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Government accelerates rural development spending billions of rupees

The government is fast-tracking its development journey in rural areas spending billions of rupees without sustained revenue mobilisation while public debt is on a downward path, economic consultants warned.

These rural development work and mega infrastructure projects including major expressway construction will have to be implemented with financial allocations made for capital expenditure in budget 2022 or through state borrowings, they pointed out

In this context, the Government’s tax policy is expected to remain within the broad parameters as announce in December, 2019, in keeping with its decision to maintain consistancy while providing a stable environment for businesses.

In particular to plan their activities, especially at a time of a pandemic that has created significant uncertainties.

However, focus is also on to aggressively improve the tax administration making use of technological advancements including Artifical Intelligence (AI) and big data analytics, while continuously introducing mechanisms to make tax payments more tax payer friendly. Systems will also be geared to minimize tax evasion and thereby broadening the tax base including the introduction of online payment modalities and e-signatures.

As a measure of further simplification of the tax structure, a composite single tax will come in to effect from earlythis year.

Measures will also be taken to enhance none tax revenue through including the introduction of auctioning of licenses, increased dividends and levies, with the improved performance of the State Owned Enterprises (SOEs).

The high allocation for road development and other rural development projects cannot be met from capital expenditure of Rs.931 billion set aside in the budget.

Under this set up such projects will have to be funded from local or foreign borrowings despite the directive issued last year by the Presidential Secretariat discouraging high cost debt funded development initiatives.

Among those high cost projects are stage IV of the Central Expressway Project (CEP), which extends from Kurunegala to Dambulla and the recently launched “One Lakh Work” project under the rural development programme.

In these circumstances, the Ministry of Highways is continuously submitting cabinet papers seeking approval to change the contracts given to foreign–local consortiums while extending the express highway network, informed sources disclosed.

Initially the construction contract of Stage IV of the CEP was awarded to UK consortium M/s Roughton International Ltd which was to obtain a loan from the UK Export Finance (UKEF) to implement the project.

But this contract was cancelled by the ministry and re-awarded to a Chinese consortium by limiting its distance up to Galewela as Roughton International has declined to fund the project recently.

However the contract to construct the stretch of express highway from Rambukkana to Galagedera has been given to a local company replacing the already selected bidder, the MCC Chinese Company due to a dispute in terms and conditions, official documents revealed.

All these projects were debt-funded projects unbearable for the debt-ridden government, a senior economic consultant said.

It has also been revealed that the total government borrowing from banks was around Rs. 5000 billion which is 52 per cent from its debt portfolio.

The billion dollar question is as to how the government is going to fund these road development projects under the expenditure crisis situation.

The Finance Ministry is contemplating seeking funds for road development from a private equity investment and credit company by keeping assets of Selendiva Company as surety.

Referring to the “One Lakh Work” project being implemented in one year period under the rural development programme, he noted that a sum of Rs. 100 billion is needed to implement this initiative of the Finance Minister Basil Rajapaksa.

This massive rural development project will cover 36,000 villages in 14,000 grama seva nildari divisions in 25 districts.

As there was no provision in budget 2022 to raise a part of this money required for the project, the Finance Ministry is compelled to use the revenue of over Rs.71 billion from the newly imposed one-off 25 per cent surcharge tax on individuals or companies earning taxable income more than Rs. 2 billion for the assessment year 2020/2021. This tax is geared to raise Rs. 100 billion.

Revenue is expected to grow by 46 per cent to Rs. 2,284 billion in 2022. Several new taxes and tax increases are proposed in this regard; the surcharge tax on profits, social security contribution, and financial VAT.

Even if the estimated tax revenue of Rs. 333 billion is achievable, the balance revenue collection would need to increase by 24 per cent to gain the expected revenue target.

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