Economic Capsule - October 2014

Economic CapsuleOctober 2014

Research & Development Unit

C O N T E N T S

BANKING SECTOR NEWS

Commercial Bank Sweeps the Board at Brand Excellence 2014

Commercial Bank Slashes Interest Rates on Home Loans

Branch Openings

ECONOMIC & BUSINESS NEWS Doing Business 2015

Budget 2015 Highlights

Condominium Industry in Sri Lanka

October, 2014


Banking News

< Research & Development Unit >

Commercial Bank Sweeps the Board at Brand Excellence 2014

• Commercial Bank won the coveted ‘Service Brand of the Year’ and three other accolades at the 2014 SLIM Brand Excellence Awards to become the bank that won the most awards at this prestigious event conducted by the Sri Lanka Institute of Marketing.

• Commercial Bank took the Golds in the ‘Service Brand’ category and in the ‘Best New Entrant’ category for its ‘Anagi’ Savings Account for Women, as well as the Silver in the ‘Best Local Brand’ and the Bronze in the ‘CSR Brand of the Year’ categories in a dominant showing at this annual gala.


Commercial Bank Slashes Interest Rates on Home Loans

The Commercial Bank of Ceylon has announced further reductions in interest rates applicable to the Bank’s Home Loans along with fast-tracked approvals and discounts from selected suppliers of materials and fittings.

• Floating Rate 9.5 %

• Fixed RateUp to 10 yrs 10.5 %Above 10 yrs 12.0 %

Revised Rates


Branch Openings

Commercial Bank 239 @ Urubokka


October, 2014


Economic & Business News


Doing Business 2015

***Last year's rankings are adjusted. They are based on 10 topics and reflect data corrections.


October, 2014


Budget 2015Highlights


Summary of the Budget (2009-2015)2013 % of GDP 2014 % of GDP 2015 Budget % of GDP

Total Revenue & Grants 1,204 13.9 1,422 14.4 1,689 14.9

Total Revenue 1,188 13.7 1,394 14.1 1,654 14.6

Tax Revenue 1,188 1,394 1,654

Non-Tax Revenue 132 149 174

Provincial Councils Tax Sharing and Devolved Revenue 51 56 64

Grants 16 28 35

Total Expenditure 1,720 19.8 1,922 19.4 2,210 19.5

Recurrent 1,256 1,386 1,525

Public Investment 481 553 696

Other (17) (17) (11)

Budget Surplus (+)/deficit(-) (516) (5.9) (500) (5.0) (521) (4.6)

Total Financing 516 500 521

Total Foreign Financing 80 260 251

Total Domestic Financing 436 240 270

Rs Billion


Banking Sector

Concessions for accounts maintained by senior citizens

•Offer a 12% annual interest rate for deposits of pensioners and elders, who maintain their deposits in State Banks.

•In order to enable State Banks to pay this interest rate on such deposits, it is propose to issue Rs. 30 bn worth of Government Bonds at 12 % to subsidize the elderly.

•CBSL has permitted Finance Companies to pay 11 % interest on such deposits.

•To exempt Statutory Reserve Requirement (SRR) on individual deposits maintained by elderly people in all Licensed Commercial Banks (LCBs).

•Interest income of deposits held by elders exempted from tax.

•Withholding tax (WHT) on interest reduced from 8% to 2.5% w.e.f. 1 Jan 2015.

Budget Highlights 2015


Banking Sector Impact• At present 1 year LCB FD rate stands between ~4% - 6% with a 1% upward adjustment for senior citizens.

• If 12% annual interest rate is granted for deposits of pensioners and elders, it is expected to increase the disposable income of the elderly population of the country who largely depend on deposit interest income as a major source of income.

• This proposal is likely to be applicable only to senior citizens who already maintain accounts with GoSL banks and thus there will not be a flight of deposits to GoSL banks from the private sector banks.

• However, if the interpretation of the proposal is not applicable only to senior citizens who already maintain accounts but applicable also to new senior citizen accounts opened with GoSL owned banks, there could be a flight of deposits from private sector banks to GoSL owned banks whilst also resulting in higher overall market interest rates in the near term.

• CBSL has permitted Non-Bank Finance Institutions (NBFIs) to pay 11% on deposits of pensioners and elders. This is one percentage point lesser than what is going to be offered by state banks for such deposits. However, usually the NBFIs offer a higher rate for deposits compared to banks since NBFIs charge a higher interest rate for lending.

• The setting of the interest rate at 12% for such deposits at state banks may lead one to question the validity of the official inflation rate which is very much lesser than 12% (CCPI: AA: 4.2% and YoY 3.5%).



Banking SectorConcessions for pensioners• To grant a loan of Rs. 50,000 each, to at least 100,000 retirees from public services to

develop their own backyard economies and for them to generate self-employment income in addition to their pension income. Such loans could be drawn from bank branches from which they draw their monthly pension without securities.

• An amount between Rs. 5,000 and Rs. 250,000 not exceeding a maximum of 50 % of the savings in Banks by pensioners associations, senior citizen clubs and death relief societies, to be used to give small loans to them at a low rate of interest .

Other• To provide Rs. 10 bn capital to strengthen the Bank of Ceylon.• In order to provide greater security to deposit holders of the banks, deposit insurance to

increase by 50 %.



