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Research Team Sidath Kalyanaratne, Vaishalie Shakespeare, Raguram Raamakrishnan, Upul Atapattu
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Socio Economic Budget
The government of Sri Lanka presented the budget focusing on a medium term
budgetary framework from 2015 2017, targeting a gradual reduction in budget
deficit to 4.6%, 3.8% and 3.0% by 2015, 2016 and 2017 respectively. The budget
deficit expected for 2014 is 5.0% of GDP (Gross Domestic Product), in
comparison to the recorded deficit of 4.9% by September 2014. The reforms
presented in the budget 2015 encourages certain local industries through import
substitution whilst increased focus was towards elevating the healthcare and
education sectors and its work force. Furthermore, proposals targeted the low
income segment of the country while several concessions were granted to small
scale businesses. The infrastructure developmetn drive is expected to continue
through the proposed investments for 2015, focussing on the provincial and rural
roads and the rail network.
Tax concession for new investments A company with a committed
investment in excess of LKR 500 Mn made before the 31
st
of December 2015, in
the manufacturing sector (excluding liquor and tobacco), is proposed a reduction
of 50.0% of the applicable tax rate for a period of 7 years from the
commencement of commercial operations.
Electricity tariff reduction extended beyond the residential consumer
segment It is proposed to have a separate tariff band for SMEs, restaurants
and small shops consuming electricity below 300 units per month to enjoy a
25.0% tarrif reduction on the monthly electricity expenses. The budget also
proposes a tariff reduction of 15.0% for all other industries from November 2014.
Key highlights on import substitution An increase in CESS on rubber
imports by LKR 10/Kg and impose a CESS of LKR 150/Kg on imported milk
powder was proposed whilst the high CESS on the importation of butter, yogurt
and diary products to be maintained.
Special provision tax on motor vehicle imports It was proposed to impose an
Excise Special Provision tax on motor vehicle imports in lieu of all multiple
taxes at the point of import. The simplified taxation is expected to generate
additional revenue of LKR 5 Bn.
Minimum wages proposed The budget proposed a minimum salary of LKR
15,000 per month for the state employees whilst increasing the cost of living
allowance by LKR 2,200 to LKR 10,000 by January 2015. The total number of
state employees stood at 1.3 million as at 2014Q1. The government expenditure
on public servants remained at LKR 305.6 Bn for the first nine months of 2014,
an increase of 6.8% compared to the same period of the previous year.
Furthermore, it was proposed to increase the private sector minimum
remuneration to LKR 10,000 per month whilst suggesting a minimum increase of
24.10.2014
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October 2014 2
-1,000
-500
0
500
1,000
1,500
2,000
2,500
2012 2013 2014 (budget) 2014 (revised) 2015 (budget)
LKR Bn
Government Revenue & Grants Government Expenditure Budget Deficit
LKR 500 per month for those who are already drawing a salary above the
proposed minimum.
Reduction in VAT (Value Added Tax) The government proposed to reduce
the VAT to 11.0% from 12.0% in 2015. Revenue from VAT increased to LKR
200.4 Bn for the first nine months of 2014, an increase of 11.2% compared to the
corresponding period in 2013.
PAYE (Pay As You Earn) Taxes Reduced The budget proposed a
reduction in PAYE tax rate to a maximum of 16.0% for all employment
categories by 2015. Revenue from PAYE tax increased by 15.0% to LKR 16.7
Bn during the first nine months of 2014 from LKR 14.5 Bn in 2013.

Government continue to back the Airlines Sri Lankan Airlines Ltd and
Mihin Lanka Ltd were allocated USD 150 Mn. The funds will be utilized for the
final phase of the proposed capitalization. The combined expected loss is LKR
30.6 Bn for the two airlines, compared to the incurred loss of LKR 16.4 Bn for
the first six months of 2014. The actual loss made by the two entities for 2013
stood at LKR 30.6 Bn.
A Snapshot of the 2015 Budget
The government is expecting to achieve a budget deficit of LKR 500.0 Bn for
2014, a reduction of the deficit by 3.1% from the 2014 budget. However, deficit
for the first nine months of 2014 reached LKR 489.8 Bn.
The Government has been able to reduce the deficit as a percentage of GDP to
4.9% for the first nine months of 2014. Furthermore, the government expect to
achieve a budget deficit of 5.2% of GDP in 2014 and 4.6% in 2015, which may
be a challenge under the suggested reforms.








Source - Budget Speech 2015
Total revenue and grants are expected to increase by 19%, while total
expenditure is expected to increase by 15% in 2015. Tax revenue is expected to
contribute up to 83.8% of the total revenue and grants, where as recurrent
Government Revenue, Expenditure and Budget Deficit
NDB Securities (Pvt) Ltd 2015 Budget Proposal Highlights 24
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October 2014 3
expenditure is expected to decrease to 69% from 72% of the total expenditure for
2015.


