments in this region, I propose to grant a 5 year tax holiday for any investment over Rs. 50 million and generates employment for 50 people.

I propose that interest income on loans granted for such investment by the banks be exempted from income tax and equipment and machinery imported for such projects will be exempted from Custom Duties and VAT.

Development of lagging regions

26. I propose to extend the date of complete investment to qualify for a tax holiday for investments in districts other than Colombo and Gampaha, till March 2009. Further, I propose to treat expenditure incurred in the relocation of businesses outside Colombo and Gampaha Districts as an unlimited qualifying payment for two years. However, all income from such investments after being relocated will be subject to the normal tax regime.

Incentives for foreign earnings

27. In order to encourage foreign earnings of Sri Lankan individuals and enterprises, income such as salaries, fees and divided will be exempted from income tax provided such income is remitted to Sri Lanka through the Sri Lankan banking system.

To enhance foreign exchange earnings, I propose to permit local enterprises to borrow from the global capital markets and, high interest rates charged by local banks could thereby be reduced. Further in order to promote Sri Lankan exports, I propose that Ports Authority charges for garments and other exports to be made similar to the levies and charges structure prevailing in relation to agricultural products.

Welfare of the apparel sector employees

28. I propose to allocate funds from the income of the Board of Investment to provide greater welfare facilities to employees in export processing zones through the provision of better bus services, mobile police services, medical facilities and by restoring street lighting and maintenance of roads in the Katunayake, Seeduwa and Biyagama local authority areas.

Free Trade Zone for Building Material

29. I propose to setup a Free Trade Zone for Building Material in the Kelani Valley, to be able to meet the demand of building material for the construction sector at reasonable prices in a competitive environment and also aimed at easing the traffic congestion in Colombo metropolitan areas. I propose to avail Rs. 250 million under the vote of the Ministry of Trade to build the required infrastructure.

Housing Development

30. I propose to allocate Rs. 100 million to develop housing facilities for shanty dwellers in ten selected districts with the help of community organisations in such areas and the beneficiaries. I also propose to extend tax concessions to any person making an investment in such projects.

Development of Small and Medium Scale Industries

31. I propose to extend the tax free period that was availed to those importing high tech machinery and equipment to enhance the production capacity of local enterprises, till December 2009.

I propose to grant concessionary loans subject to maximum of Rs. 15 million, at an interest rate of 10 per cent for garment factories situated outside the Colombo district to enable the modernisation.

I propose to extend financial assistance at concessionary rates from the National Co-operative Fund, pertaining to project proposals submitted by Co-operative Societies for production purposes in diary, fishery, livestock, textile and small and medium industries.

Local Milk Production

32. In order to encourage local milk production, I propose to increase the guaranteed price being paid to milk producers for milk, to Rs. 30-40 range per Ltr. In addition, credit facilities will be provided at concessionary rates for the importation of milching cows, development of animal husbandry and to set up small and medium milk processing centres.

I also propose to exempt milk and dairy products from VAT. I have allocated funds to grant concessionary loans to develop over 50,000 livestock farms in Northern, North Central, Southern and Uva Provinces.

It is proposed to strengthen the legal framework to prevent the slaughter of milching cows and to increase the associated fine from Rs. 250 to Rs. 50,000. It is also proposed to allocate Rs. 100 million to set up cold storage facilities and milk collection centres at provincial level.

Api Wawamu - Rata Nagamu

33. Our country spends around Rs. 30 billion for the importation of milk powder, sugar, vegetables, fruits and wheat flour. As incentive to promote local production of these on a priority basis, I propose to ensure high prices for such local products, by providing safeguards from imports, availing seed and plant material and extending technical support. Provisions have been made to write-off part of the debt of small and medium paddy millers to revive their business.

Steps have also been taken to grant loans at 8 per cent interest, under the ‘Krushi Navodaya’ Programme.

I propose to restrict the income tax on interest of the Agricultural Credit Guarantee Fund of Central Bank of Sri Lanka to 10 per cent, to further promote and expand facilities extended under that scheme.

