Joint Economic Council
Memorandum on the 2003/2004 Budget
1. Introduction
This
Memorandum outlines the views and summarises the recommendations of the Joint
Economic Council with respect to the 2003/04 Budget.
2. Central Focus
and Key Objectives of the 2003/2004 Budget
The
present economic context is best described as the dilemma between the outcome
of already engaged long-term economic reforms, and the immediate concerns of
falling investment as well as high unemployment.
The
Private Sector recognises the implementation of major reforms in several
sectors, namely education, sugar, financial services, ICT and business
facilitation.
As
far as business facilitation is concerned, intensive discussions were held
during the last twelve months and the private sector would like to acknowledge
the commitment of the various stakeholders to improve, in a significant manner,
the business environment. We look
forward for an urgent implementation of the conclusions reached. Furthermore, the business community has
observed an improvement at the level of the BOI in facilitating investment in
the country.
These
reforms together with an inflation rate which is expected to go below 5%, will no doubt have a significant impact on the
competitiveness of our economy and prepare
In
the light of the above, the JEC believes that the central focus of the
2003/2004 Budget should be employment creation and, as such, the key
objectives of the forthcoming budget should be:-
(a)
To re-dynamise
investment, mainly in the private sector;
(b)
To re-establish public finance
discipline; and
(c)
To raise the general level of
employability.
3. Immediate
Concerns
3.1 Unemployment rate exceeding 10%
The
unemployment rate, on the basis of the CSO figures for the year 2002 and the
job losses in the first quarter of 2003, has exceeded 10% and is expected to go
up in the light of further closures in the textile sector. Within the last 10 years, unemployment rate
has been going up in a consistent manner.
Figure I clearly shows the trend.
Figure
I
3.2 Declining GDP Growth
Notwithstanding the conjectural problems
pertaining to the weather conditions and the political crisis in
Figure II
3.3 Low-skills
levels, loss of exports share and rising unemployment
The
economic transformation of
Figure III shows this disturbing trend.
Source: OECD Development Centre – “Trading
Competitively: A Study of
The
competitiveness of our exports is decreasing and with LDC’s
having freer access to our main markets, the risk of
The
low skill level of our labour force in an inflexible market where labour
mobility is highly regulated is a recipe for high unemployment. The difficulty for social partners to adjust
to fluctuating order levels, working hours and multi-skill needs can only bring
about job losses.
4. Meeting the
challenge of employment creation
In
order to meet the challenge of employment creation, the 2003/2004 Budget should
aim at :-
4.1
Continuing to
enhance the overall investment climate;
4.2
Improving
public finance discipline;
4.3
Raising level
of employability and productivity; and
4.4 Improving the performance of SME’s
4.1 Continuing to
enhance the overall investment climate
The
overall investment rate has been decreasing from a high of almost 30% in 1990’s
to a low of 22% in 2002 with private sector’s share going down from 76% to
69.7%. It is therefore essential to
identify investment opportunities and continue to improve the overall
investment climate.
4.1.1 Clear
investment policy guidelines
Investment
opportunities exist clearly in such areas as tourism and integrated resorts,
real estate, energy, ICT and training.
Accordingly, the 2003/2004 Budget should highlight these sectors as
priority areas for investment and set the following targets:-
(i)
Investment
policy guidelines to be made public by each of the respective Ministry within
three months of the Budget Speech;
(ii)
Transparent
procedures and clear deadlines to be made “on line” as from October 2003;
(iii)
The
announcement that, henceforth, all interface between any investor and the
Authorities will take place at the level of the BOI;
(iv)
In sectors
where regulatory bodies are not yet operational, a temporary process for
‘arbitrage’ should be announced;
(v)
A review of the
Landlord and Tenant Act of 1999 to change the “base year rent”;
(vi)
Access to SAFE
by operators through BPML in the ICT sector with the ICTA overseeing the
competitiveness of the telecom rates using the rates of our competitors as
benchmark;
(vii)
A special
budget provision for the promotion of ICT; and
(viii)
The individual
qualifying under SAPES should have automatic access to work permit.
4.1.2 A
broader monetary policy-making process
The
monetary policy-making process needs to be reinforced with broader based
consultation. An enlarged monetary
policy-making body would allow for a careful gauging and enhanced appreciation
of the impact of existing and emerging issues on the domestic economy with
appropriate measures to counter any adverse impact on operators within the
economy.
Furthermore,
the JEC believes that, as a matter of policy, Government should make it
mandatory for the monetary policy-making body to issue, on a quarterly basis, a
summary of the economic “considerations” guiding its decisions with respect to
the monetary policy and interest rate movements.