Tobacco and Alcohol• With immediate effect, in lieu of VAT and Nation Building Tax (NBT) − Excise Duty will be charged on manufacture of liquor − Customs Duty & Cess will be charged on import of liquor − Excise Duty will be charged on manufacture of cigarettes

Motor Vehicles and Transport • Impose Excise Special Provision Tax on motor vehicle imports, in lieu of all multiple taxes at

the point of import. • Customs based taxes on all electric cars will be reduced to 25%• Import 500 small buses to expand rural transport services • In order to strengthen the bus fleet of Sri Lanka Transport Board (SLTB) with 2,000 buses, a

public investment of Rs.1bn has been provided to SLTB • Duty concessions to import new buses, engines and gearboxes for any buses that have

operated at least for five years



Exports• Reduce import taxes of packaging material required for exports w.e.f 01 Apr 2014 • High level of Cess on primary commodity exports and is expected implement with

effect immediately • A pension scheme is proposed for the employees in the apparel industry from 2015

Dairy• Raise the guaranteed liquid milk price from Rs.50 to Rs.60 per litre

• Reduce the price of locally produced milk powder by Rs.100 per kg

• Reduce the price of yoghurt by Rs.5 per yoghurt

• Cess of Rs.150 per kg on imported milk powder and the Cess on imported butter, yoghurt and dairy products to be maintained



Agriculture• Rubber: Increase Cess on all raw rubber imports by 33%. Guaranteed price of

Rs.300.0 per kg for rubber suppliers w.e.f 01 Nov 2014 • Sugar: Extend concessionary tax rate of 12% to the local sugar industry • Allocate Rs. 5bn to modernise select sugar manufacturing plants and increase the

farm gate price of sugar cane to Rs.4,500 per MT • Tea & Coconut: Increase subsidies for tea small holders’ and coconut replantation. • Paddy: Continue the fertilizer subsidy of Rs.350.5 per kg for paddy cultivation.

Increase guaranteed paddy price to Rs.34-40 per kg


SME• Proposals seek to increase the turnover threshold for SME to Rs. 750mn from the

present ceiling of Rs. 500mn. Persons who come within this category are entitled to pay tax at a lower tax rate of 12%.


Budget Highlights 2015Concessions for the Manufacturing Sector

• 50% reduction in the tax rate on profits from any manufacturing business (other than liquor or tobacco) for the period of 5 years (up to a max. of Rs.500mn), if the following conditions are satisfied;

− Business is expanded to areas outside Western Province.− Investment in depreciable fixed assets more than Rs.300mn.− Investment is made within the period 1 April 2015 to 1 April 2017− Presently liable to tax at 28%.

• 50% reduction in tax rate on profits from a manufacturing business (other than liquor or tobacco) for the period of 7 years provided the following conditions are satisfied;

− Register with IRD on or before 31 December 2015− Investment exceeding Rs.500mn within specified time frame

• Concession by way of a 10% reduction of the corporate tax rate on tax profits from the sale of manufactured products in the local market, by any local manufacturer who has commenced the business during the 1970’s and is engaged in imports substitution.


Concessions for New Investment• Proposed concessions to a new undertaking that makes a minimum Investment of USD

2mn.− Accelerated depreciation allowance for investment in depreciable assets.− Exemption from dividend tax for 5 years.− 50% income tax discount for 3 years.


Concessions to Sri Lankan Migrant Workers• High income earning Sri Lankans working abroad will be granted concessionary duty

permits on the importation of a motor vehicle equal to 60% of foreign exchange remitted to the banks in SL.

• A duty waiver of 50% on importation of gold via foreign currency accounts

Concessions for Gem & Jewellery Sector


Concessions on Interest Income

Individuals & Charitable Institutions : • Interest Income accruing to any individual/charitable institution is to be subject to

withholding tax at 2.5%.This withholding tax will serve as a final tax. • As per the prevailing law interest income is liable to tax dependent on income level at

scale rates up to 8%.


Concessions on Employee Income (PAYEE Tax)

• Employment income accruing to a person is to be taxed at a maximum rate of 16% (presently employment income is liable to tax at scale rates, with the maximum rate being 24%)


Value Added Tax (VAT)• The present rate of 12% will be reduced to 11%• The present threshold of Rs. 12mn p.a. will be increased to Rs 15mn p.a. • Wholesale & Retail Sector: The current applicable threshold of Rs. 250 mn per

quarter of value of supplies is reduced to Rs. 100 mn per quarter

Nation Building Tax (NBT)• The threshold will be increased to Rs.3.75 mn per quarter (Rs.15 mn p.a.). (The current threshold is

Rs. 3 mn per quarter)

Betting and Gaming Levy• Increase of the tax rate on gross collection from the business of bookmaker or

business of gaming to 10% (Present rate is 5%)

• Levy a US$100 per person entrance fee to premises where casino entertainment activities take place



Other Miscellaneous Taxes• It has been proposed to exempt all the levies imposed by Local Authorities on

businesses with monthly turnover less than Rs.50,000

Recovery of Tax in Arrears

• A special refinance facility scheme which is repayable within five years will be provided by all banks at 6% interest rate to facilitate the settlement of arrears in tax/EPF/ETF up to 31 Dec 2010 (settlements to be concluded within six months)

EPF Contribution

• Employer’s minimum EPF contribution increased by 2% to 14% so that each employee will have 22 % savings from their salaries.



Effective Dates of Proposed Amendments

Effective Date Type of Tax

1st April 2015 Income Tax

1st January 2015

Value Added Tax Betting & Gaming levy Act Nation Building Tax

Immediate effect

Cess Ports & Airports Levy Excise (Special ) Duty Customs Duty Special Commodity Levy

Sources:

Budget Speech 2015, KPMG, CT CLSA &

Asia Securities Research

The views expressed in Economic Capsule are not necessarily those of the Management of Commercial Bank of Ceylon PLC

The information contained in this presentation has been drawn from sources that we believe to be reliable. However, while we have taken reasonable care to maintain accuracy/completeness of the information, it should be noted that Commercial Bank of Ceylon PLC and/or its employees should not be held responsible, for providing the information or for losses or damages, financial or otherwise, suffered in consequence of using such information for whatever purpose.

Economy & Finance

Economic Capsule - October 2014