I also propose to implement an incentive scheme for agricultural extension and research officers who are working in the field. I propose to allocate a further Rs. 300 million to strengthen the ‘Api Wawamu - Rata Nagamu’ Programme.

34. I propose to remove VAT on local sugar and rice based products. I also propose to strengthen the legal framework to prevent coconut lands in excess of 5 acres from being blocked out and sold.

Fertiliser Subsidy

35. It is proposed to avail all varieties of fertiliser at Rs. 350 per bag for paddy cultivation, and to avail Urea fertiliser at a concessionary price of Rs. 1,200 per bag for land owners owning less than 5 acres and Rs. 15,000 million is allocated to continue with this subsidy.

Since chemical fertiliser is harmful to the environment and health, it is proposed to encourage the use of organic fertiliser and Rs. 500 million has ben allocated to promote organic fertiliser production.

It is proposed to popularise in a structured manner, the use of appropriate carbonic/ chemical mixed fertiliser over the long- term, in place of chemical fertiliser which is now being used.

National Priority to Address Nutritional Needs

36. Although we have implemented many nutritional programmes such as mid-day meals for schoolchildren and nutritional food for expectant and lactating mothers, it is reported that 33 per cent of children are underweight, in addition to many facets of nutritional deficiencies in our country.

This trend is attributable to there being lack of awareness on nutritional requirements and no attention being paid to the nutritional values of food intakes.

Therefore, in addition to Rs. 1,650 million earmarked for school mid-day meal in 2008 it is proposed to implement an integrated programme under the Ministry of Healthcare and Nutrition using the allocations made to several ministries totalling to Rs. 2,865 million to promote nutritional standards of pregnant and lactating mothers as well as infants with the emphasis on those in the Eastern, estate areas as well as other difficult areas.

In addition to the free nutritional food presently provided to pregnant and lactating mothers, a further sum of Rs. 250 million has been allocated to extend facilities required to promote breast feeding and to provide infant milk powder at concessionary prices through child and maternity clinics.

37. I propose to increase the Social Responsibility Levy which is 1 per cent to 1.5 per cent in support of further strengthening the National Action Plan for Children which is being implemented as an integrated effort involving many facets. I expect to raise an additional Rs. 1,000 million from this measure.

Intellectual property sales development centre

38. I propose to allocate Rs. 50 million to Intellectual Property Fund to setup an Intellectual Property Sales Development Centre to enable local intellectuals, artists and inventors to introduce their creations engage in sales promotions as well as to hold discussions and seminars.

Local film and teledrama industry

39. Many steps were taken through the last Budget to strengthen the local film and teledrama industry.

In order to recognised our local film industry and protect our cultural values, taxes were introduced on the importation of foreign films, teledramas and advertisements.

To ensure that this revival process is continued. I propose to set up a National Heritage Center using such funds with the involvement of Tourism and Cultural Ministries with modern training centers and studios to promote talents of local film and teledrama artists.

I also propose to extend tax concessions on the importation of essential equipment required for the production of films and teledramas. Further, I propose to increase tax relief granted on investments for production of films from Rs. 25 million to Rs.35 million. I also propose to grant tax concessions up to Rs. 25 million for the construction of high-tech modern theatres.

Incentives for Public Servants

40. The Public Service which was run down, got a new revival in terms of Mahinda Chinthana; Ten year Horizon Development Framework Rs. 1,000 per month was paid as a cost-of-living allowance.

Even under very difficult circumstances, we ensured that this allowance was increased by Rs. 375/- once in every 6 months and the total allowances as of now is Rs. 2,125 per month. Even amidst all challenges, I propose to continue to pay the cost-of-living allowance to public servants.

Therefore all public servants will get a cost-of-living allowance of Rs. 2,500 from January 2008 and to Rs. 2,875 from July 2008 in addition to their monthly salary.

I also propose to increase the cost-of-Living allowance to pensioners. I propose to allocate the required funds from the Treasury Miscellaneous Vote.

41. While giving priority to those in the junior grades and fresh applicants, I propose to allocate an additional amount of Rs. 1,500 million to continue with the distress loan scheme for the benefit of a large segment those in the government service and to make the necessary allocations from the Treasury Miscellaneous Vote.

