Government Policy and Strategy
for SME Development
J.P.D.R Jayasekara & Anuradha Thilakarathna
Ministry of Finance and Planning, Sri Lanka
The Fourth IMF-Japan High-Level Tax Conference For Asian Countries in Tokyo
April 2–4, 2013
Outline
1. Country Profile
1. Overview
2. Key Social Indicators
3. Key Economic Indicators
2. SMEs - Definition
3. Importance of SME in the Economy
4. Government Policy Framework and SMEs
5. Recent Policy Changes related to SMEs
Sri Lanka
Location
Between 5° 55’ & 9° 50’ North Latitude
& 79° 42’ & 81° 53’ East Longitude
Pearl of the
Indian Ocean
Set in the Indian Ocean in South Asia, the tropical island nation
of Sri Lanka has a history dating back to the birth of time. It is a
place where the original soul of Buddhism still flourishes and
where nature’s beauty remains abundant and unspoilt.
Few places in the world can offer the traveler such a
remarkable combination of stunning landscapes, pristine
beaches, captivating cultural heritage, and unique experiences
within such a compact location. Within a mere area of 65,610
kilometers lie 8 UNESCO World Heritage Sites, 1,330 kilometers
of coastline - much of it pristine beach - 15 national parks
showcasing an abundance of wildlife, nearly 500,000 acres of
lush tea estates, 250 acres of botanical gardens, 350 waterfalls,
25,000 water bodies, and a culture that extends back to over
2,500 years.
This is an island of magical proportions, once known as
Serendib, Taprobane, the Pearl of the Indian Ocean, and Ceylon.
www.srilanka.travel
UNESCO World Heritage
Key Social Indicators
Description Unit Base Year Value
Mid-year population '000 2012 20,277
Population density persons per sq. km. 2012 323.0
Growth of Population % 2012 0.7
Life Expectancy at Birth Years 2011 74.9
Infant Mortality Rate Per 1,000 Live Births 2007 8.5
Maternal Mortality Rate Per 100,000 Live Births 2011 41.6
Crude Birth Rate Per 1,000 2010 17.6
Crude Death Rate Per 1,000 2010 6.2
Literacy Rate (%) % 2010 91.9
Literacy Rate - Computer % 2009 20.3
Access Electricity % 2011 91.0
Access to Safe Drinking Water % 2011 84.0
Key Economic Indicators
Description 2000 2006 2007 2008 2009 2010 2011
GDP (Billions of Rs) 1,258 2,939 3,579 4,411 4,835 5,604 6,543
Per Capita GDP (US$) 899 1,421 1,617 2,014 2,057 2,400 2,836
GDP Growth 6.0 7.7 6.8 6.0 3.5 8.0 8.3
Consumption (% of GDP) 82.6 83.0 82.4 86.1 82.1 80.7 84.6
Investment (% of GDP) 28.0 28.0 28.0 27.6 24.4 27.6 29.9
Trade Balance (Millions of US$) -1,798 -3,370 -3,657 -5,981 -3,122 -4,825 -9,710
Exchange Rate (Rs/US$) 75.78 103.96 110.62 108.33 114.94 113.06 110.57
Gross Official Reserves (Millions 1049.0 2836.7 3508.2 2401.9 5357.4 7196.5 6748.1
of US$)
Revenue & Grants (% of GDP) 17.2 17.3 16.6 15.6 15.0 14.9 14.5
Expenditure (% of GDP) 26.7 24.3 23.5 22.6 24.9 22.9 21.4
Overall Deficit (% of GDP) -9.5 -7.0 -6.9 -7.0 -9.9 -8.0 -6.9
Government Debt (% of GDP) 96.9 87.9 85.0 81.4 86.2 81.9 78.5
SMEs - Definition
• SMEs are defined in variety of In Sri Lanka:
ways by various countries • An enterprise with fewer than 50 people
using such parameters as: and capital investment less than 5 million
Number of persons Rs (Department of Small Industries)
employed • An enterprise with less than 8 million Rs
Amount of capital invested investment and less than 50 million Rs
Amount of turnover or annual turnover (Export Development Board)
nature of the business
• The World Bank states that:
if any enterprise has below 99 people,
it can be defined as an SME.