Source Budget Speech 2015
Government Revenue
The revenue expected for 2014 has been revised downwards by LKR 47.5 Bn (to
LKR 1,422 Bn). The total revenue is LKR 836.9 Bn up to September 2014. The
monthly revenue needs to increase by about 10% in the last three months of 2014
to achieve this target.

Source Budget Speech 2015
Inflows from income tax is expected to rise 24.8% to LKR 322 Bn in 2015, while
taxes on goods and services are set to rise 15.2% to LKR 774 Bn. Taxes on
external trade is projected to increase 23.5% to LKR 321 Bn.

3
4
5
6
7
8
2012 2013 2014 (budget) 2014 (revised) 2015 (budget)
%
-
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
900.00
Income Tax Taxes on Goods
and Services
Taxes on External
Trade
Non Tax Revenue
LKR Bn
2014 (budget) 2014 (revised) 2015 (budget)
Tax and Non-Tax Revenue
Budget Deficit as a Percentage of GDP
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Government Expenditure
The total expenditure for 2014 is expected to be LKR 1,922 Bn, which is a
downward revision of LKR 63.6 Bn. The actual expenditure incurred up to
September was LKR 1,326.7 Bn, which is well within the revised target. Public
investments/GDP has come down to 5.6% from the budgeted 6.7%.

Source - Budget Speech, 2015
For 2015, public investments as a percentage of GDP is expected to rise to 6.2%,
which seems to be optimistic, while recurrent expenditure is set to rise by
10.03% to LKR 1,525 Bn.

Source - Budget Speech, 2015




0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2013 2014 (budget) 2014 (revised) 2015 (budget)
LKR Bn
Recurrent Public Investments
-
100.00
200.00
300.00
400.00
500.00
600.00
Salaries and Wages Other Goods and
Services
Interest Subsidies and
Transfers
LKR Bn
2014 (budget) 2014 (revised) 2015 (budget)
Total Expenditure
Recurrent Expenditure
NDB Securities (Pvt) Ltd 2015 Budget Proposal Highlights 24
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Deficit Financing
Total foreign financing is expected to be LKR 260.0 Bn in 2014, which is 12.0%
above the budgeted figure of LKR 235.5 Bn. Total domestic financing is
expected to come down 14% to LKR 240.0 Bn in 2014. Irrespective of the
interest rates being in check, the government has reduced its domestic bank
borrowings to LKR 81.0 Bn from the budgeted LKR 100.00 Bn. Meanwhile,
foreign commercial borrowings have seen a substantial increase of two folds in
2014 to LKR 197.0 Bn from budgeted LKR 97.5 Bn.


Source - Budget Speech, 2015
Funding mix for the 2015 deficit is expected to be financed by total foreign and
domestic borrowings at the ratio of 48.2:51.8. Government has slightly increased
its domestic financing mix to 51.8% from 48.0% witnessed in 2014. Foreign
commercial borrowing is expected to increase to 37.4% in 2015 in comparison
with 18.9% in 2014, which is an increase of LKR 97.5 Bn in absolute value.
Impact on the Stock Market
The budget proposes an electricity tariff reduction of 15.0% for all industries,
apart from the tariff reduction of 25.0% proposed for small scale business
units consuming less than 300 units per month. Further clarifications would
be required to understand if the 15% tariff reduction would have an impact
on certain companies in the listed space.
Proposal to reduce the present rate of VAT from 12.0% to 11.0%.
The tax-free threshold applicable for VAT on supermarket scale retail trade
to be fixed at LKR 100 Mn per quarter (as opposed to LKR 250 Mn
previously).
Pre budget increase in exercise tax on cigarettes and liquor (arrack proof litre
by LKR 90, foreign liquor proof litre by LKR 120, Beer with alcohol volume
over 5.0% by LKR 15, Beer with alcohol volume less than 5.0% by LKR 10)
to remain unchanged. This may have an impact on some of the companies on
the beverage, food and tobacco sector.
210.00
220.00
230.00
240.00
250.00
260.00
270.00
280.00
290.00
Total Foreign Financing Total Domestic Financing
LKR Bn
2014 (budget) 2014 (revised) 2015 (budget)
Deficit Financing
NDB Securities (Pvt) Ltd 2015 Budget Proposal Highlights 24
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Proposal to increase the CESS on rubber imports by LKR 10/Kg and
implement a guaranteed price of LKR 300/Kg to encourage small rubber
growers to be implemented from November 2014. The proposed outcome
may have an impact on some of the companies listed under the plantation
sector.
The budget proposes a CESS on imported milk power of LKR 100/Kg.
The government proposes the Ceylon Petroleum Corporation to form a joint
venture to protect its interest in the Trincomalee oil tank farm that has been
leased on a 99 year tenor to the Indian Oil Company, to develop storage
facilities. This may have an impact on certain power and energy sector
companies on the listed space.
In order to assist small poultry farms, the government proposes a supply
mechanism to provide maize at LKR 40/Kg and provide incentives for
chicken and eggs exporters. This may have an impact on certain listed
companies on the beverage, food and tobacco sector.
Similar to the previous budget, it was proposed to implement a credit scheme
with an 8-year maturity at 6 percent interest to all well performing companies
that will commit, on an agreed area for planting and replanting, for social
development of plantation workers and to increase the volume of value added
tea exports.