Api Wenuven Api Fund

42. We have implemented a programme to provide members of the armed forces who are engaged in a national task and their family members, housing, education, health and recreation facilities.

We have already commenced the construction of a housing complex with all facilities at Ipalogama with about 1,500 units and I propose to expand such projects into other areas as well.

43. We have secured the participation of the private sector in this process, who have got investment opportunities in the construction of schools, hospitals, stadiums and marketplaces. I propose to set up a fund by the name of ‘Api Venuven Api’ to ensure the success of this programme.

I propose that all contributions to this fund as well as any income of the fund, will be tax free. I invite Sri Lankans living overseas also to contribute to this fund. I propose to allocate Rs. 750 million to develop necessary infrastructure for these housing complexes.

Non-resident homeland development bonds

44. I propose to introduce Non-resident Homeland Development Bonds through banking institutions in Sri Lanka, the maturity period of which would be 1 to 5 years to encourage Sri Lankan non-residents, to contribute towards developing their homeland. I propose that the 100 per cent property tax applicable to non-residents in the purchase of land will not apply to those who invest in these bonds and that interest arising from such bonds will also be exempt from income tax.

Drug prevention programme

45. ‘Mathata Thitha’ - drug prevention programme has made considerable progress with the participation of several ministries. Sri Lanka Police and the Department of Excise have taken broad steps to combat drug abuse. We have sharply increased taxes on alcohol and cigarettes to discourage consumption.

The revision of Excise and cigarettes tax after the presentation of the Appropriation Bill is expected to increase a bottle of liquor by Rs. 35 and a cigarette by Rs. 2. This is expected to generate additional revenue of Rs. 7,700 million. I also propose to increase the stamp duty on the renewal of liquor licence from Rs. 1,000 to Rs. 10,000.

Project management department

46. There is an urgent necessity to ensure direct supervision in the preparation of agreements and in the implementation of such contractual arrangements, which are undertaken by various Ministries and Departments.

Therefore, I propose to setup a new Department in the Ministry of Finance and Planning consisting of multidisciplinary experts in the field of law, business, finance, engineering and project planning and to undertake overall coordination and supervision of all project management staff. I propose an allocation of Rs. 50 million for the setting up of this Department.

Coordination between Provincial Councils and Line Ministries

47. Development work carried out by various line ministries and provincial councils, at provincial level require to be co-ordinated in order to enhance productivity and ensure that people in areas in which such work is carried out, could enjoy more meaningful development. It is proposed to implement a review mechanism targeting education, health, roads, agricultural and irrigation sector activities, with the cooperation of relevant ministries and provincial agencies.

48. Honourable Speaker, although the bulk of the road network is coming under the purview of the Provincial Councils, the income avenue of Provincial Councils are not sufficient to ensure effective maintenance of such roads.

The Government gives around Rs. 100 billion annual grant to Provincial Councils. Such funds are not sufficient to maintain and improve infrastructure at provincial level. As such I propose to work out with the provincial set up to introduce a road user fee on vehicles to maintain the provincial road network.

Government expenditure management

49. To ensure the prudent control and management of Government expenditure, a saving of 1.5 per cent in recurrent expenditure and a saving of 7 per cent in capital expenditure has been assumed for final budget estimates.

Concluding remarks

A revenue surplus of Rs. 38 billion is expected from the 2008 Budget. Accordingly, we attempted to change the 30-year long practice of financing a part of day-to-day expenditure from borrowings.

It is a pleasure to note that the overall Budget deficit of Rs. 297 billion which is 7 per cent of GDP in 2008, is entirely on account of capital expenditure. This demonstrates that we mobilised borrowings only for development activities which in turn generate income to service debt repayments.

The protest campaign that we witnessed in the wake of the recent International Bond Issues was not a reflection against the borrowings itself, but more an eruption of uneasy feeling stemming from the fears that such credit will strengthen the Government by being able to engage in rapid economic development activities and would also result in strengthening the exchange rate and the interest rate.

Irrespective of who undertakes the task, there is no question that large sums of funds are required for development activities. Past 30 year experience has proved that such resources cannot be mobilised through the sale of national resources and privatisation. We have to increase revenue and get foreign exchange.