4.1.3 A
pro-active corporate tax regime
4.1.3.1The introduction of a uniform corporate tax of 15% for
all companies;
4.1.3.2 Review of
Section 26 (3) of the ITA 1995; and
4.1.3.3 Introduction
of Group relief for group companies
4.1.3.1 A uniform corporate tax rate of 15%
The
introduction of the Value Added Tax, the rationalisation of customs duties, the
framework of the Companies Act 2001 and the range of more than 40 different
types of companies which benefit from a corporate tax rate of 15% are all
reasons in favour of the uniformisation of a single
15% tax regime. A single tax rate will
significantly streamline the income tax’s department workload and send a strong
signal to economic operators.
The
table below shows the income tax paid by companies for the years of assessment
1994/95 to 2001/02. The highest
percentage increase occurred for the year of assessment 2001/02 when the tax rate
was reduced from 35% to 25%.
|
Year of assessment |
Tax rate % |
Tax paid by Companies Rs M |
Increase Rs M |
Percentage increase |
|
1994/95 |
35 |
940.9 |
|
|
|
1995/96 |
35 |
981.5 |
40.6 |
4.3 |
|
1996/97 |
35 |
1,067.2 |
85.7 |
8.7 |
|
1997/98 |
35 |
1,171.0 |
103.8 |
9.7 |
|
1998/99 |
35 |
1,337.0 |
166.0 |
14.2 |
|
1999/00 |
35 |
1,340.9 |
3.9 |
0.3 |
|
2000/01 |
35 |
1,521.2 |
180.3 |
13.4 |
|
2001/02 |
25 |
1,874.9 |
353.7 |
23.3 |
Some
specific schemes such as the Freeport, Regional Headquarters schemes, ICT and
Equity funds which presently have special tax treatment should continue their
regime for 10 years until these sectors can be fully integrated.
4.1.3.2 Review of Section 26 (3) of the ITA 1995
Section
26 (1) (b) provides that any expenditure or loss to the extent to which it is
incurred in the production of exempt income is not tax deductible. This implies that any expense attributable
solely to exempt income is not deductible.
Where
it cannot be ascertained whether an expenditure or loss is attributable to
either taxable income or exempt income, then Section 26 (3) provides that such
expenses will be computed in accordance with the Income Tax regulations.
The
formula used for the apportionment of the expenses based on the above
regulations is restrictive and in many cases unfair. There is an urgent need that a more flexible
and correct method be applied.
We
therefore recommend that:-
§
A “de minimus clause” be introduced as it existed in the
Income Tax Act 1974 whereby the apportionment of expenses will not be required
if the exempt income does not exceed 25% of the total income.
§
Where the
exempt income exceeds 25% we adopt the same principle as in the VAT legislation
which provides under Section 21 (3) (d) that the VAT Commissioner may approve
an alternative basis of apportionment for determining non-allowable input tax
should the method prescribed be unfair and unreasonable.
4.1.3.3 Introduction of Group relief for Group
companies
One
of
Under
our current system, only a limited number of companies within a group can
transfer their losses from one company to another.
As
our system develops and becomes more sophisticated, group companies will become
more prevalent. Our system should
therefore recognise the reality of group companies. We therefore recommend introducing Group
Relief through our corporate tax system.
This will also give companies flexibility to start new activities
through subsidiaries and contribute to a more supportive environment for
innovation and risk-taking. Group Relief
should be available to all companies in that losses of subsidiaries can be
transferred to the holding company or vice versa or even between subsidiary
companies.
We
also recommend that the same definition as to what constitutes a Group Company
under the Companies Act 2001 be adopted for income tax purposes.
Consortium
Relief
In
certain ventures involving foreign strategic partners, the shareholding
requirement of 75 per cent may be too high for some companies to qualify for
Group Relief. One way for allowing loss
transfer for joint ventures and companies that do not meet the percentage
requirement is through the provision of Consortium Relief. The U.K., for example, has a Consortium
Relief regime that defines a company to be owned by a consortium if not less
than 75 per cent of its ordinary share capital is both directly or indirectly
owned by companies that own each at least 5 per cent. We recommend that Government implements
Consortium Relief as part of the
Group Relief regime. In case of
Consortium Relief we recommend that the loss be pro-rated according to the parent's
shareholding.
4.1.4 Good
governance
The
JEC, for the last two years, has been raising the awareness of the corporate
sector on the issue of good governance through its Code of Conduct. A number of companies have adhered to this
Code and we are now working on an accreditation system. The Committee on Corporate Governance has
also been active and will soon present its proposals on corporate
governance. Government, with the setting
up of ICAC is also showing its commitment in the overall combat against
corruption.