NDB Securities (Pvt) Ltd 2015 Budget Proposal Highlights 24
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Summary of the Budget 2012 2013 2014 2014 2015
2012
(actual)
2013
(actual)
2014
(budget)
2014
(revised)
2015
(budget)
Total Revenue and Grants 1,118 1,204 1,470 1,422 1,689
Total Revenue 1,102 1,188 1,437 1,394 1,654
Tax Revenue 909 1,006 1,275 1,189 1,416
Income Tax 173 206 283 258 321
Taxes on Goods and Services 520 572 689 672 774
Taxes on External Trade 217 228 303 260 321
Non Tax Revenue 143 132 163 149 174
Provincial Councils Tax Sharing and Devolved Revenue 50 51 - 56 64
Grants 16 16 32 28 35
Total Expenditure 1,607 1,720 1,986 1,922 2,210
Recurrent 1,181 1,256 1,328 1,386 1,525
Salaries and Wages 386 432 411 478 558
Other Goods and Services 135 108 192 152 163
Interest 408 446 441 443 425
Subsidies and Transfers 251 270 285 313 379
Public Investment 444 481 669 553 696
Education and Health 46 56 74 78 120
Infrastructure 398 425 594 475 576
Other (18) (17) (11) (17) (11)
Revenue Surplus(+)/Deficit (-) (80) (68) 109 8 129
Budget Deficit (489) (516) (516) (500) (521)
Total Financing 489 516 516 500 521
Total Foreign Financing 181 80 236 260 251
Foreign Borrowings 235 179 234 173 258
Foreign Borrowings-Gross 365 179 332 370 453
Debt Repayments (184) (99) (96) (110) (202)
Foreign Commercial 130 - 98 197 195
Total Domestic Financing 308 436 281 240 270
Non-bank Borrowings 71.00 83.00 129.30 120.00 160.00
Foreign Investments in T Bills / Bonds 106.00 56.00 51.30 39.00 40.00
Bank Borrowings 132.00 297.00 100.00 81.00 70.00
Revenue and Grants/GDP (%) 14.70 13.90 14.80 14.40 14.90
Revenue/GDP (%) 14.50 13.70 14.50 14.10 14.60
Tax/GDP (%) 12.00 11.60 12.80 12.00 12.50
Expenditure/GDP (%) 21.20 19.80 20.00 19.40 19.50
Current Expenditure/GDP (%) 15.60 14.50 13.40 14.00 13.50
Public Investment/GDP (%) 5.90 5.50 6.70 5.60 6.20
Revenue Surplus (+)/ Deficit (-)/ GDP (%) (1.00) (0.80) 1.10 0.10 1.10
Budget Deficit/ GDP (%) (Excluding Grants) (6.40) (5.90) (5.20) (5.00) (4.60)
Source:- Budget Speech 2015


NDB Securities (Pvt) Ltd 2015 Budget Proposal Highlights 24
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October 2014 8
Mrs. Prasansani Mendis Chief Executive Officer prasansini@ndbs.lk 011 2131005
Sales Branches
Head Office CSE
Mr. Gihan R. Cooray gihan@ndbs.lk 011 2131010 Mr. Sujeewa Athukorala sujeewa@ndbs.lk 011 3135495
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Mr. Aroos Faleel aroosfaleel@ndbs.lk 011 2131012 Kiribathgoda
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Mr. Taamara De Silva taamara@ndbs.lk 011 2131018 Galle
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Mr. Ramesh Anthony ramesh@ndbs.lk 011 2131023 Gampaha
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Mr. Harsha Sritharan harsha@ndbs.lk 011 2131017 Jaffna
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Mr. S. Vibushan
vibusha.@ndbs.lk 021 5671155
Rathnapura
Operations Mr. Uddeepa Peiris uddeepa@ndbs.lk 045 2230800
Ampara
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