As such, rather than debating that borrowing is wrong, it is desirable to question as for what purpose the borrowings obtained. We proceeded to mobilise this large sum of funds through the Bond issue only after making a concerted effort to raise Government revenue and also to raise funds from concessionary sources.

We took this measure in order to be able to complete the infrastructure projects already undertaken well on time, to find required foreign exchange for such development projects and also having considered the fact that domestic borrowing would result in high interest rates and thereby weaken the performance of the private sector.

As already explained, these funds will be used to complete development work already undertaken and will not be used to provide for the flour subsidy or for day-to-day consumption expenditure, as was done in the past.

Honourable Speaker, as a developing country which has faced bitter experiences of brutal terrorism, we cannot underestimate the imminent impact on the stability of our country if we relax road barriers, exposing our intelligence services to be vulnerable, neglect the needs of our Security Forces or ignore their advice.

We have witnessed that the cost of ill effects and destructions outweigh the cost of inconveniences and sacrifices. Honourable Speaker, we need to forget personal animosities arising from jealousies and the associated political rivalries when it comes to national security and economic development.

It is not possible to rectify the mistakes of 30 years and to eliminate associated destructions and enter a path that would help to address the needs of the nation within a short span of time or by taking a divided approach and by defaming each other.

We believe that the influence of the Mahinda Chinthana: Vision for a new Sri Lanka - A ten-year horizon development framework has assisted in reducing ideological difference, since some of our leaders who demanded a federal solutions for years have now given up such solutions, those who mapped the process of privatisation of health, education and national resources are now compelled to demand the protection of such sectors, local entrepreneurs and products are in the forefront, in place the system that prevailed which attached greater prominence only to foreign investors.

Time has come for us to further narrow down all ideological differences and work towards finding a political solution to our national problems, based on democracy and humanitarian considerations.

We must engage in a political process especially to find solutions to the problems faced by the Tamil and Muslim communities who live in the North as well as in the East, parallel to the progress made by our Security Forces who are engaged in the task of protecting our motherland and liberating Tamils, Muslims and Sinhalese, from the grips of terror.

I wish to emphasise that the fight against terrorism is not a fight against the Tamil people. It is our duty and responsibility to protect and preserve democratic rights of Tamils, Muslims and Sinhalese in all parts of the island. I therefore invite all of you in the opposition to join hands with the Government to move toward with a common agenda in the interest of our motherland.

Honourable Speaker, although the prices of certain essential commodities are likely to remain high due to soaring international prices, it is indeed a blessing in disguise to promote local substitutes.

Although we are likely to face many challenges in carrying out national security operations and in implementing development projects, we should treat them as tasks essential in the interest of our motherland and our future generation.

I invite everybody to join hands to generate an economic growth in excess of 7.5 per cent during 2008, by expediting all key development projects, to create a prosperous country in line with Api Vavamu - Rata Nagamu, the national food production drive taking advantage of favourable weather conditions, increasing local investment and production in the backdrop of the enthusiasm created in the private sector, and the notable progress made in the national security front.

Honourable Speaker, we do not believe that high economic growth is sufficient for a meaningful development for our people and the country.

The development process should necessarily include an infrastructure network that provides opportunities for people living in remote areas to benefit from the economic growth, a process that provides equal opportunities for all communities while preserving social and cultural values and creates aspirations of becoming a nation that moves forward with emphasis on innovations.

The Mahinda Chinthana: Vision for a new Sri Lanka - a ten-year horizon development framework has created a new approach for this meaningful development. To be able to achieve this, we should balance our failures and successes and dedicate ourselves to move forward as a strong nation.

Ministers, Secretaries to the Ministries, Head of Institutions and all public servants, I request you to cooperate and assist to develop a dedicated public service by marking attendance with the use of an electronic finger printing system, render your services based on a Code of Conduct and Ethics and free from corruption and also make a concerted effort to eradicate bribery and corruption.

I invite the entire public service to mobilise the working class, the entrepreneurs and the taxpayers to work towards country’s development.