• Hence, a clear definition is needed to:
provide concessionary financial facilities on a targeted basis and
provide specific business development service
• Therefore, the Department of Census & Statistics has started an “Economic
Census” in 2013/14 with a key objective to prepare a unique definition for Micro-
Small, and Medium Enterprises in Sri Lanka
Importance of SMEs in the Economy (1)
• SME sector is considered the core segment of • SMEs play an important role
economic development in the country in economic development
through:
• The country has a SME economy:
• Creating employment
• 70% of plantation sector; opportunities
• 85% of rubber;
• Mobilizing domestic savings
• 100% of paddy; and
• Poverty alleviation
• 90% coconut are of small holdings
• Income distribution
• 26% of the total population
• Regional development
• More than 70% of the country fall within the • Training of workers and
SME sector entrepreneurs
• SMEs’ contribution to the total Gross • Creating an environment in which
Domestic Product of the country has large firms flourish
increased to 52% in 2011 from 40% in 2010 • Contributing to export earnings
Importance of SMEs in the Economy (2)
Key SMEs – Sector-wise SMEs in the Plantation and Agriculture
The SME sector dominates Sectors
agriculture, plantation, • Paddy Milling
construction, manufacturing, trade and • Tea
other services. • Rubber
• Coconut
SMEs in the Services Sector
• Fruits and Vegetables
• Health Services
• Minor Crops
• Passenger Transport
• Poultry Industry
• Freight Transport
• Banking and Insurance SMEs in the Manufacturing Sector
• Tourism Sector • Textile and Apparel Industry
• Telecommunications • Surgical Gauze Industry
• Construction • Leather and Footwear Industry
• Business Process Outsourcing (BPO) • Gem and Jewellery Industry
• Beauty Care Industry • Edible products, including milk/fish-
based products, etc.
Government Policy Framework and SMEs (1)
• The government policy framework envisages that Sri Lanka will have a stable
society, ensuring:
• a quality living to its people through having access to a decent living,
electricity, water, schooling, and health facilities.
• Development goals are to be realized through:
• a rapid economic growth and by transforming the structure of the
economy to be a modern, environmentally-friendly, and well-connected
rural-urban economy that can create employment opportunities with
better remuneration.
• The vision of the Government of Sri Lanka is to double the country’s per capita
income to US$4,000 by 2016 and consolidate Sri Lanka as an emerging economy.
• This requires a growth rate of around 8 percent to be maintained over the years.
Government Policy Framework and SMEs (2)
SMEs are being strengthened by the government
• The government has assigned high priority to the • SMEs are the central
SME sector to strengthen the SME as the mechanism in the
backbone of the economy. entire operation
• Steps have been taken by the government to • A vibrant SME sector
form an entrepreneurial development can play a key role in
environment by introducing appropriate policy creating employment
reforms and providing greater incentives for opportunities and high
SMEs. economic growth in
post-conflict Sri Lanka
• The government social welfare schemes are being
redesigned to provide stimulus to SMEs: • Hence, SMEs need
• Thriposha; recognition, support,
• Surgical gauze;
and considerable
synergy to integrate
• Selected pharmaceutical products;
with the real economy
• School textbooks, uniforms, furniture, etc.
• Continuation of fertilizer subsidy
• Planting and replanting subsidies
Recent Policy Changes Related to SMEs (1)
Investment Fund Account (IFA)
From the budget in 2011, all banks were required to set up an IFA from the reduction of the
corporate income tax collected on banks from 35% to 28% and VAT on financial services
from 20% to 12%.
Instructions were given to the banks to provide funding for SME development programs
using the IFA.
Special SME bank branches were established to utilize IFA and will support SMEs providing
guidance for marketing, financial management, changing energy by renewable sources,
and increasing productivity and competitiveness.
A 50% government guarantee will be given for those banks providing loans under IFA to
restructure SMEs in order to improve their performance.
From the budget 2013:
• The investment in sustainable energy sources, including solar power, and women’s
entrepreneurship venture capital projects, up to 10 million Rs each, will be added as
qualifying sectors.
• Where the funds in the investment fund account have not been utilized as per the
Guidelines by June 30, 2013, the respective institutions are required to transfer the funds
lying credit of the funds to the Treasury.
Recent Policy Changes Related to SMEs (2)
Income Tax
• The annual turnover, which applies for the concessionary income tax rate of
10% for SMEs, has been increased to 500 million Rs.
• Corporate income tax rate on SMEs was reduced to concessionary rates of
10 to 12 percent.
Description Income Tax Rate (%)
Agriculture
Manufacture of any product for export with 65% LVA
Operation of storage facilities
10%
Supply of labor
Educational services
Development of software
Small companies (taxable income not exceeding 5 million Rs)
Non-traditional exports
Livestock, poultry, & animal products
Tourism & construction 12%
Manufacture of handloom products
Healthcare services
Operation of mini-hydropower projects or other alternative energy sources
Recent Policy Changes Related to SMEs (3)
Income Tax Cont’d...