We
believe that all stakeholders should continue to work together to make
4.1.5 Improving
the delivery of utilities at competitive levels
The
conventional assumption that public utilities would be efficiently run by the
State without an improved regulatory environment has become obsolete. The improvement in the telecommunications
sector as a result of a better legal environment with a modern regulatory body
bears testimony for a review of the present arrangements in the provision of
such utilities, as energy and water.
Given
that the competitiveness of the corporate sector will be adversely affected if
we fail to deliver utilities at competitive rates, the forthcoming budget
should set the scene for the emergence of a more efficient and competitive
environment for the delivery of utilities.
4.1.6 Tourism
and hospitality industry
The
tourism industry will undergo radical changes as new sub-sectors such as golf,
conferencing and travel-intensive services will become more and more important
in our economy. In this context, the
tourism industry would soon be confronted to “second generation” constraints,
and these would demand a re-thinking of the following:
(i)
An air access policy based more on
matching tariff with demand among competing traveling
segments, (such as tourists, VFR (visiting friends and relatives), business and
education) during peak seasons;
(ii)
Re-adjusting incentives to cover a
wider range of activities in the tourism sector, namely, golf, conference and
banqueting, health; and
(iii)
More integrated planning with a
re-inforced NPDP.
The
2003/2004 Budget should acknowledge these issues and make provisions to move
the tourism industry to new thresholds.
4.1.7 Financial
services sector
Whilst
recognising the need for a strong regulatory environment, the JEC would like to
caution against the dangers of over-regulation and the risk of constraining the
industry. The right balance between the
best legal framework and self-regulation is an objective that all stakeholders
in this sector should aim for.
We would
therefore invite Government for very close consultation with the industry prior
to the enactment of new legislation and/or new measures in this sector.
4.2 Improving public finance discipline
Though
budget deficit for the year 2002/03 is expected to be below 6%, it still
remains high. The implementation of the
PRB Report will put additional pressure on the public exchequer. Public debt is on the rise reaching some Rs 100 billion that represents around 65% of GDP. Government must avoid getting into the debt
trap and must improve discipline in the management of public finance.
On
the revenue side, we recognise the reforms initiated in the Customs department
and positive results will no doubt accrue in the coming years. However, the JEC believes that the 2003/04
Budget should trigger an initiative to recoup the significant “manque à gagner”
from the “non accounted” activities of the economy
with a view to extending a wider fiscal base whilst containing a further
expansion of the “informal” economy. We
are fully aware that such an exercise is complex and can only be implemented in
a “phased approach”. We need, however,
to start the process urgently.
On
the expenditure side, the JEC would like to reiterate the urgency for
implementing the framework for PPP (Public Private Partnership) projects. The PPP instrument is the ideal tool to
maintain capital expenditure without putting pressure on the public debt and
the budget deficit. On the basis of
meeting 25% of the capital budget of around Rs 9
billion from PPP projects, Government expenditure would go down by Rs 2.2 billion. This
target is achievable within the next two years.
We
also believe that Government should explore the possibility of optimising the
use of existing facilities, infrastructure and equipment prior to embarking on
the construction of new facilities or purchase of new equipment. The innovative utilisation of the computer
laboratories of the State Secondary Schools, during “off” working hours,
week-ends and holidays for the Computer Proficiency Programme is a clear
illustration of what is achievable without heavy additional investment.
Furthermore,
there is a need to embark on a major programme to reduce inefficiency and
wastage in the public sector. We wish to
reiterate our position as enunciated in the 2002/2003 Budget Memorandum for the
Civil Service to work closely with the NPCC on a time-bound action plan to
reduce all wastages.
4.3 Raising the level of employability and productivity
4.3.1 Raising overall skills level across the
economy –
Making
The
low share of high-skill exports whilst being a serious constraint on the
economic performance of
Accordingly,
we believe that with the emergence of new sectors such as the ICT and financial
services, the re-engineering of the existing sectors (sugar, textile and
hospitality) and our regional expansion plans,
In
this respect, it is proposed that an audit of all training institutions both in
the public and private sectors be undertaken with a view to rationalise and
facilitate the emergence of a strong “knowledge industry”.
4.3.2 A more flexible employment framework to
encourage
Employability
The
present rigid employment framework discourages labour mobility and does not
encourage employers and employees to have a strategy for life long learning in
terms of multi skilling and greater employability.
In
this context, we need to introduce, as a matter of urgency some flexibility in
the existing framework to allow for immediate employment creation. Accordingly,
the JEC would like to recommend that appropriate amendments be brought in the
labour legislation to allow business to recruit new employees for at least two
years on a temporary basis. We believe that such an environment would encourage
the following:-
(i)
specific short
term employment contracts; and
(ii)
labour
outsourcing/subcontracting;
Furthermore, we wish to propose the:-
(i)
creation of a
national labour data bank providing information on demand/supply of labour in
different sectors of the economy; and