• Tax holiday period was extended from 3 years to 4 years and
further extended to 6 years based on the level of investment
• ESC chargeability simplified by removing the liability on the
turnover for any business of which the profits are subject to
income tax
• Extend exemption limit of Economic Service Charge (ESC) for
enterprises with quarterly turnover up to 50 million Rs
• Chargeability to ESC is exempted on any sale of locally
manufactured clay roof tiles and pottery products by a
manufacturer
• Write off all unpaid tax liabilities up to March 2009 of all
enterprises with annual turnover below 100 million Rs
• Removal of the Debit Tax and Social Responsibility Levy
Recent Policy Changes Related to SMEs (4)
Value-Added Tax (VAT)
• Application of a single VAT rate of 12%
• Exemptions:
• Importation of pharmaceutical machinery and spare parts;
• Importation of machinery and equipment for bakery products, manufacture of
footwear, and bags;
• Importation of equipments for mini-hydropower projects implemented for the
supply of electricity to the national grid;
• Local manufacture of hydropower machinery and equipment, value-added local
products to tourist hotels and airlines, locally developed software, unprocessed
agriculture, and fishing;
• Importation of agricultural machinery and seeds;
• Importation or supply of lorries and busses, machinery for the production of rubber
and plastic products, molding (steel, glass, rubber, or plastic), items needed in the
poultry industry
Recent Policy Changes Related to SMEs (5)
Nation Building Tax (NBT)
• Reduction of the NBT rate from 3% to 2%
• Amalgamation of NBT and Provincial Turnover Tax
• Exemptions:
• Importation of equipment for mini-hydropower projects implemented for the supply
of electricity to the national grid;
• Wholesale or retail sale of printing of books and collectors of fresh milk, green leaf,
cinnamon, and rubber;
• Importation of equipment for mini-hydropower projects implemented for the supply
of electricity to the national grid;
• Locally manufactured clay roof tile and pottery products by a manufacturer;
• Sale of paintings by the creator of such paintings
Recent Policy Changes Related to SMEs (6)
Other Special Treatment for the SME Sector
Tax Concessions to SME Sector (from the Budget 2013)
• Any person or partnership, with an annual liable turnover/ supplies not exceeding Rs.12Mn, from all
the businesses carried on by such person or partnership will not be liable to pay VAT and NBT
(including NBT on whole sale or retail business).
• Income tax and corresponding indirect taxes payable by any person having turnover not exceeding
Rs.300 Mn per year from every trade or business carried on by such person for any period ending
prior to April 1, 2011, and not complied with tax laws, will be exempted from payment of such taxes, if
the past earnings are invested prior to 31.3. 2014, in any trade or business and duly comply with tax
laws
• The profits and income from such trade or business (carried on by capitalizing such earnings) will be
exempt from income tax for a period of 5 years.
• Tax exemptions to individuals returning after the completion of foreign employment
Any individual who returns from foreign employment and invest his/her savings to commence
new businesses will be exempt from all taxes payable on turnover and on the profits and
income from all such new businesses for a period of 5 years.
Recent Policy Changes Related to SMEs (7)
Import Duty & Other Trade-Related Taxes
• Application of four band tariff lines of import duty (0%, 5%, 15%, 30%)
• Import duty is 0% or 5% for many inputs / raw materials used by SMEs
0% 5%
Purebred breeding animals Clays, sulphur, phosphate, cement
Vegetable, fruit, tea seeds Trishaws for goods transportation, motorcycles
Machinery, mechanical appliances, electrical machinery Optical, photographic, medical equipments
Plastics, chemical and pharmaceutical products Hand tools, spoons and forks
Tractors, tankers, bowsers, dumpers Nickel
Base metals, fertilizers Some mineral fuels
Fabrics, yarn , synthetic fibers Industrial or medical plants
Printed books, brochures and leaflets, wood pulp Containers of packaging
Recent Policy Changes Related to SMEs (8)
Import Duty Cont’d.
• Import duty exemptions with the approval of relevant authorities:
• Prefabricated poultry houses, plant, machinery and equipment, including parts and
accessories for poultry industry;
• Multilayered packaging materials consisting of laminates of paper, polyethylene film
and aluminum foil used for packaging of liquid milk, vegetable juice, and fruit juice;
• Finished leather to be used for the shoe- and bags-manufacturing industry;
• Ingredients other than maize, lentils, and rice for the manufacturing of animal and
poultry food;
• Raw materials, components, parts, and accessories for the manufacture of fishing
boats;
• Weather stations, greenhouses, polytunnels, sprinklers, drip irrigation systems, and
materials for the construction of green houses, polytunnels, drip irrigation systems,
and netting for agriculture and related activities;
• Lacquers, coating, and varnishes used for coating of metal cans and closures used for
the packaging of food
Recent Policy Changes Related to SMEs (9)
Import Duty Cont’d.
Use of industry-specific CESS to promote local production:
• Meat, eggs & milk products (butter, yogurt, cheese, curd, etc.);
• Some types of vegetables, fruits, flowers;
• Coconut, tea, spices, cereals;
• Beauty or makeup preparations, shampoos, shaving preparations, soap;
• Plastic products, natural rubber and rubber products, leather products, paper products
Special Commodity Levy in support of food production – rice, sugar,
onion, chili, green gram, etc.
Thank You
